Posted on 10/02/2008 6:36:27 PM PDT by HarleyD
I'm sorry for the vanity but I have a question for our economists on this site. I'm in the process of moving at least some of my investments into more secure holdings. However, I was wondering if it would be possible that pumping $1T into the economy could trigger hyperinflation. I've been reading through this issue on various sites and it seems that some feel that hyperinflation could be trigger by the government failure to find buyers or pumping large amounts of dollars into the economy without proper tax revenues. Has there been any serious thought given about this issue in regards to the bail-out, or is $1T just a drop in the bucket compared to the number of dollars that currently are floating around? Your comments would be appreciated.
It depends. If there is truly a liquidity crises the answer is no, since the economy would absorb this money. If they are wrong, interest rates would have to drastically rise to prevent hyperinflation. therefore, the short answer is probably not.
M3 is contracting as is net lending. We are in for a bout of deflation first.
jas3
M3 is contracting as is net lending. We are in for a bout of deflation first.
jas3
With our luck, we will get inflationary depression...
Second, the Paulson plan has the Treasury buying assets from banks with money the treasury raises itself in the usual way, from the bond market. This lets investors hold safe US treasuries in high demand, while the Treasury holds the riskier debts investors are not currently willing to hold. It does not increase the money supply. The Treasury is going to sell its own bonds to raise the money to buy everything it buys. Cash flows from people who want treasuries to the Treasury to the banks. Mortgage loans flow from banks to the Treasury and stop there, while its own debts go out to the investors supplying the money.
Third, what hyperinflation actually is, it the populace repudiating their own currency and refusing to hold it or use it. Which happens when everyone tries to spend every dollar they receive as rapidly as possible, for something else, thinking that the dollars will lose value in real terms if they hold onto them. This is always marked by rapid increases in the prices of everything measured in that currency, and by high interest rates for those who hold it anyway.
Right now, T-bills, safe dollar debts, yield 0.4%. A normal figure would be 3-5%, and a high figure would be 10-15%. That is a sign that people have a huge demand to hold dollars, not to get rid of them. This is a safety oriented demand, not a desire for more dollars to spend buying things. It means people fear being in assets besides dollars, fearing that the dollar price of those assets will fall in the near future. That is the opposite expectation that hyperinflations are made from.
You are hearing irresponsible doom-mongering by ideologues who think our entire financial and monetary system is unsound and must collapse, because it doesn't fit their own preferred policies in those areas. Which are approximately those of 1820.
The government is skating on thin ice. To get money beyond tax revenues, it issues Treasury bills. When someone buys the T-bills, that amount is added to the national debt.
Right now, the interest on the short term T-bill is about 1/20th of 1%. As Warren Buffet said, it is no different than stuffing your money into a mattress.
In a manner of speaking, that is quite right. Corporations are now putting great sums of money in T-bills precisely because they do not trust any other investment. T-bills will not make them money, but they will not cost them money either.
The same rule applies to individuals. Since most people would not invest in T-bills, and banks have become questionable, about their only alternative is keeping cash at home.
However, there are very definite limits to T-bills. If the government cannot meet the interest on those bills, now about 9% of the entire annual budget, it runs out of money. It might try and sell some assets if anyone is buying. But generally if it can’t persuade or coerce anybody into buying more T-bills, it has no money, and can no longer increase the national debt.
This almost happened once, in 1895. J.P. Morgan, the man, organized the New York bankers to bail out the government.
All that to answer your question. If the government no longer has money to spend, the every dollar created instantly translates to inflation. If the government wants to spend a lot more money, then it causes hyperinflation.
The government is skating on thin ice. To get money beyond tax revenues, it issues Treasury bills. When someone buys the T-bills, that amount is added to the national debt.
Right now, the interest on the short term T-bill is about 1/20th of 1%. As Warren Buffet said, it is no different than stuffing your money into a mattress.
In a manner of speaking, that is quite right. Corporations are now putting great sums of money in T-bills precisely because they do not trust any other investment. T-bills will not make them money, but they will not cost them money either.
The same rule applies to individuals. Since most people would not invest in T-bills, and banks have become questionable, about their only alternative is keeping cash at home.
However, there are very definite limits to T-bills. If the government cannot meet the interest on those bills, now about 9% of the entire annual budget, it runs out of money. It might try and sell some assets if anyone is buying. But generally if it can’t persuade or coerce anybody into buying more T-bills, it has no money, and can no longer increase the national debt.
This almost happened once, in 1895. J.P. Morgan, the man, organized the New York bankers to bail out the government.
All that to answer your question. If the government no longer has money to spend, then every dollar created instantly translates to inflation. If the government wants to spend a lot more money, then it causes hyperinflation.
The government is skating on thin ice. To get money beyond tax revenues, it issues Treasury bills. When someone buys the T-bills, that amount is added to the national debt.
Right now, the interest on the short term T-bill is about 1/20th of 1%. As Warren Buffet said, it is no different than stuffing your money into a mattress.
In a manner of speaking, that is quite right. Corporations are now putting great sums of money in T-bills precisely because they do not trust any other investment. T-bills will not make them money, but they will not cost them money either.
The same rule applies to individuals. Since most people would not invest in T-bills, and banks have become questionable, about their only alternative is keeping cash at home.
However, there are very definite limits to T-bills. If the government cannot meet the interest on those bills, now about 9% of the entire annual budget, it runs out of money. It might try and sell some assets if anyone is buying. But generally if it can’t persuade or coerce anybody into buying more T-bills, it has no money, and can no longer increase the national debt.
This almost happened once, in 1895. J.P. Morgan, the man, organized the New York bankers to bail out the government.
All that to answer your question. If the government no longer has money to spend, then every dollar created instantly translates to inflation. If the government wants to spend a lot more money, then it causes hyperinflation.
Hyperinflation has always resulted from deliberate policies by a government to achieve a particular goal (Weimar Republic is the best example).
Inflation we can cure. Deflation, is the real problem. We don’t know how to cure deflation (ask the Japanese).
I dumped everything into BRK.A a couple of weeks ago.
Right now we are seeing deflation. When the value of the Currency increases anyone would be a fool to lend money, hence the Credit Crunch, which in turn leads to more deflationary pressure. CASH is King today.
So the million dollar question is what effect the bailout or not will have. A trillion dollar bailout may actually be good (our economy is based on small amounts of inflation) if they immediately clean house, arrest Congress critters, and repeal stupid legislation, which of course won’t happen.
So the next round of bail outs will be hyper inflationary.
Now since I am no prophet and can’t predict the future, I am wrong more often than I am right, so I cheat by diversifying and play the immediate trends. The housing bubble has burst so we are in deflation which means cash is great or invest in companies that have lots and lots of cash. BRK.A
I agree completely. Do you know where I can get good M3 data?
Thank you.
I appreciate it when someone can distill tings down to layman’s terms.
You are witnessing market manipulation by offshore (ME) money, the Chicago Options Exchange, Soros and you know who to give us an October suprise. Obama is very plugged in to Chicago “gangs” and the financial markets are the worst thugs in the world.
I was convinced today when Harry Reid falsely said a insurance company was about to fail. It was totally fake but he was trying to ramp up the chaos to help Obama. Insurance stocks tanked. We are being played with fake polls, the MSM/Obama media, etc.
Do not worry about hyperinflation. Volunteer and donate now. Go to McCcain’s web site, go to their local HQ to volunteer. If yoy are in a solid Blue or Red state, they can get you to call voters in swing states. I made 2000 + calls for Bush in 2004. I would have preferred spending my weekends doing other things but we beat Kerry by a mile in 2004. Kerry was much stronger in Florida than Obama. Get to work - donate and volunteer. Ignore the polls.
I agree...the continued devaluation of real estate exacerbates the situation
I know that in Mexico the revaluation was done in a way unfair and exploitive of the middle and upper middle class. This was due to the methods of valuing debt and loaned/rented/held on contingency assets across the re-valuation which favored the debt holder and the asset owner.
The real problem is the political overreaction to a deflationary crisis, especially by an unscrupulous marxist like Barack Obama. If he’s the POTUS he’s likely to spend money like crazy to try to get reelected, and then we will move from deflation to hyperinflation. Look for gold to first bottom at about $700 per ounce, and then rise to over $2000; the sky’s the limit.
In our fast-dynamic economic system — a complex feedback distributed system with almost innumerable nodes and many couplings — especially the super-fast dynamic derivatives — it is quite possible we could experience wild swings from deflation to inflation. Or even a mix in somewhat less coupled sub-sectors of some with severer deflation and others with hyper-inflation. Money is merely gigahertz bits on the wire!
Sure we do. Encourage a massive influx of immigration (legal or illegal) to stimulate economic activity. That's exactly what the 2007 "open borders" debacle was all about, and it's no coincidence that the current economic crisis surfaced right around the same time the proposed amnesty bill went down to defeat.
The Japanese couldn't use this method because their language and cultural impediments make it very difficult for them to attract foreign immigrants.
Concur. There’s no doubt when we look at the prices of entire asset classes that we’re looking at deflation:
1. Housing
2. Land
3. Stocks/equities
4. Securitized debt
5. Commodities.
All this money eventually might show up in the economy, but first we have to fill these sinkholes on bank balance sheets, then housing has to stop going down before the banks will lend again, etc.
It would be more like, for example, a family’s $(old) 100,000 mortgage were to be revalued at $(new) 10,000, but the $(old) 30,000 salary revalued at $(new) 2,000.
The Treasury could issue $20 trillion tomorrow and buy half the planet. Everyone is scrambling to sell everything there is to get into cash, and into dollars specifically.
The doom mongers wrote a hyperinflation script and they beat the moon on it with borrowed money. They were wrong, straight round the table, and everything they goosed is cratering straight back to earth. Somebody forgot to tell the Fed that dollars are confetti. You see, the Fed didn't let the narrow money base move *one inch* from the spring of 2005 to the spring of 2008, 3 straight years, while the doom mongers shot the lights out.
Without more actual spendable money chasing all of it, none of those price increases were ever going to stick. They all just called forth supply and crushed demand. The bubble blowing doom mongers are the real inflationists, not the Fed and not the US government. And they are comprehensively wrong. It was all utter guff, the same utter guff thrown at Bush and the US. And it is collapsing as the house of cards it was all along.
Nothing is going to put your imaginary bubbles back together again. Dollars aren't confetti, the Fed isn't a ponzi scheme, but all the washboard con men screaming it is on every street corner, they all are. And they are naked, and they are broke.
The doom mongers wrote a hyperinflation script and they beat the moon on it with borrowed money. They were wrong, straight round the table, and everything they goosed is cratering straight back to earth. Somebody forgot to tell the Fed that dollars are confetti. You see, the Fed didn't let the narrow money base move *one inch* from the spring of 2005 to the spring of 2008, 3 straight years, while the doom mongers shot the lights out.
Without more actual spendable money chasing all of it, none of those price increases were ever going to stick. They all just called forth supply and crushed demand. The bubble blowing doom mongers are the real inflationists, not the Fed and not the US government. And they are comprehensively wrong. It was all utter guff, the same utter guff thrown at Bush and the US. And it is collapsing as the house of cards it was all along.
Nothing is going to put your imaginary bubbles back together again. Dollars aren't confetti, the Fed isn't a ponzi scheme, but all the washboard con men screaming it is on every street corner, they all are. And they are naked, and they are broke.
Exactly so, and here’s a nasty thought I’d like to try out on you:
Let’s not debate the politics of Paulson’s bailout plan. I’d just like to discuss the possible efficacy of same.
Let’s say that Paulson goes out, wanting to spend $300 billion to buy up crap paper.
So how are they going to do this?
Well, they’re going to float T-bill treasury debt, right? Short term paper, yes?
The amount of money that they’re going to float out there is going to increase interest rates at the short end of the curve, right?
So, as you say, “right now, the safety demand for money is nearly infinite...” (and I completely concur), so short-term T-bills with a higher interest rate attract a LOT of interest, and a whole bunch of liquid money flies into the T-bills... where it proceeds to sit.
And do nothing, waiting for the crapstorm to abate.
Uh, what was the point of this exercise again? To re-capitalize the banks, right? So this plan has just sucked a whole mess of liquidity out of the markets and into treasury debt... sorta self-defeating, no?
Do you see it going down any other way? Because I completely agree with you: the demand for safe paper/money is nearly infinite, as evidenced by the yields on 3-month T-bills... being nearly zippo.
And what are those dollars worth? And those dollars aren't dollars, not spanish weight (real de a ocho), not even greenbacks -- they are just some binary string of an electronic interchange. Move very fast.
“The Federal Reserve ceased publishing M3 statistics in March 2006. They explained that M3 did not convey any additional information about economic activity compared to M2, and thus, had not been used in determining monetary policy for years. Therefore, the costs to collect M3 data outweighed the benefits the data provided.[15] Some politicians have spoken out against the Federal Reserve’s decision to cease publishing M3 statistics and have urged the U.S. Congress to take steps requiring the Federal Reserve to do so. Congressman Ron Paul claimed that “M3 is the best description of how quickly the Fed is creating new money and credit. Common sense tells us that a government central bank creating new money out of thin air depreciates the value of each dollar in circulation.”[16] Some of the data used to calculate M3 are still collected and published on a regular basis.[15] Current alternate sources of M3 data are available from the private sector.[citation needed]”
Above from Wikpedia.
jas3
[M3 is contracting as is net lending. We are in for a bout of deflation first.]
I am hoping for deflation, we are 100% in cash right now. For the life of me, I can’t see how inflation can be good for an economy since it is a form of theft.
From an information theory perspective though, what you are looking for is steady inflation OR deflation - it hardly matters as long as it is stable. You can build a house with a ruler that grows or contracts if the rate of change is steady and calculable, but not if the rate of change cannot be accurately predicted. So while credit contraction along with M3 contraction is deflationary, the harm comes from unsteady jolts of cash infusions followed by money contraction destroying the information carrying capacity of the currency.
First, the treasury will fund it term, to match how long it expects to hold the assets. And rates will barely move - see infinite demand. At the most, the t-bills will climb back to around where Fed funds are, still rock bottom absolute numbers.
Second, the bills or notes will all wind up parked in the banking system, directly or indirectly. They will be liquid and people will lend them around as needed on repurchase agreements, there is nothing immobile about them. Banks have zero risk reserve requirements (Basel II) against treasuries, so the sales will add to their equity and their required risk reserves will fall.
The rates the banks have to pay to borrow in the bond market will fall, because they won't be having billion dollar mark to market losses every quarter.
The first bank that then extends itself to buy up all the distressed paper lying around at double digit yields, will then make a killing.
If the banks are borrowing at fed funds or CD rates and lending at the huge spreads currently on offer from high grade corporates, they won't lose money. A 5% rate spread will burn through their charge offs for actual bad debts, which at the most run 1% of loans per year.
The thing keeping them from healing on their own right now is the 20% rates and up they have to pay to borrow - which they read as a flat inability to borrow - if they are perceived to have a weak capital position compared to their peers. Lehman failed because its credit costs his 15% and stayed there for a month. Wachovia's notes hit 230% in the secondary market and it failed in a day.
That stops when people believe their own debts will be paid back in full. As soon as that is established, they can lend to anyone else not yet back to normal, undistressed rates.
Which does not mean it will be instant. It won't. There are commodity bubbles out there still going smash. There is real side economic weakness - jobs. The savings rate has to rise. All will take some time to work through.
But we will work through it with a functioning banking system, if when the Fed sets fed funds at 2%, it actually costs banks 2-3% to borrow. Right now the Fed can set rates at 2%, but the banks actually pay 8% for the strongest to 30% for the weakest. That is the thing the Paulson plan is designed to end.
The spreads (over risk free treasury rates) on financial company debts *are* the crisis, right now.
One man's opinion.
They might well issue $70 trillion tomorrow. No sense being behind the curve of liquidity.
Does that make you predator or prey?
Cash sometimes is not an asset, but a rapidly spoiling commodity.
“Dollars aren’t confetti, the Fed isn’t a ponzi scheme”
You have a gift for florid rhetoric, but actually it is quite simple.
The economy has sharply contracted, President Obama and the Democratic Congress are desperate about their reelection ( the only thing they care about ), so they prime the pump furiously with a trillion dollar deficit. The dollar is now falling again, and our oriental friends won’t buy all that debt, so the fed is prevailed upon to help out by buying most of it. There’s your hyperinflation trigger. With a fiat currency it’s all too easy. Of course it means we’d become Zimbabwe-North, but that won’t bother the nonexistent consciences of the governing party.
In fact you are engaged in "just jawing", in the market sense of the term. Meaning, you'd like to improve the rewards of a given asset position or a price on offer, but you aren't willing to switch which side of the trade you are on. Men who make markets are willing to take either side on the terms they propose. They cut and let you choose. They don't both cut and choose for you.
If bank debt (which is what dollars are) is a lousy asset because banks have a great deal because they can make dollars, you can hold bank stock instead of bank debt. If on the other hand you can see that bank stock is very risky, so risky you don't want to hold it yourself, then you are not being just when you demand the perfect safety of debts with that stock ahead of you, but attack it for earning something.
Yes a stable price level is preferable, but so is perpetual peace. Prices are unstable for a reason. Men are free and they are changing the world all the time. The demand for money can skyrocket - it is now for instance - and the only way to keep money prices even remotely stable when that happens is to let the quantity of money in existence rise right along with that demand.
It isn't like you can keep the price level constant by leaving the supply of money constant. It wouldn't, it didn't in the past. Instead it fluctuated with demand for money, and gave us the usual booms and busts. Including violent deflationary busts that we do not want to visit again.
Is that a fact? Sorry, I'm not the type to have any idea where to look, but do you know where there might be factual charts showing the M3 & M1 supply over the past year or two and up to the most current numbers available?
I should think this might be very interesting.
I know they quit compiling M3 data, there are other sources but they seem to be guesses as much as anything : (
We don’t seem to be able to get accurate Macro financial data.
In any case, the Housing Bubble wouldn’t have been figured into M3, just like stocks aren’t but that would be very nice data to have. I think that many people treat houses and stocks just like money. But it is interesting that the housing collapse would effect the M3 figures if we had them.
Any for-profit institution with the Feds market power would. Instead we have men pretending to be libertarians demanding they behave like disembodied eunuchs above reality in some airy Platonic realm of indifference.
Liquidity isn't wealth. Money isn't wealth. 98% of all our wealth is and is always going to be future claims on real production stretching a generation ahead and beyond. Trading present money for those future claims isn't gaming anything and it isn't ponzi anything, it is mere economy and the recognition that intertemporal trade exists and is profitable.
The fixation on money is absurd, it is just a modest subset of the liabilities of the financial sector, and no more magical than anyone else's liabilities. Net worth and total balance sheet size (assets and liabilities) of each sector are much more relevant.
[100% in cash, eh?
Does that make you predator or prey?
Cash sometimes is not an asset, but a rapidly spoiling commodity. ]
Yup, we have to make a move and try and buy hard assets at the bottom, otherwise our cash will be worthless. Now I just have to convince some others in the family.
[Inflation is not a form of theft. It may well be a form of error or a result of men’s errors, but it is not theft. No one ever guaranteed you that the exchange value of any commodity, money or anything else, would remain unchanged, no matter what other men do.]
Oh come now Jason, since when is inflation not theft? As Mugabe’s beaten hordes in Zimbabwe whether they’ve not just been robbed.
I think they will have to inflate. Obama wants to tax the upper middle class because the middle is just about out of disposable income.
Savings wiped out or at least depleted for many, stagnant income for the last 10 years combined with high inflation (30% decline of the dollar since 2000). State and local government budgets and pensions under water, declining tax revenue. They are bailing out credit cards, student loans, car loans,US banks, foreign banks, insurance companies and just about anybody that has their hand out and we are just getting started. There is not enough revenue.
IMHO deflation for a few months then $10 gas this time next year. Inflation is going to be the only way to any money in anbody’s pocket.
http://www.intellectualconservative.com/2007/12/13/inflation-vs-demand/
“”Inflation is a general rise in the overall price level. And it results from only one thing: a deteriorating currency; that is, excessive money creation by banks, in particular, central banks””
Look, the Fed was a bit slow about it in 2004, but they did the right thing. They raised rates to break the bubble, and they broke it. They left the narrow money supply constant from 2005 to 2008, spring in each case, and it broke a raging inflationary brainstorm that shot every commodity price and real asset into the stratosphere, with huge losses to real allocation effeciences and huge transfers to fundamentally unproductive (and sometimes downright hostile) interests and sectors.
That inflationary brainstorm *was* the fever, and it had to die. The Fed killed it, as was their duty. Now we have to clean up the mess, and that means playing lender of last resort for some of those smashed by their own idiocy and their pigheaded unwillingness to reverse themselves after the Fed made it ruinous to continue. These things play out on a bigger scale and with longer lags than most finance pros recognize, let alone the man in the street. But that is the pace economics naturally moves, and it can't be changed.
The cycle isn't something we can wave away with a magic wand or a pat ideological prescription. But we can manage it, we know how. Just let the tools work.
In Zimbabwe, there is indeed actual theft, but it involves goons and restrictions on trade and pricing, seizure of assets in the literal sense, etc.
In the US, private banks, not the government, create new money as they issue debts, betting on this or that entrepeneurial activity to succeed. When they are right, they add the value of the debts they issued. Yes it changes relative prices, *every* entrepenurial action of any scale does. But it is not theft. No force is being used, everyone is free to trade out of the way, etc. When large bets are made and fail, it hurts others - all large scale economic activity can and does produce externalities, sometimes positive and sometimes negative.
When I buy a coffee at Starbucks instead of a stock you just bought, I change the value of assets you own. Does this mean I just robbed you? When I lend to a business associate and he uses that to outbid you for a piece of land you could both use, it reallocates resources and it changes prices. Does that mean I just robbed you? Not at all. It just means that I am free to engage in entrepenurial or consumer activity, and I do not require a "by your leave" from you or from the government to do so. And if it changes the world in which you live and operate - and it does - and that includes making the exchange value of everything you own or want, bounce around, then tough freaking toenails. You are responsible for managing all that and adapting to it, not me. No, you may not run to the government and demand they put a gun to my head and stop me from doing anything, that might make the value of your assets bounce this way rather than that.
That is what calling inflation theft amounts to demanding. Because what causes it in this free society with modern financial capitalism, is the free financing decisions of private banks and their clients. If it is theft, bankers are the thieves, not the government. The government via the Fed merely regulates somewhat, rather belatedly, how much of it they do. It is their private free actions that are actually changing the effective money supply, and actually bidding resources away from their old holders, to the uses they bet on as entrepeneurs and financiers.
If it is theft to move assets in ways that change the values of things you own, then all meaningful economic freedom of others is theft. This is in fact the thesis of 19th century socialists, not of libertarians or capitalists. The attack on finance in the name of the imaginary norm of perfect stability of exchange values, is a reprise of the socialist attacks on capital generally.
Nothing can make the exchange value of *anything* perfectly stable. The instability of values is a direct consequence of the freedom of other men, and not of government coercion. Demanding that it cease can only end in the demand that the freedom of other men, cease.
The one who got this right was Hayek in Road in the context of the quest for economic security, and its tendency to destroy economic liberty. Economic liberty is something we actually *can* have, and it is worth having. Economic security *isn't*, and attempting to demand it destroys liberty.
If you don't like dollars are stores of value, don't hold dollars as stores of value. Unlike Zimbabwe, no one will hold a gun to your head if you prefer Euros, or gold coins, or diversified portfolio investment, or real estate, or gimcracks, art, relics, whatever you please. As for media of exchange, bank credit cards or folding cash will serve just fine and the amounts required are completely nominal. As for contracts, contract however you please, or accept the terms others want and they trade into the risk profile you want.
The average American household is short nominal dollars anyway, to carry real estate. In case nobody noticed, rather too aggressively, which brought us here. If inflation is set in stone, that means they were robbing the mortgage backed security owners.
It was a misunderstanding when it was first leveled as an accusation, based on expecting everyone to be in a single definite asset position involuntarily - long folding cash and owning essentially nothing else, beyond a few personal items. But that isn't remotely true, especially anymore. It also reflected a wartime finance use of monetary policy in the world wars, that is ancient history by now, in the industrial democracies. In short it is an outdated smear.
Well, everybody has their own opinion and time will only tell.
Just my opinion - The treasury has opened up the coffers to the fed to buy up all the bad debt. Treasuries are now bonds backed by bad debt, junk bonds if you will. This is point where many currency crises begin when private institutions risk level is reached and they now dump the questionable debt.
Such unassailable facts and airtight facts!
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