Keynes vs Friedman
Interesting Bloomberg article on the current massive attempts to reliquify the system:
“Federal Reserve Chairman Ben S. Bernanke is siding with John Maynard Keynes against Milton Friedman by flooding the financial system with money.
If history is any guide, says Allan Meltzer, the effort will end in tears. Inflation “will get higher than it was in the 1970s,” says Meltzer, the Fed historian and professor of political economy at Carnegie Mellon University in Pittsburgh. At the end of that decade, consumer prices rose at a year-over- year rate of 13.3 percent.
Bernanke’s gamble that the highest jobless rate in 25 years and the most idle factory capacity on record will hold down inflation is straight out of the late British economist Keynes. Should late Nobel-prize-winner Friedman’s dictum that “inflation is always and everywhere a monetary phenomenon” prove right, the $1 trillion or more in liquidity Bernanke has pumped into the financial system by expanding the Fed’s balance sheet may leave him to cope with surging consumer prices.
So far, investors and economic data both back up the Bernanke-Keynes view. The market in Treasury Inflation-Protected Securities as of April 6 indicated long-term inflation expectations of 2.5 percent, below the 2.8 percent average inflation rate of the past 10 years.
Figures to be published April 15 will probably show that the March consumer price index was unchanged from a year earlier, thanks to a steep decline in energy costs, according to economists surveyed by Bloomberg News. In February, the index rose at a year-over-year rate of just 0.2 percent.”
Fascinating stuff . . .
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Source:
Bernanke Bet on Keynes Has Meltzer Seeing 1970s-Style Inflation
Rich Miller
Bloomberg, April 13 2009
http://www.bloomberg.com/apps/news?pid=20601109&sid=a8tjEzB.d.kU&
April 13th, 2009 at 1:55 pm
This is what I’ve been trying to tell you all for months and months… : )
April 13th, 2009 at 2:00 pm
The CPI probably won’t rise significantly during Obama’s first term. That’s really all that he needs to worry about.
(Commodity prices constitute another matter altogether).
April 13th, 2009 at 2:04 pm
Should late Nobel-prize-winner Friedman’s dictum that “inflation is always and everywhere a monetary phenomenon” prove right, the $1 trillion or more in liquidity Bernanke has pumped into the financial system by expanding the Fed’s balance sheet may leave him to cope with surging consumer prices.
There are two components to “monetary phenomenon”: money supply and velocity.
Yes the money is ramping insanely. The velocity, however, is dropping insanely.
April 13th, 2009 at 2:05 pm
Bernanke’s gamble that the highest jobless rate in 25 years and the most idle factory capacity on record will hold down inflation is straight out of the late British economist Keynes.
I believe this is correct, the problem is that when economic growth returns we could have a secondary crisis in the form of inflation. Imagine the problems we have now being followed by another inflationary debacle and 1979-1983 type recession.
Such a scenario – recovery leading to renewed crisis – would be psychologically devastating.
In that scenario we could well end up with something like the Great Depression except where the dollar and all USD based debt loses credibility.
At least we still had a reliable currency and could obtain loans when the Great Depression was over.
That might not be the case this time around.
April 13th, 2009 at 2:05 pm
Karen, to query you specifically,
do you feel it is accurate to say that Roubini agrees with Keynes when he is saying that slack in goods and labor markets will head off any inflation?
And would I be right to say that you side more with Friedman?
((myself, for what it’s worth, I have been stuck at the starting point where increasing the money supply is, by definition, inflation. but also that the destruction of asset values is deflationary. cue the music…. ‘walk around in circles, walk around in cirles…’)
April 13th, 2009 at 2:08 pm
I estimate that the hole Bernanke is trying to plug with his helicopter drop in 30Trillion deep. There is no way he can print that much without the citizenry revolting. Thus deflation is our lot.
April 13th, 2009 at 2:08 pm
Karen, to query you specifically,
do you feel it is accurate to say that Roubini agrees with Keynes when he is saying that slack in goods and labor markets will head off any inflation?
In technical terms, plunging velocity will offset a surging money supply.
The question then becomes:
What happens when the velocity returns?
April 13th, 2009 at 2:11 pm
There are two components to “monetary phenomenon”: money supply and velocity.
Yes the money is ramping insanely. The velocity, however, is dropping insanely.
It seems that the implicit assumption behind all this reliquification then is that velocity won’t return or if it does they can drain the money supply without plunging the economy back into recession (I’ll believe it when I see it).
This may be why Japan refuses to actively combat deflation:
The may realize that their money supply has grown so much that a return of higher velocity could be a disaster.
April 13th, 2009 at 2:14 pm
Steve Barry (@1:55) versus Karen (@ 1:55)
I say that GLD, USO, DBB and DBA will be MUCH higher in 2012 than they are now… at least double where they are now (on average).
April 13th, 2009 at 2:18 pm
I particularly side with Meltzer but also believe in Friedman’s dictum. Currently, I’m still not seeing deflation anywhere… i see falling prices and discounting on slack demand and job losses… if money were so scarce, how could yields be so low? and where will the next bubble be?
April 13th, 2009 at 2:19 pm
@DL:
deflation first…then re-flation (and buy the gold miners). You could buy gold to try and hold its value during deflation, but I will not try it.
April 13th, 2009 at 2:20 pm
markets should weaken from here into the close.
April 13th, 2009 at 2:21 pm
“if money were so scarce, how could yields be so low? and where will the next bubble be?”
Yields are low because there is no demand for money…the supply is there.
April 13th, 2009 at 2:25 pm
I may also be one of the few people that feel the market fell too far, too fast under unprecedented circumstances… and once the banks got “guaranteed” with funny money… there was no need to run to the atm everyday and pull out the limit was there? that finally halted the vicious cycle of fear i suppose.
April 13th, 2009 at 2:26 pm
guidepostings @ 2:20
You calling a top in this rally?
(I hope it’s finally here).
April 13th, 2009 at 2:27 pm
Steve, i think you just made my point, the world is awash in money. The supply is there. Surely, I misunderstood you.
April 13th, 2009 at 2:29 pm
karen @ 2:25
You may be right; and maybe the politicians and the Fed panicked along with stock investors.
Nevertheless, a re-test of 670 is possible, if not likely.
April 13th, 2009 at 2:29 pm
The market has not fallen far enough, given that even operating ernings (earnings before bad stuff0 was negative for the first time ever in the best quarter of teh year (4Q). No help from a straonger dollar since then…if this situation is not rectified quickly, the stock market as a whole (that is the equity in these companies, not the assets themselves) is worth very little.
April 13th, 2009 at 2:33 pm
my trading dogma has taken a back seat to the strength of this tapes momentum – so it has mostly become a day trading market.
with that said – this maybe as good as it gets. there’s quite a bit to be said to be short here – it’s definitely the harder trade to hold with so much expectations built into banks reporting.
technically it looks ready to rollover again.
but my comment was squarely issued to today. i think the post 3 trade will give back everything and then some.
April 13th, 2009 at 2:33 pm
karen:
I agree the supply is there…your conclusion is that is why yields are low…I rather think it is as much lack of demand as too much supply. Actually both are conspiring to keep rates so low if you think about it.
April 13th, 2009 at 2:35 pm
Wrong. He is siding with Friedman 100%. This is from the Friedman playbook, not Keynes essentially. Keynes would probably say the cylical imbalances are to strong and must be worked out. It is the failure of monetary policy that beget Keynes work to stop structural damage to healthy parts of business through “government stimulus”.
Also, Bernanke IS NOT flooding the world with money. He is trying to make you THINK he is flooding the world with money, when it isn’t even close.
Whoever wrote this, needs to get it straight and educate themselves.
April 13th, 2009 at 2:36 pm
One can’t get inflation when credit deflation is raging so intensely. While velocity has plummeted, it will be slow to return. The economy won’t turn upward as rapidly and unemployment won’t disappear overnight. We may see a return to 3% inflation, but that will be good thing.
April 13th, 2009 at 2:36 pm
Yes, low velocity, high spare capacity and little sign of either problem reversing in a hurry suggests little worry about inflation in the short-term.
However, without inflation (and a lot of it), governments in most of the developed world will not stand a chance of paying off their newly acquired debt short of raising the tax burden to strangulation point for their economies.
So, I wonder how hard the central banks will feel they need to fight to keep the beast caged? They would, of course, feel absolute confidence in their ability to check the rampage at just precisely the right moment…
April 13th, 2009 at 2:43 pm
XLF is now 30% above it’s 50 day MA. How much wider can the gap become?
April 13th, 2009 at 3:06 pm
Here comes our daily final hour buying push. Didn’t even know what time it was until I looked the market’s trying to rally. Big shock to see it’s the final hour. Here it comes…….
April 13th, 2009 at 3:13 pm
XLF is now 30% above it’s 50 day MA. How much wider can the gap become?
I’ve been looking at buying some XLF puts today but haven’t pulled the trigger.
Few weeks ago I was looking at some XLF calls and didn’t pull the trigger – have spent a lot of time wishing I did.
April 13th, 2009 at 3:14 pm
Here comes our daily final hour buying push. Didn’t even know what time it was until I looked the market’s trying to rally. Big shock to see it’s the final hour. Here it comes…….
Don’t mean to steal other peoples lines but:
Market opens in 16 minutes!
April 13th, 2009 at 3:17 pm
Like I said, here we go. All three indices will be magically positive today after being down the whole day. Wait for it. Long live the PPT (Government Sachs)!!
April 13th, 2009 at 3:20 pm
I am a grasshopper.
The banks, leveraging as high as 40x, was not inflationary?
But the FOMC and Federal Government, pumping out loans, is absolutely inflationary?
I really don’t understand why one is different than the other, in overall effect. I’d presumed that the current mad dash of cash was an attempt to put a bulwark in place in the economy, since the 40x leverage simply deleveraged too fast.
I’d appreciate an education.
April 13th, 2009 at 3:27 pm
Mannwich:
If you were a certain group, you would do the same thing…it’s a hail mary pass…the alternative is too harsh a reality.
April 13th, 2009 at 3:30 pm
@Steve: Perhaps but it’s all going to end badly regardless and probably make things worse. I guess I have to just accept that this is likely going to go this way and prepare accordingly. Still frustrating nevertheless.
April 13th, 2009 at 3:32 pm
Everytime somebody says “this is just a bear market rally” on national television it adds 10 points to the S&P 500 and 10% to XLF.
April 13th, 2009 at 3:33 pm
We can – and will – see asset deflation cohabiting with commodity inflation. It will be ugly.
More inflation in things we need, and deflation in assets requiring debt, as interest rates grind higher.
“Unimpaired assets” should out-perform.
April 13th, 2009 at 3:34 pm
Mannwich @ 3:17
“Long live the PPT (Government Sachs)”
Well, I wouldn’t describe them as a PPT so much as a market manipulator in both directions. At some point in the next few weeks, they’ll be dumping everything in the last half hour instead of buying it.
April 13th, 2009 at 3:34 pm
@Mannwich
Simply more of the same…QQQQ volume is half its 100 day MA as of 3:30. This is a light volume distribution to suckers.
April 13th, 2009 at 3:39 pm
“Figures to be published April 15 will probably show that the March consumer price index was unchanged from a year earlier, thanks to a steep decline in energy costs…”
Energy costs? Since when did we include energy costs in CPI (or food costs, for that matter)???
April 13th, 2009 at 3:40 pm
“Since when did we include energy costs in CPI (or food costs, for that matter)???”
We include it if it suits our purpose…otherwise, we exclude it.
April 13th, 2009 at 3:41 pm
Super-Anon’s post reminded me of an segement of an article I read years ago in Dirt Rider magazine regarding adding a small amount of mass to the flywheel of a dirt bike engine.
Experiment regarding the effects of velocity on a small mass.
Step 1. Attach a string from a tree limb to a golf ball such that the golf ball hangs at your forehead.
Step 2. Have your partner lift pull back the ball about 18 inches from you head and let it swing down until it collides with your head. Note the force of impact.
Step 3. If you dare, have your partner swing the ball at maximum velocity and note the impact.
As long as the rate of acceleration to the velocity of money is low, just barely enought to break the coefficient of friction, perhaps we can manage to reduce the mass (supply) before it picks up too much speed.
We can just knock the economy in the head lightly.
April 13th, 2009 at 3:59 pm
Still looking for the 10% pull back that isn’t being allowed to happen. Volume is light yet again. Every 50 point rise in the S&P prompts me to buy a few more puts. I’m halfway to my allocation.
@constant – Looked at adding the per capitia, doesn’t really do anything to my models. It’s the eqivalent of dividing everything by x. Percentages don’t change, and the rate of change between percentages don’t change. The only aside I got out of it was that if the US takes on all outstanding debt that they report on ~52 Trillion, then we would be on the hook for just less than 200k each.
April 13th, 2009 at 4:10 pm
In the last 21 days, total put/call has been above one exactly one time…astounding! No fear! Decades lows!!
April 13th, 2009 at 4:14 pm
Goldman out early…so brazen
April 13th, 2009 at 4:14 pm
Steve Barry @3:40
Exactly! I guess Core CPI (inflation ex inflation) is no longer needed, so it has been discarded. Makes me all the more cynical about this whole rally, and whatever else they’re not telling us.
I’m sure they’ll be digging through the trash to find Core CPI again before the end of the year.
April 13th, 2009 at 4:31 pm
Inflation is everywhere and always a monetary phenomenon. It has nothing to do with slack capacity, or laid-off workers, or any of that Keynesian stuff. Inflation is essentially a change in the accounting. Ceteris paribus, if there are more dollars today than yesterday, but the same amount of quarter-pounders, the price of quarter-pounders will go up.
It does matter (the level of inflation) how much the money supply changes hands (velocity), which in turn is determined by how much demand there is for the stuff, which is itself determined by how much demand there is for the goods and services money represents.
But even at very low velocity, there can still be inflation, if there is more money than is needed relative to the demand for goods and services it represents. And the inflation might appear just as a decline in the rate of deflation that would otherwise obtain if the money had not been created.
If you think the Fed isn’t furiously adding money to the economy, just take a gander at their balance sheet of late. It is now at $2 trillion, and expected to go to $3 trillion by years end. All of the increase represents new dollars, but without any new output. Most of the new dollars are going directly to housing ($750 billion to buy MBS, in addition to $500 billion already planned or bought). But money is fungible. If you buy down the rates for MBS to juice the housing market, you might arrest the decline in housing prices, but you’ll probably also create another bubble, either in housing or somewhere else. Incidentally, no one, except the Fed, voted on any of this implicit taxation.
That’s why I’ve been in Karen’s camp for a long time. Buy some gold (the real stuff, not just an etf) because you might need it to buy stuff with one day, and for speculating/investing, I pick oil, because dollars are really priced in oil anymore, and it’ll be a long while until we are free of the need for it.
April 13th, 2009 at 4:37 pm
This week’s PPI/CPI combination may provide one of the last opportunities to buy TIPS.
If the numbers are very soft, TIPS will probably sell off. I would be a buyer on weakness.
April 13th, 2009 at 4:57 pm
I wonder about the same thing our friend Randomletters asked about
The banks, leveraging as high as 40x, was not inflationary?
weren’t they just printing money also? and weren’t they just making out of thin air? isn’t this true of any body who was using leverage of say more than 10 times? they were just acting like they 40 million dollars when all they really had was 1.
But the FOMC and Federal Government, pumping out loans, is absolutely inflationary?
April 13th, 2009 at 5:02 pm
Since money = credit = debt it is not just currency or government fiat that must be measured to decide this question.
If debt is now being destroyed faster thatn Bernanke is inventing money, then the total is decreasing and we are heading toward deflation.
We saw the inflation back in 2006-2007 when storefront mortgage outfits printed money so fast that it drove a speculative housing bubble.
April 13th, 2009 at 5:20 pm
Inflation is relative. For example, a lube oil and filter costs me $35 today. When oil was at $145 a barrel it cost me $30 (same place). I have mentioned here before that consumer prices at the grocery store are rising. When you are paying roughly the same but getting less (ounces or pounds) you are paying more. Then there’s inflation by dilution of the dollar by printing more of them. Which causes it to lose more in purchasing power. TIPS? Please. We know those numbers are rigged. Does anyone believe that inflation in the long term will be lower than 2.8%? I have to go take my meds….
April 13th, 2009 at 6:29 pm
To what extent does the collapse of the shadow banking system feed into the collapse of velocity? Did the Fed ever measure the effect that this market had on overall credit?
I think that this highly opaque market is playing a much bigger role than we realize.
April 13th, 2009 at 7:50 pm
Sounds awfully familiar. Bifurcated reflation explanation anyone?
Keep an eye on what GS is up to. . . pump, then dump, raising capital to pay off their gubmint loans, then short, and then shift. . . to basic first order commodities.
April 13th, 2009 at 8:19 pm
What if both Friedman and Keynes were both wrong?
What if there is something else going on here? What if our current monetary system is nothing to do with fractional reserve banking or the Fed printing a few trillion bucks. What if money creating powers were actually ceded to large financial institutions who created “credit” for the last couple of decades, and used that ‘trust’ to create the largest credit/money/asset/debt bubble of all time. What if everything we were ever taught in B-schools and econ classes was wrong?
I think the Fed needs to “print” 20-30 Trillion to counteract this credit bubble collapse.
April 13th, 2009 at 8:48 pm
@karen: Of course the world is awash in money. OPM. And the Os are bailing. But to where? If I had OPM I’d shrink my perspective to local. Kind of like “micro-loans”. How much Orange County insanity was funded by Orange County money? There may be hope yet. BTW, Newport Beach is not really that cool. I have no concept of sane people paying those prices for shacks. Must have been their parents’ money.
April 13th, 2009 at 8:57 pm
@AT: You know what? I had a similar thought about a short time ago after reading this post and the comments. What if everyone is wrong? I think this is the problem with Summers and Geithner – like Rummy and the neo-cons they’re whole world view is that the financialization of our economy was/is a good thing, so they’re not going to all of a sudden admit that they were not only dead wrong but catastrophically wrong. This is likely why they’re scurrying to put humpty dumpty back together again. Might work for a little while but it won’t last. As I think leftback put it – the parasite (banks) is eating the host (the greater economy and country).
April 13th, 2009 at 8:58 pm
….clarification: Like Rummy and the neo-cons worldview of “promoting democracy in the Middle East”……
April 13th, 2009 at 9:06 pm
the parasite (banks) is eating the host (the greater economy and country).
IOW, squeezing the Golden Goose till blood is squirting from it’s little, bitty eyes.
Just keeping it real for Joe 6pack
April 13th, 2009 at 9:18 pm
I know I’m naive, but didn’t Friedman place the blame of the depression on the fed for withdrawing liquidity?
April 13th, 2009 at 9:47 pm
“wally Says:
April 13th, 2009 at 5:02 pm
Since money = credit = debt it is not just currency or government fiat that must be measured to decide this question.
If debt is now being destroyed faster thatn Bernanke is inventing money, then the total is decreasing and we are heading toward deflation.”
Give Wally the prize. He got it right. It’s not Keynes v. Friedman. It is hugely more complex than that.
If either Keynes or Friedman were able to manipulate an economy with a *FIXED* supply of “money”, then either would be able to produce an outcome that they desired, within reason. In fact, Keynes and Friedman (for the most part) both did all their work in a world in which the monetary systems were based on some form of “metallism”. That is to say, that the amount of currency outstanding–and thus the value– was subject to be redeemed by some FIXED amount of a metal, usually gold and/or silver.
Since Nixon uncoupled the dollar from it’s metallic backing on August 15, 1971, the US Dollar has “floated.” Its value has been determined since by…what someone will give you for it. That is the value of our currency, what someone will give you for it.
One of the issues resurrecting itself is the inflation of the 1970’s and Paul Volcker’s remedy for it.
In the early 1970’s, the price of crude oil shot up from about $3 a barrel to over $40 a barrel. That sent the price of gasoline skyrocketing (relatively). Not only did it cost more to put gas into the tank, but it also cost more to transport everything that was sold, which added to the cost. Wages and benefits that were tied to inflation went up.
Enter Volcker.
He created a recession by raising the prime interest rate to levels that were once thought to be usurious. Now some people worship him. But make note that prices didn’t come back to former levels; they only stopped going up. Millions of people were out of work; gasoline was scarce…and expensive.
The rapid increase in the price of oil was a real increase in the price of a key commodity, one that the economy couldn’t do without, or substitute for. We had to pay the price or do without. Volcker’s interest rate policies caused the demand for the dollar to increase because there was a demand for dollars to buy high-yielding American debt. (Thus the real value of the payments for oil grew), so the sellers of the oil were somewhat assuaged.
But the US has never been the same again. We have lurched from one economic crisis to another. First it was the 1970’s Oil Crisis, then the Savings-and-Loan Crisis, then the crisis of 1987, then the LTCM crisis, then the Y2K crisis, then 9/11 Crisis, and now the mortgage crisis .
There has to be a better way.
April 13th, 2009 at 9:48 pm
http://www.debtdeflation.com/blogs/2009/01/31/therovingcavaliersofcredit/
““Talk about centralisation! The credit system, which has its focus in the so-called national banks and the big money-lenders and usurers surrounding them, constitutes enormous centralisation, and gives this class of parasites the fabulous power, not only to periodically despoil industrial capitalists, but also to interfere in actual production in a most dangerous manner— and this gang knows nothing about production and has nothing to do with it.” [1]
Ten years ago, a quote from Marx would have one deemed a socialist, and dismissed from polite debate. Today, such a quote can (and did, along with Charlie’s photo) appear in a feature in the Sydney Morning Herald—and not a few people would have been nodding their heads at how Marx got it right on bankers.F
He got it wrong on some other issues,[2] but his analysis of money and credit, and how the credit system can bring an otherwise well-functioning market economy to its knees, was spot on. His observations on the financial crisis of 1857 still ring true today:…”
April 13th, 2009 at 9:49 pm
http://www.debtdeflation.com/blogs/2009/01/31/therovingcavaliersofcredit/
“His observations on the financial crisis of 1857 still ring true today:
“A high rate of interest can also indicate, as it did in 1857, that the country is undermined by the roving cavaliers of credit who can afford to pay a high interest because they pay it out of other people’s pockets (whereby, however, they help to determine the rate of interest for all), and meanwhile they live in grand style on anticipated profits.
Simultaneously, precisely this can incidentally provide a very profitable business for manufacturers and others. Returns become wholly deceptive as a result of the loan system…”[1]…”
April 13th, 2009 at 10:22 pm
not sure that we haven’t always lurched from one crises to another. they just used to be much worse and take infinitely long to recover from. After all the last two big ones prior to 1971, took a minimum of 10 year to 30 years to recover from. how is it not better to have smaller ones that don’t near as long to recover from.
April 13th, 2009 at 10:22 pm
Thanks for posting that Hoffer. I first saw Steve Keen’s stuff on Yves Smith Naked Capitalism blog. I mentioned it here a few months ago and may have linked. The first time I read through his work my mind started spinning. You know that feeling where you just know “there’s something wrong” but you can’t pin it down, and then someone else comes along and seems to nail exactly what you were searching for….this guy did it for me. I think either you or some other good poster linked this more simplistic look at credit as well….it’s an easier read than Steve’s work and approaches it from the other camp, the taker of credit.
http://mises.org/story/3329
April 13th, 2009 at 10:28 pm
@ AT,
I believe, in actuality it is a simple reflection of disequilibrium in the disparity of wealth getting out of hand and the consequences of the shenanigans created to keep up that disparity.
Free Market Capitalism is in theory based upon the market forces to over time allocate the capital to it’s best and highest purpose, but in the real world, inefficiencies prevent this from occurring at times. Add to this the human factors of greed, corruption, and myopia in political, legislative, and market systems and the whole thing gets thrown out of whack.
Our real economy has positive feedback loops inherent in the complex system that have concentrated money and power into increasingly small groups that has created a disparity which under normal circumstances would cramp the system and force a return to more equitable distribution. This time, however, those with the capital and the power set up the system to concentrate the profits at the top and not “trickle down” the money to the proletariat via wages enough to support the 70% consumer spending based GDP in the long run, so they devised a plan to keep the game going a little while longer via credit.
(add tv, and cultural consumerism, and zombifying drugs to the mix and ya got yer happy oblivious consumers spending away for years racking up the so called debt bubble!) This is what created the credit bubble. . . those with the concentrated money and power letting greed and stupidity get a hold of them to the point where they started creating ways to suck more money and power out of their oblivious consumer slave society, and in the process wrecked the whole thing.
In the long run, the way to fix this mess isn’t the deleveraging of the massive credit bubble (although that is what is immediately apparent). It is fixing the system as a whole so that we as a society and economy become more efficient in general, less concentrated on materialism and consumer spending, and more equitable and less corrupt in the aspects driving the disparity of wealth and the economy as a whole.
In reality, a system based upon the aspects of competing forces and equilibrium will always fail if the system has inherent flaws that do not allow this to occur and create feedback loops causing it to gradually skew. You can only keep up the charade going while you loot for so long until it resets, and sometimes, it resets in a catastrophic manner via war, revolutions, or civilizational collapse.
Just some tinfoil hat bs, but you might want to check out some
http://wonkroom.thinkprogress.org/2008/03/17/1928-resemblances/
http://elsa.berkeley.edu/~saez/saez-UStopincomes-2006prel.pdf
April 13th, 2009 at 11:04 pm
AT,
Graphite had found that mises.org article~ BR’s search engine works pretty well..
though, to this: “You know that feeling where you just know “there’s something wrong” but you can’t pin it down, and then someone else comes along and seems to nail exactly what you were searching for..”
Yes, hard to describe the positive sensation of that type of occurence..
reminds me of an article I had come across during some ‘deep web’ searching..posted by a couple of Korean Ph.d.s that were delineating their findings on Wealth distibution as a function of (bank reserve requirements+monetary velocity)..
LSS: lower bank res.req+higher monetary velocity the higher the concentration of wealth over a shorter period of Time.
haven’t been able to find the art. since, even the ‘bookmark’ brings back 404 errors.
though, Prechter’s graph sketches out a scenario that is, both, likely, and easy to grasp..
RP is, too often, radically mischaracterized, and, more often, poorly understood. That dude is one of the Best.
April 13th, 2009 at 11:56 pm
It’s no longer money nowadays. In the era of fractional reserve, credit issuance passes for the creation of money. And the fact is, very few are borrowing. The overwhelming debt we carry shrinks any threat of inflation.
April 14th, 2009 at 12:21 am
the other things people overlook about ‘inflation’ are the relative Demands across Asset classes..
LSS: if there is a perceptible shift into ‘non-financial’ Assets, we’ll see Price increases in the newly Demanded realm(s) that’ll make our eyes water, if not bleed..
so many Financial claims have been generated v. Physical World, mixing metaphors, many are going to be left without ‘Chairs’–physical/meta-, and otherwise..
April 14th, 2009 at 12:28 am
“willid3 Says:
April 13th, 2009 at 10:22 pm
not sure that we haven’t always lurched from one crises to another. they just used to be much worse and take infinitely long to recover from. After all the last two big ones prior to 1971, took a minimum of 10 year to 30 years to recover from. how is it not better to have smaller ones that don’t near as long to recover from.”
First, I’d like for you to go to your local library and check out the book, “The Black Swan,” (by Nassim Taleb) and read it twice. Then I’d like for you to check out “The (Mis) behavior of Markets” (by Benoit Mandlebrot and Richard Hudson) and read it three times.
After that, then read, “Bad Money” (by Kevin Phillips), for a runup to the present malady.
The information is out there.
April 14th, 2009 at 1:27 am
GS (PPT) has been providing the bid under the market as the the FEAR machine (CEOs, US Treasurey, Fed, FDIC and POTUS) conspired to stoke the fear of missing out on the big rally.
Now that GS is going to close its $5B secondary offering at nearly 2x its valuation only 30 days ago, and very close to the price of its latest offering, what is their incentive to prop up the market further?
My guess is that GS would rather let the other GSEs (financials) fend for themselves and attempt to raise capital in a more challenging market conditions (lower valuations).
This would further GS’s competitive advantage. Since GS runs the show, you can expect the rug to be pulled out from under the market shortly after it successfully places its secondary. Perhaps as early as tomorrow or Wed…
April 14th, 2009 at 1:57 am
there is first the issue of whether this is (has been) a liquidity or a solvency/credit crisis. you either worry about the fed, or you worry about the banks. myself i worry about the banks, and the defunct credit market that was based on securitized assets.
on the fed, the theoretical discussion about velocity/quantity misses a specific quandry. according to theory, if you put quantity X of money out when velocity is low, then when velocity increases you have to sop up some quantity less than X over some specific time period in order to prevent money based inflation. the quandry is — what time period, and how much money?
if he issues way too much money then he will cause stagflation, because even if he draws off enough money to firmly stifle growth, it will still not be enough to stifle inflation. (this is the specific scenario soros pointed to in his recent interview.) if he doesn’t issue enough money, the economy will stall, the damage will increase, and the dynamic inertia becomes more unpredictable and more costly to fix. he has to put out just enough, quickly enough, to get the economy going, then withdraw the money gradually to keep the economy back to sustainable growth, then withdraw the remaining surplus money before inflation expectations get reset. he is also surely counting on the major economic restructuring that is going on (e.g., a GM bankruptcy) to break the normal money channels (distribution, trade, sales, construction, etc.); this will slow velocity substantially until new channels are formed.
i don’t believe political considerations matter to bernanke here. and he is outside the conceptual envelope of the pathetically simplistic AS/AD charts that dr. meltzer surely holds dear. the problem is not structural but dynamic, and history can only guide us about structures. (if it could guide us about dynamics, nobody would get caught in a bursting bubble.) timing and a gut feel for economics and money matter more than balance sheets and dogma.
and i’d enjoy spectating at this great test of human cunning and character, if i didn’t have wealth to protect.
April 14th, 2009 at 2:11 am
drollere,
you go w/: “according to theory, if you put quantity X of money out when velocity is low, then when velocity increases you have to sop up some quantity less than X over some specific time period in order to prevent money based inflation. ”
in that theory, how does this: “you have to sop up some quantity”, specifically: the “sop up” part, happen?
I’ve yet to hear a believable explaination to that query..
April 14th, 2009 at 2:14 am
Friedman will be forgotten. Though I admittedly still see a faceless grin in nightmares that must be his.
April 14th, 2009 at 2:34 am
here’s, yet, a different take:
“…1. Central or “free” — the bank serves only one
critical function in an economy (a slight
exaggeration, but not by much)
2. That function is wholly described in Roger Ward
Babson astoundingly fine book on _Banking,
Bond and Stocks: The Elements of Successful
Investing_, 1919
Do visit two citations to this book in the
CITS DEBT WATCH:
http://groups.google.com/groups?q=%22roger+ward+babson%22+1919&ie=ISO-8859-1&hl=en
3. The one critical function of banking is to assure
that the income from loans exceeds the cost
of loans.
Babson notes that the only thorough way to assure
this is a banking process where bankers have
extensive knowledge of the risks attendant to
each loan.
The banker sets a risk premium accordingly.
The bankers who fail to do so, are put out of
business during economic hardships.
The bankers who loaned according to careful
practices stay in business.
4. As for the money supply, as we know from the
very basic principal of macroeconomics:
PY=MV
(where P stands for aggregate price;
Y for national output; M for money supply;
and V for velocity of money)
The relationship between M (commonly M2),
and inflation is hotly debated.
Indeed, if the treasury expands the supply
of money via the purchase of goods and
services that no debt secures, then, they
are truly printing money. And, most often
the result is inflation — a nasty punishment
of all “fixed income” folk, who, now, continuously
pay the “hidden tax” imposed by the “printing
of money” that lacks backing — either as federal
debt, or as a “call upon” future tax income.
My point is — unless hoarding occurs, the
velocity of money can increase as fast as
modern banking can get money to exchange hands.
So, a fixed money supply has only a secondary
effect on an economy’s ability to grow, as, that
growth can simply have a 1:1 correspondence with
the increased velocity.
But I do see a tension. It takes time and
deliberation for a banker to meet the risk
assessment process described in #2, above…
*****In summary, it is my view that over 90% of outstanding loans
would not pass the risk/security test that Babson describes
in his 1919 book. ******I.e., we are facing the possibility of
huge defaults. Does FDIC save the day? Well, if you are
a federal government with a $44 trillion debt, and if an
economic downturn assesses that the U.S. Federal Government
is a bad risk — they have no money except via taxation.
(there is less than $1 of reserve against every $100 of FDIC
insured funds)
And, if we have a President who doesn’t have a clue about
all this, and he actually just signed a bill to yet increase
the U.S. Federal debt by another $330 billion per year, and I’d
say “our goose is cooked.”
There is only one, non-hyperinflationary avenue out of such
a mess. The President has the power, by executive order,
to convert all “T” bills to 30 year bonds…”
http://www.colorado.edu/peacestudies/sustainable-economics/debt/archives/msg00784.html
01 June 2003
and, as a reminder MIT is not Hartford..
April 14th, 2009 at 6:51 am
Bernanke’s term is up in 2010. Assuming he has had it, then he won’t be around to apologize when inflation really kicks in. Just like Greenspan he can say, from offstage in the book he will write, that ‘mistakes’ were made but he had no other good choices, yada, yada, yada.
April 14th, 2009 at 7:56 am
If you think the Fed isn’t furiously adding money to the economy, just take a gander at their balance sheet of late. It is now at $2 trillion, and expected to go to $3 trillion by years end. All of the increase represents new dollars, but without any new output. Most of the new dollars are going directly to housing ($750 billion to buy MBS, in addition to $500 billion already planned or bought)
——————
1. Government is squeezing out the private players so capacity is bound to decline.
2. Government is reinjecting money into the zombies. People aren’t stupid at one point that money will flow out of the dead sectors and go into the new ones.
3. But when this happens, the money into those sectors will probably flow faster than production so prices will increase.
4. Contrary to popular belief, throughout history deflation has been a good thing… it’s not so good now that we have central banks! Government NEEDS inflation to make future debt affordable.
5. Deflation is my personal best case scenario and because there is an obvious lack of fear when it comes to the prospect of inflation, I’m betting we’re going to get hit.
April 14th, 2009 at 11:40 am
Fact is that you cannot increase your prices beyond what your customers can pay. To get inflation (and we desperately need it) we have to first get increases in wages – so consumers can afford to pay more for products. That will not happen before unemployment sinks to less than 5% or we get 60 senators from the socialist party. Unfortunately inflation is at least 5 years away.
April 14th, 2009 at 11:44 am
BR, you need to include Steve Keen in this discussion.
Keynes v Friedman are NOT the only 2 ideas.
http://www.debtdeflation.com/blogs/2009/01/31/therovingcavaliersofcredit/
April 14th, 2009 at 12:19 pm
If they printed 560 trillion dollar bills and that paper was placed in a bankbox and never got out, the supply of dollars would have increased by a huge amount, yet it would have absolutely no effect on inflation or anything else.
Money cannot create inflation until it gets into the hands of consumers (or investors). If it hits the hands of housing consumers it will create inflation in housing, if it hits the hands of stock consumers it will create inflation in stocks.
Right now the amount of money they are creating is not enough to compensate for the destruction of money created by financial institutions in the past decade. It seems that the created money is almost all hitting the hands of “government bond” investors so we have inflation in bonds. The money destroyed is coming out of consumers of housing & stock investments, so we have deflation there. Since the finaincial institutions refuse to put their bailout money where it is needed to fight deflation, government must bypass them and invest directly.
April 14th, 2009 at 2:32 pm
Well, I would say that “the market in Treasury Inflation-Protected Securities as of April 6 indicated long-term inflation expectations of 2.5 percent, below the 2.8 percent average inflation rate of the past 10 years” is painted while wearing sunglasses…
In this economic downturn, 2.5 percent inflation might be “high” considering nobody is spending money … If job losses were eliminated and foreclosures were not happening, my guess is that the “long-term inflation expectation” would be much higher than 2.5% and reflect an increase due, likely, to the increase in monetary “inputs”…
Of course, I wear glasses as well…
April 15th, 2009 at 7:37 am
M2, the money stock, has not skyrocketed, but M1 (reserves held by banks at the Fed+currency in circulation) has. The banking system currently has $.8tn in excess reserves, these are its Fed deposits that it can lend out, thereby increasing the money stock, but has not lent out. The Fed recently (Aug) began paying interest on them, so the Fed funds spread over this Fed-paid interest is effectively zero, motivating banks to not lend the excess reserves.
April 15th, 2009 at 10:32 am
d4winds,
Very interesting. Does that mean that the Fed is basically capitalizing sick banks for free, so they can make their stress test goals and capital ratio’s? Just asking because I don’t know enough about what counts as “capital” in the regulatory requirements, and I figure it must be serving some purpose to move that paper money from the Fed vault to the bank vault.