Jump to content
House Price Crash Forum

Everything You ‘Know’ About The Fed Is Wrong


Recommended Posts

Following on from my previous post...

To use an analogy that I think everyone can understand would be that, "every kid who gets paid twice the pocket money thinks that they can buy twice as much in the tuck shop, what they might not realise is that if there is only one tuck shop, and every other kid gets given twice as much pocket money, it doesn't increase what's available to buy."

Edited by GradualCringe
Link to comment
Share on other sites

  • Replies 69
  • Created
  • Last Reply

Top Posters In This Topic

Following on from my previous post...

To use an analogy that I think everyone can understand would be that, "every kid who gets paid twice the pocket money thinks that they can buy twice as much in the tuck shop, what they might not realise is that if there is only one tuck shop, and every other kid gets given twice as much pocket money, it doesn't increase what's available to buy."

yeah, but they can buy the luxury cola cubes.....and of course, the shopkeeper, the suppliers, the growers, will all be needing to finance their doubling of money too.

hence the inflation to compensate.

Link to comment
Share on other sites

I'm not sure if you've noticed, but I've provided numbers that show there is a clear limit to how much money printing can occur before a hyperinflation occurs (i.e. governments financing a deficit of greater than 20-30% of expenditure through money printing), an event which is in no way sustainable (have you read the historical accounts of hyperinflations)?

I personally think a level of high inflation is what is needed, but the inflation needs to occur in the right place, ie in wages outside the financial sector.

A quick thought experiment::

Right now the system is set up so that banks get access to the money first (and at low rates). This means they can buy up assets cheaply before they then inflate them by lending out to the broader economy which will then bid up those asset prices. This is why bankers have got rich.

I can see an effort by the banking class to now blame low growth on the persecution of banks in more recent times. Actually this is false, yes it is true that right now growth and inflation are low because the banks aren't lending, but that is because we have this weird insistence that banks should be the source of lending and monetary growth for the economy. In reality they are just middlemen and I think we should just cut them out of the equation.

It would be easy to inject more money in to the economy, we could just abolish income tax for everyone (except those in the financial sector) and have Government print the rest to cover Government spending which could be limited to 2% growth. This would massively boost the economy, also cause high inflation, but suddenly make the financial sector very poor in comparison.

Link to comment
Share on other sites

I personally think a level of high inflation is what is needed, but the inflation needs to occur in the right place, ie in wages outside the financial sector.

A quick thought experiment::

Right now the system is set up so that banks get access to the money first (and at low rates). This means they can buy up assets cheaply before they then inflate them by lending out to the broader economy which will then bid up those asset prices. This is why bankers have got rich.

I can see an effort by the banking class to now blame low growth on the persecution of banks in more recent times. Actually this is false, yes it is true that right now growth and inflation are low because the banks aren't lending, but that is because we have this weird insistence that banks should be the source of lending and monetary growth for the economy. In reality they are just middlemen and I think we should just cut them out of the equation.

It would be easy to inject more money in to the economy, we could just abolish income tax for everyone (except those in the financial sector) and have Government print the rest to cover Government spending which could be limited to 2% growth. This would massively boost the economy, also cause high inflation, but suddenly make the financial sector very poor in comparison.

I'd broadly agree. By necessity Osborne has spent fortunes but consistently lied about his intentions, showered money on those responsible for the crisis - bankers and house price gamblers - while squeezing everybody else to dress up the numbers. He's starved what he should have fattened and fattened what he should have starved. The banking system had to be saved post-2008 but should have been nationalised in the process and the principal villains made an example of. Subsequent bailouts ought to have gone to households and businesses in the form of tax rebates and VAT reductions.

Edited by zugzwang
Link to comment
Share on other sites

Until central bank balance sheets have returned to normal sizes and short term funding rates are at normal levels (say CPI + 1.5%),

That can't possibly happen with negative nominal interest rates.

Anyway, definitions of normal are entirely subjective and depend entirely on how long of a historical period one wishes to take as defining normal.

Link to comment
Share on other sites

snip

It would be easy to inject more money in to the economy, we could just abolish income tax for everyone (except those in the financial sector) and have Government print the rest to cover Government spending which could be limited to 2% growth. This would massively boost the economy, also cause high inflation, but suddenly make the financial sector very poor in comparison.

It would also unleash the public sector entitlement...think its bad now?....

and no, there would be little wealth created to cover the extra cash.

Doesnt matter who gets the excess, if there is 100% more, your money is devalued by 50%.

Everything then costs 50% more ( wages and premises are the biggest costs in most businesses), and whoops, we are back to square 1.

Indeed, Krugman would agree with you....the debt doesnt matter.

As for saving for anything...impossible....ANYTHING and EVERYTHING would be financialised...instead of weakening thebanks, you would make them even more essential.

Sorry, I beleive your plan is death to 2/3rds of the population...literally.

Link to comment
Share on other sites

That can't possibly happen with negative nominal interest rates.

Anyway, definitions of normal are entirely subjective and depend entirely on how long of a historical period one wishes to take as defining normal.

I don't think that we need to go that far back to find normal with respect to the Fed's balance sheet. http://www.econbrowser.com/archives/2013/03/whats_going_to.html

I agree that "normal" is subjective with respect to short term real rates.

The challenge at the moment is that I expect to lose at least a third of my savings (which I define more broadly as my net assets across all classes rather than simply bank balances and bonds as seems to be popular amongst the MMT crowd) unless I am very lucky indeed. I don't know whether this loss will come though inflation or deflation or, as I still see more likely, deflation then inflation. As long as my percentage loss is smaller than average, I think that I will be OK but I don't even know that with any degree of certainty.

Link to comment
Share on other sites

You HPCers need to take a big step back & look at this over the long term.

The federal reserve was formed in 1910. Back in those days :

You could have bought a house in Chancery Lane for £11,000, one in Fleet Street for £25,000 or one in Cannon Street – down by the Thames – for £20,000.

printy printy inflation is already here !! The fed has achieved 90% of what it wanted to do

& is doing pretty well.

Low interest rates hurting them ?? Interest on nothing

Isn't & hasnt cost them much : )

& now that gold isn't backing the currency & had been long forgotten they can now really drop rates.

Why give everyone more money than they need in interest , when they can force everyone including businesses

To borro

More money at lower rates.

Edited by Crashman Begins
Link to comment
Share on other sites

Following on from my previous post...

To use an analogy that I think everyone can understand would be that, "every kid who gets paid twice the pocket money thinks that they can buy twice as much in the tuck shop, what they might not realise is that if there is only one tuck shop, and every other kid gets given twice as much pocket money, it doesn't increase what's available to buy."

+1

However, if you give all the doubled pocket money to just one or two kids, the prices won't rise and the one or two good kids feel very rich and get to boss other kids around by throwing out a few sweets occasionally.

It may cause inflation of some luxury sweets though.

CLEWI-Chart.jpg

http://www.forbes.com/sites/scottdecarlo/2012/09/19/cost-of-living-extremely-well-index-our-annual-consumer-price-index-billionaire-style/

Link to comment
Share on other sites

http://www.telegraph.co.uk/finance/financialcrisis/10038882/Warren-Buffett-sees-brutal-damage-for-savers-from-central-bank-money-printing.html#disqus_thread

Warren Buffett sees 'brutal' damage for savers from central bank money printing

Veteran investor Warren Buffett has warned that savers and bondholders are suffering a "brutal" erosion of their money as the US Federal Reserve and other central banks force yields to historic lows.

Etc

Link to comment
Share on other sites

So long as wage rises are low at (about 2% at the moment). I am not worried about hyperinflation it simply cant happen.

All that QE is doing is replacing the money that the 0.1% aren't spending.

If I had £375 billion in a safe at home. The printing of another £375 billion wouldn't have any real effect on things so long as my money stays locked away.

With savers not spending borrowers had to rely on new people borrowing money so they could pay down their debt. This worked fine until 2007/2008.

Without the Government stepping in the borrowers would have gone bankrupt the banks would have gone bust and the savers would have lost al their money.

Link to comment
Share on other sites

So long as wage rises are low at (about 2% at the moment). I am not worried about hyperinflation it simply cant happen.

All that QE is doing is replacing the money that the 0.1% aren't spending.

If I had £375 billion in a safe at home. The printing of another £375 billion wouldn't have any real effect on things so long as my money stays locked away.

With savers not spending borrowers had to rely on new people borrowing money so they could pay down their debt. This worked fine until 2007/2008.

Without the Government stepping in the borrowers would have gone bankrupt the banks would have gone bust and the savers would have lost al their money.

What has hyperinflation got to do with wages?

All you need, is for people to lose confidence in state currency and then choose to save/hold something else. If lots of people do it, the price of state currency will go down (supply/demand).

For example, Bitcoin is often touted as a deflationary currency, when it is in fact inflating - more Bitcoins are mined every day. However, the market rate is dictated by demand relating to this supply. State money is no different in this regard, other than people being forced to pay taxes (and other debts) in state money, which gives it minimum level of demand.

Link to comment
Share on other sites

What has hyperinflation got to do with wages?

The only definition of hyperinflation I can find is when prices go up by over 50% a month.

when the Weimar Republic had hyperinflation people were taking their wages home in wheel barrows.

You need a feed back loop to get hyperinflation with wages trying to catch up with prices IMO.

Link to comment
Share on other sites

The only definition of hyperinflation I can find is when prices go up by over 50% a month.

when the Weimar Republic had hyperinflation people were taking their wages home in wheel barrows.

You need a feed back loop to get hyperinflation with wages trying to catch up with prices IMO.

Sure, but that can come from demand for the currency collapsing.

If an asset becomes toxic and people don't want to hold it, the value of said asset collapses along with the demand for it.

It doesn't matter whether the asset is state money, gold, tulip bulbs or whatever; prices relative to said assets will sky rocket.

Link to comment
Share on other sites

So long as wage rises are low at (about 2% at the moment). I am not worried about hyperinflation it simply cant happen.

All that QE is doing is replacing the money that the 0.1% aren't spending.

If I had £375 billion in a safe at home. The printing of another £375 billion wouldn't have any real effect on things so long as my money stays locked away.

With savers not spending borrowers had to rely on new people borrowing money so they could pay down their debt. This worked fine until 2007/2008.

Without the Government stepping in the borrowers would have gone bankrupt the banks would have gone bust and the savers would have lost al their money.

If the government run a deficit of greater than 20-30% of expenditure, funded by money printing for several years in succession, we will more than likely see hyperinflation.

We're not quite there yet (£375 billion over 4 years is approximately 12% of expenditure, per year, enough to re-inflate, but not enough to cause hyperinflation ).

Edited by GradualCringe
Link to comment
Share on other sites

I personally think a level of high inflation is what is needed, but the inflation needs to occur in the right place, ie in wages outside the financial sector.

A quick thought experiment::

Right now the system is set up so that banks get access to the money first (and at low rates). This means they can buy up assets cheaply before they then inflate them by lending out to the broader economy which will then bid up those asset prices. This is why bankers have got rich.

I can see an effort by the banking class to now blame low growth on the persecution of banks in more recent times. Actually this is false, yes it is true that right now growth and inflation are low because the banks aren't lending, but that is because we have this weird insistence that banks should be the source of lending and monetary growth for the economy. In reality they are just middlemen and I think we should just cut them out of the equation.

It would be easy to inject more money in to the economy, we could just abolish income tax for everyone (except those in the financial sector) and have Government print the rest to cover Government spending which could be limited to 2% growth. This would massively boost the economy, also cause high inflation, but suddenly make the financial sector very poor in comparison.

Starting with your last paragraph, you would have trouble (as have all governments who started this) with containing the growth in money to just 2%, as governments that have printed money in the past to cover their deficits, have found out that their costs go up faster than their revenue (just look at the issue of assignats in the lead up to the hyperinflation of revolutionary era France), and they have to print ever more to cover the spending gap resulting in hyperinflation. It would be simpler, fairer, nor create inflationary mispricing, and require no action from legislators to just let the banks go bust.

With regard to your penultimate paragraph, money has to have some backing i.e. a promise to pay, or convertability to some asset that requires physical effort to obtain, otherwise the temptation to print is too great, and more often than not (assignats being another good example) hyperinflation is the end result.

I'm a bit confused about your statement "In reality they are just middlemen and I think we should just cut them out of the equation", are you saying that the government should be the monopoly lender?

Link to comment
Share on other sites

If the government run a deficit of greater than 20-30% of expenditure, funded by money printing for several years in succession, we will more than likely see hyperinflation.

We're not quite there yet (£375 billion over 4 years is approximately 12% of expenditure, per year, enough to re-inflate, but not enough to cause hyperinflation ).

Its hot money. Can be used as collateral for multiples of credit creation, £375bn could easily become 3-4Trillion, and that's at extremely conservative reserve levels. Lack of demand, debt saturation is the only stopper in this particular bottle. If that changes for some reason, look out!

Link to comment
Share on other sites

Join the conversation

You can post now and register later. If you have an account, sign in now to post with your account.

Guest
Reply to this topic...

×   Pasted as rich text.   Paste as plain text instead

  Only 75 emoji are allowed.

×   Your link has been automatically embedded.   Display as a link instead

×   Your previous content has been restored.   Clear editor

×   You cannot paste images directly. Upload or insert images from URL.

Loading...
 Share

  • Recently Browsing   0 members

    • No registered users viewing this page.




×
×
  • Create New...

Important Information

We have placed cookies on your device to help make this website better. You can adjust your cookie settings, otherwise we'll assume you're okay to continue.