Posted on 12/12/2006 12:15:06 PM PST by GodGunsGuts
It's correct as it was written. The Fed typically hikes rates to fight inflation, and lowers rates to stimulate a sluggish economy.
Looks like someone wanted another hike.
That was the smart play in the '70s.
That's what I was thinking.
NeoCaveman's premise is correct, and foreign currencies are entirely irrelevant in this case.
Wages adjust with inflation, whereas debt, such as a fixed mortgage, will not. Even if NeoCaveman's real income stays static his nominal dollar earnings will increase. His mortgage payment will stay static in nominal dollars, and decrease in real terms. This scenario is all too familiar to anyone who lived with the inflation of the '70s.
By the end of Carter's administration everyone knew that you should exchange your dollars for real goods as fast as you could. And if you could take on a lot of debt, all the better. It didn't even have to be mortgage debt- credit card, car loans, any kind of debt was better than having dollars that quickly shrank in value.
This is the sort of psychology that inflation promotes, and it's something the Fed rightly fears. The Fed may be in a bit of a bind. The inflation that they see now is due to credit that was already extended, and that's removed from circulation only with difficulty. A substantial fall in housing prices and mortgage credit might do the trick, but at a high price.
NeoCaveman's debt, assets and income are in dollars. The dollar weakens against the Euro by 10%. How does that help him pay back his debt?
I expect massive inflation - or total economic depression. I think the fed will opt for the former to do the standard monetizing of debt.
Well, theres a question needing asking that if you know the answer to, you'll be very, very rich.
In order to monetize the debt, they still have to get the money into the hands of the people. The last round was done via inflating real estate. Literally trillions of dollars of notes were created.
So what's next? Short of dropping money from choppers, how does the liquidity get out? Many, if not most, are maxxed out on the credit front.
Maybe some kind of currency re-valuation. Maybe they'll pump the stock market.
I'm afraid we are living under the Chinese curse, "May you live in interesting times..."
That's just dead wrong; on all accounts.
There were plenty of them prior to the '29 Crash; none after it.
You really need to learn what constitutes a REAL "depression".
Correct. The following chart shows that, over the entirety of the past five years, the dollar has declined against the Euro (USDEUR), Japanese Yen (USDJPY), British Pound (USDGBP), Swiss Franc (USDCHF), Canadian Dollar (USDCAD), and Australian Dollar (USDAUD):
The chart can be accessed and modified at this link.
They didn't really get money. They got houses. And if creative things can be done to somehow allow people to continue to make minimal payments as wages catch up with massive inflation, while house prices go down or stay flat, fewer homeowners get hurt acutely, but we all get hurt to some degree with the massive inflation.
IOW, if, over 5 or six years, real estate goes down 30-60%, but all other goods go up 100% and wages go up 80%, well, so what if you have a $3,500 house payment when your electric bill is $800, your car payment is $1,200, a big mac is $6, a six pack of coke is $15 and your grade school janitor job pays $125,000 a year?
Piece of cake.
>>There hasn't been a DEPRESSION here, since America entered WW II<<
On that you and I strongly agree.
As a student of THAT one, I think we are poised to enter one that is WORSE than that one was. Not guaranteed, mind you, but the risk is very real.
>>You really need to learn what constitutes a REAL "depression".<<
I did, decades ago. And learned more in the proceeding decades.
Incomes typically adjust with inflation. Debt doesn't adjust in a similar fashion. With a 30 year mortgage you will be paying off that debt in cheaper dollars as the years pass. In an inflation like the 70s you didn't need to wait long for those dollars to get cheaper.
Debt is contracted in real dollars that are equal to nominal dollars at the time you take the loan. You repay the debt with nominal dollars that get cheaper in real terms over the term of the loan. A lender who doesn't ask for a sufficient inflation premium loses money.
Deflation operates in reverse of this. Nominal dollars become more valuable in real terms over time, and usually harder to earn. Incomes fall in nominal terms even as they remain static or even increase in real terms. A long term loan in a deflationary environment is great for a lender, a real problem for a borrower. In the Depression, Treasuries were a good investment.
I know how inflation works. He wasn't happy because inflation increased, he was happy because GGG said the dollar plunged.
How does a drop in the value of the dollar, versus other currencies, make his debt easier to pay off?
'Monetizing the debt' occurs when the Fed purchases Treasury paper, effectively converting the Treasury debt into cash. This can have a highly inflationary effect.
The mortgage and real estate inflation isn't the same thing, it's an inflation facilitated by a lot of different factors. And I expect we will see a push for a lot of new regulations on lending if the option ARMs turn out to be as bad as they look.
I assumed he was speaking of the article that GGG posted, which mentioned 'inflation' 9 times. If you see a discussion of the dollar vs other currencies in the article please cite it, I didn't spot one.
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