Posted on 09/16/2009 2:40:47 PM PDT by LS
Freepers I have a question that I can't seem to hear any "talking head" of any political persuasion ask:
First, are we monetizing the debt in large amounts?
Second, if the answer is yes, then where is the money going and why do we have no inflation?
We do not have rapidly growing production and employment, so we cannot have an equality of "dollars and goods." Therefore if we have "too many goods chasing too few dollars," where is the (what should be dramatic) price increases?
Further, some of the info I've seen says that Americans are NOT taking on new debt at all, but simply paying off their old debt; and not spending. So again, where is all this money going?
Presumably inflation will come, but it can take a while. As long as there is slow or no growth, debts to pay off, lots of unemployed folks, we can go on without inflation. In fact, we can have inflation.
The scary thing is that inflation actually hits when all this deleveraging is through. Some people, like Marc Faber, think it could still be years off, as gubmint debt becomes the latest, and perhaps final bubble before reality comes a callin' for real.
Maybe someone has a different take. That's my understanding of it.
And gubmints wouldnt necessary mind inflation. They can pay off their debt with crappy worthless dollars.
First question, yes, but most of it is not in circulation but simply ‘on the books’.
Second ties to the first question in one sense, not all of it is in circulation so you don’t have more direct dollars chasing goods. Inflation, however, has other factors, such as the cost of goods production. We’ve always monetized our debt (in recent history) and if you look at simply that in chart form, you would think we would be in over our heads with inflation, yet the purchasing power of the average citizen goes up. This is in part to the cheaper costs of production and distribution balancing the inflationary effects.
The other part of #2 is that, there has to be something putting the money into circulation “chasing” after the goods. If people don’t have jobs, they are spending less, so the dollars aren’t chasing the goods. Much of it is sitting in bond form, not in cash on the street.
The next part of #2 is simply, producers know that the market may not be able to handle a price increase to some extent, so they look at cutting expenses before raising prices through lay offs or reducing other expenses. They know, for example, the market can’t handle their increasing costs on a widget by 50% so instead, they cut workforce to reduce the expense associated with the cost of the widget.
It’s being used to purchase our own treasuries for one, and being held back by large financial insitutions to shore up their balance sheets, for another. The level of debt destruction has thus far outstripped any “quantitative easing,” so inflationary pressures in the broader economy are being held in check by lack of demand, for the most part. It’s a game that can’t go on for long without consequence, though.
Most of the money is going into bank coffers, which gets converted into “profits” on their earnings reports.
A lot of money (not currency, but deposit balances) have disappeared because of banks 'unwillingness to lend and consumers paying off debt. If I deposit money in the bank most of it will be lent to people who spend it and it eventually makes it to the suppliers bank accounts. The banks lend that again, and after another spin it is lent again, and again. If banks decide to sit on the money instead of lending it, then the ratio between total money supply and currency drops and a lot of money disappears even with the same amount of currency. I've even done some of it personally by keeping a larger amount of cash than normal starting last July just in case banks started collapsing. Me keeping cash out of the bank might destroy ten times that amount of money by preventing the bank from lending it.
If every man, woman and child kept an extra $300 in cash, that would be about $100 billion which because of that fractional reserve system might destroy $1 trillion in the money supply. Normally if that happened the Fed drop the short term interest rate to increase lending and deter saving or drop the reserve requirement. However rates are about as low as possible and banks are unlikely to lend more even if legal reserve requirements are dropped.
If you watch Glenn Beck he went into this in great detail on his show last hour.
Yes. All you have to do is look for reports that the Federal Reserve is "buying" Treasury Notes or Treasury Bills. (I like to refer to these as "I owe Me's.") Basically the both sides print some paper (usually only figuratively as these things are done electronically) and exchange it. The Treasury spends the Federal Reserve Notes (FRNs) it received and these go into circulation. The Federal Reserve puts the Treasury Notes/Bills into a vault (or a database) and nothing has to be done until the notes become due. (Then the Treasury issues more notes, mostly eventually purchased by the Fed, and the FRNs are used to redeem the old Treasury Notes. So at any time, it's the net purchase of Treasury Notes by the Fed that counts.)
Second, if the answer is yes, then where is the money going and why do we have no inflation?
There is some inflation. But the economy is not so good, so there is not the usual amount of borrowing. Borrowing is also a "money" creator. Also, people spend less when they are unsure about the future so the "velocity" of money (spending per person really) isn't as high as it might be. Watch out though if the economy ever does recover.
ML/NJ
Ok, so you are arguing that the velocity of money (or lack thereof) has in essence dampened inflation, right?
“Therefore if we have ‘too many goods chasing too few dollars,’ where is the (what should be dramatic) price increases?”
Isn’t this backwards? If you have too many goods and too few dollars, the price has to come down or no one will buy them. Raising the price would be suicide.
No, actually I did watch it and he did not answer this question the whole time I watched. That’s why I had this question. He never asked Charles Payne “why no inflation?”
Exactly. Hence, my question.
Yes, good answer. Money destruction, or what happened from 1928-1932.
Well, if that’s true, then profits are paid out. That money still has to go somehwere.
I don't know. Ask that $6.00 hamburger I had for lunch today.
Another good answer. Thanks.
Yeah, I keep hearing that from my broker-—we’re in for huge inflation . . . at some point.
Exactly. So do we have too many goods chasing too few dollars? If so, is this only because of economic decline, not increased production?
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