Posted on 02/26/2006 3:43:27 PM PST by peyton randolph
Yes, FOREX volume involves an exchange of one currency for another.
Do you recall how much real money George Soros had at his disposal when he wacked the British Pound [not a rhetorical question, but I don't believe that it was all that much]?
I don't know how much he had. Once he started attacking the Pound peg, other speculators joined the attack. The important question was how much money did the British have to defend the peg. Because our currency floats, what this example really shows is that the Chinese are more vulnerable to a speculative attack on their currency than we are.
Yet our personal wealth continues to increase. Just last year alone it increased by more than 10% to $51.1 trillion.
A sizable percentage of the American public is spending more that it is making.
Given the growth of our net worth, this statement is more about emotion than fact.
With only occasion blips consumer debts and mortgage refi cash outs executed to pay for current consumption are building. What part of that concept is a mystery to you?
The only mystery here is how you fool someone into believing this nonsense when they understand that net worth is calculated by subtracting debt from assets.
Cash is cash and most CD players are bought with plastic.
And, naturally, these people are not paying that liability off which is why our net worth is shrinking...no wait, never mind.
In false interest rate signals [think current mortgage rates in light of huge loan demand]
LOL. It's always entertaining to me when folks here claim to know more than the bond market.
and a strong dollar further aggravating the trade deficit.
And to think I've always been told that the dollars strength is a monetary phenomenon that has little to do with budget or trade deficits. You're not much of a supply-sider are you?
Joe homeowner you seem to believe is doing so well is actually losing purchasing power on his income.
Another interesting tidbit from you considering real incomes in this country have increased at an average annual rate of 2% over the last century.
He has a house that has appreciated, but if he sells it he still has to live somewhere.
Yup, and many of them downsize when they retire. Of course, we need to remember that only 21% of our household net worth is attributable to home equity.
He can cash out refi, but now he is carrying more debt on an asset that can go down in price
But the average American household still maintains 57% equity in their home. You do like to worry though.
I believe that if you check, you will find that total debt is growing faster in absolute dollar terms than the four percent of growth that you refer to
Our budget deficit for 2005 was more than $450 billion? Even if it was, it's still smaller, as a percent of total GDP, than it was in the 80's under Reagan.
We buy their stuff. They buy our debt We buy some more stuff. They buy some more of our debt. Doesn't that strike you as a wee bit unhealthy over the long haul?
I am really unconcerned who chooses to buy our treasury debt when our net worth is growing five times faster than our external debt. I am in favor however, of the government significantly reducing entitlement spending thereby taking a smaller share of our income. We've had trade deficits for more than 30 years now. Trade surpluses have always been achieved during recessions. You guys keep claiming the sky's going to fall. When exactly is that tipping point going to occur? Because, I'm not seeing any of the negative effects. Keep waiting?
Construction is notoriously cyclical.
Yes, so what? You said housing was not a productive asset. Maybe we define our terms differently. How can something that creates 2 million jobs and offers an averages wage (that has increased faster than inflation since 1994) of about $20 an hour, be non-productive? That makes absolutely no sense whatsoever.
However, you will still need to live somewhere and that somewhere has probably also appreciated.
If you read the article I linked, you would know that the bulk of the rapid increase in housing costs has been limited to a relatively small number of regional markets. I could sell my house, move to numerous other markets, buy a larger home for much less money and bank a very large amount of cash. Many in these markets have chosen to do so. Try telling them that housing is not a productive asset.
Remember that real estate in Japan after an incredible run declined for something like fourteen consecutive years.
Remember that real estate here hasn't shown a year over year decline since before WWII. Lots of population growth and increasing wealth here. No population growth and declining wealth in Japan. Our economy is nothing like Japan's.
Saving and investing are not synonymous
Saving, like investing, adds to wealth. That's its purpose. I save by investing. What do you do with your savings?
However, the use for which the money is being borrowed [production or in the case of the U.S. in 2006 primarily into consumption] is also critical in determining whether wealth is being creating domestically of transferring to foreign lands.
That net worth number is something you should pay attention to. It's more than doubled since 1994. It's even more incredible when you consider the incredible base of wealth we began with. What other country in the world can make that claim? Our GDP growth is the envy of the world. The answer to your question about whether we are creating wealth or transferring it is self-evident.
Read some stories about how the Miami condo market is shaping up. Examine the appreciation of in condos in Naples. Houses in the right locations? Maybe. Watch out for condos at the tail end of hot real estate markets.
Isolated regional markets again. Reminds me of Silicon Valley in 2000. After the large correction, the prices began their upward march again and now housing is even higher than it was before the correction.
What it does mean is that the $600,000 price tag on the house is not supported by fundamentals
Maybe the fundamentals changed. The tax advantages for home ownership changed in 1997 and prices have increased dramatically since.
BTW, if the equivalent rental value is dramatically lower than the cost of ownership you have another tip off that speculation is the driver.
After considering all the benefits of home ownership, along with low interest rates, are you sure that rental values are dramatically lower? Maybe rents lag the housing market and will catch up once interest rates rise.
The U.S.is indeed borrowing from the rest of the world to finance investment and current consumption and thereby becoming increasingly indebted.
Why does it matter where the investment comes from? Do you think they should invest in their own country when the rate of return is much lower than what they can earn here? Why does it matter who buys corporate bonds? The only thing that matters is that there is sufficient capital formation for us to maintain our incredible GDP growth. Besides, the assertion that we are a net debtor nation is all myth. We possess the highest per capita assets of any nation in the world.
You seem to believe that only the Government can spend more than it takes in or that it has some sort of a monopoly on foolish expenditures.
If your assertion were true, it would be reflected in the net worth numbers. It isn't.
My assessment is that the U.S. consumer is spending like a the proverbial drunken sailor and is rapidly approaching the point where he will be unable to service his debts which emphatically include mortgages as well as student loans, auto loans, and credit cards.
Problem is you just can't prove your assessment. Many here try but they always seem to forget to post just how much we own is assets. Any discussion about debt means absolutely nothing without a full accounting of the amount of assets we own.
You should probably spend some time studying the link below. It will prevent you from making these kinds of erroneous assumptions in the future.
Fed Funds Report: Page 110 of 124
"No" I don't think that Brenake can restore prosperity by dropping paper money out of helicopters [if you do, then refer to your own comments regarding tin foil and shark jumping.]
Then how would you deal with deflation? That's what his comments were in reference to. Do you have a more effective method for dealing with it?
Once again, sleep well Mase, and remember when offered that its not really cool aid.
I see you chose not to read the links I provided. Had you done so, you would have learned from Dan Boudreaux and Walter Williams, that you guys are wrong about trade deficits causing debt and that there really isn't anything to worry about. Worrying about things that don't exist seems like such a waste of time and emotion to me.
What I was attempting to write was a comment concerning the volumes in FOREX markets differentiating between outright unhedged sales or purchases, and strategies designed to extract small arbitrage type gains or reduce currency risks through simultaneous sales and purchases of in the spot, futures or forward contracts. Aren't derivatives where most of the action is focused?
That is what leverage does in an up market. In a down market it multiplies percentage losses and it is not always easy to unwind debt.
"Given the growth of our net worth, this statement is more about emotion than fact."[you wrote in regard to the negative savings rate]
See the previous comments on leverage. Leverage on housing has gone way past that available in bucket shops in the 1920s. Options ARMs. No down payment mortgages. 125% cash out refis??? Do these sound like something that would appeal to wealthy and prudent investors or the real estate equivalent of crack addicts?
"The only mystery here is how you fool someone into believing this nonsense when they understand that net worth is calculated by subtracting debt from assets."
An interesting non response. Absolutely true. But almost irrelevant in a highly leveraged situation until gains / losses have been realized. There were a lot of millionaires in September of 1929 who were broke a couple of months later. Donald Trump after being worth hundreds of millions was saved from bankruptcy once by owing so much more than the liquidation value of his assets that his creditors did not foreclose to avoid realized losses that would threaten their capital structure. Part of the risk of loss came from the lower fire sale type pricing that would have applied in a foreclosure. Three lessons: (i) Leverage is indeed a powerful tool but it cuts both ways; (ii) Mark it to market works for commodity trading, but may not yield a true picture in the case of something illiquid such as real estate; and (iii) We aren't Donald Trump or alternatively if you are going to fail, fail big.
"And, naturally, these people are not paying that liability off which is why our net worth is shrinking...no wait, never mind."
Negative. Net worth is going up because certain assets are inflating faster than aggregate debts are rising. But aggregate debt is rising. Assets can deflate. Short of bankruptcy debts must be serviced.
"LOL. It's always entertaining to me when folks here claim to know more than the bond market."
You might be right on this one. OTOH we may be witnessing something out of the ordinary. I think your hero Greenie referred to it as a "conundrum". My belief is that he could explain it, but did not want to as it might spook the herd or more properly the flock.
"And to think I've always been told that the dollars strength is a monetary phenomenon that has little to do with budget or trade deficits. You're not much of a supply-sider are you?
I believe in minimal Government and honest money. We are about thirty years into the era of universal fiat money, but see no reason to believe that the current dollar has much of a future.
The death of the dollar would be a calamity to put it mildly. Responible monetary / lending policies would give the dollar a fighting chance.
Just for fun, please read what the Constitution has to say about money.
"Another interesting tidbit from you considering real incomes in this country have increased at an average annual rate of 2% over the last century."
And your point is that real incomes went up 2 percent per year due to real estate [or for that matter stock] speculation??? Real income went up because we worked hard, saved, invented stuff, and invested in productive assets.
"Yup, and many of them downsize when they retire. Of course, we need to remember that only 21% of our household net worth is attributable to home equity."
True, but between now and retirement it isn't liquid in any sense other than through cash out refis [more debt.]
"But the average American household still maintains 57% equity in their home. You do like to worry though."
Also probably true ... but most probably could not afford to buy their own houses today's prices. At the very least this does not bode well for further appreciation.
"Our budget deficit for 2005 was more than $450 billion? Even if it was, it's still smaller, as a percent of total GDP, than it was in the 80's under Reagan."
Wrong. The reference to debt was to all debt not just the national debt. Think in addition to the deficit about mortgages, credit cards, state and local bond issues etc. Aggregate debt went up at more in dollar terms last year the economy grew.
" ... [omitted] Trade surpluses have always been achieved during recessions."
Don't count on it this time. There are an astounding number of things that we just don't make anymore and China's factories are newer and her workers are hungrier.
"You guys keep claiming the sky's going to fall. When exactly is that tipping point going to occur? Because, I'm not seeing any of the negative effects. Keep waiting?"
Yup. But IMO it probably won't be long. There is an old market adage that the market can stay irrational longer than you can remain solvent. The doesn't mean that the market can remain irrational forever. In support of your position, optimism is the better investing approach over the long run. Having said all that, economies run in cycles and this cycle appears to exhibit imbalances of epic proportions.
In reference to construction being cyclical you wrote: "Yes, so what? You said housing was not a productive asset. Maybe we define our terms differently. How can something that creates 2 million jobs and offers an averages wage (that has increased faster than inflation since 1994) of about $20 an hour, be non-productive? That makes absolutely no sense whatsoever."
The theory is that a the end of the day a house is essentially a consumer good. It can throw off a stream of rents, but without appreciation it is not a viable economic asset when upkeep, taxes and any sort of positive ROI is factored in. That is why almost all purpose built rentals are multi unit.
The point about cyclicality means that most of the 2 million addition jobs created will not survive even a normal housing market leaving aside the potential for a bursting housing bubble.
"If you read the article I linked, you would know that the bulk of the rapid increase in housing costs has been limited to a relatively small number of regional markets. I could sell my house, move to numerous other markets, buy a larger home for much less money and bank a very large amount of cash. Many in these markets have chosen to do so. Try telling them that housing is not a productive asset."
Yes and IMO by selling you would have come out ahead under an excellent example of the greater fool theory. [And you point is?]
"Remember that real estate here hasn't shown a year over year decline since before WWII. Lots of population growth and increasing wealth here. No population growth and declining wealth in Japan. Our economy is nothing like Japan's."
... and the weather is great in [fill in the blank]. First you made the argument that the real estate market was hot in only a few places. Then you apply the rationale that only a national decline would be a problem. I agree with you to the extent that a crash is less likely in places where prices have not dramatically out paced incomes. That is in essence one of my key points. I am not certain that Fannie and Freddie could survive a moderate decline in more that one or two of the following: Southern California, South Florida, NY, Boston, Phoenix, or Las Vegas. If all of these markets were to take a hit simultaneously?
As to Japan, leveraged real estate and inflated stocks have come down from lofty heights. How is the U.S. immune from those sorts of occurrences. BTW, have Japanese incomes actually declined or is it simply that the air came out of their asset bubbles?
In regard to a comment I made about debt levels and consumer spending pattern you wrote: "Problem is you just can't prove your assessment. Many here try but they always seem to forget to post just how much we own is assets. Any discussion about debt means absolutely nothing without a full accounting of the amount of assets we own."
Assets prices can decline. See Japan. Debts must be serviced or repudiated. See Japan. American assets may be seriously inflated. See what the future brings. You seem to believe that Naples Florida is a screaming deal because it has doubled in the last three years. Based solely on the recent price action you describe it, my guess is that it more likely to be a screaming sell because it is still the same place it was three years ago except that it is maybe a little more congested and thereby objectively less desirable. Under this scenario sooner or later the flock will be sheared [shorn? ... whatever].
You are correct about me not reading your links in detail. However, judging from the quote I extracted from the first one, you might have given them a more thorough review yourself. It made one of my points very clearly.
Finally, do you actually believe that total destruction of the dollar by Brenake [and his helicopter corps] is more desirable than a deflation? Think very carefully about this question.
This exchange could probably go on for weeks, but it is time to wrap it up. Time will tell who is correct. Please feel free to ping me if it occurs to you in the future that I have been proven wrong or just want to trade a few probably opposing opinions.
GJ
Do you understand what deflation is?
Yes. Either a decline in the general price level or more properly a reduction in the money supply.
Do you understand the danger of money backed by nothing under a Fed Chairman who will continue to inflate at all costs? Legal tender laws or no legal tender laws, when faith in a fiat currency goes it is all over. If given a choice between a Wiemar Republic or a Japanese scenario, I'll take Japan every time.
A question for you: Do you think that it is natural for money to inflate or could it be [gasp] a technique for some portion of the population to enrich itself at the expense of the rest?
Systematic inflation is a form of theft. If inflation was a good thing Argentina would not have declined from the top five in per capita income to its present level.
Can a deflation more severe than the recent experience in Japan occur. Certainly. But helicopter money even as a metaphor? The man should be out selling used cars.
So, if deflation occurs when the money supply shrinks (or grows more slowly than output), how would you suggest stopping deflation? Or do you think deflation is no big deal?
Do you understand the danger of money backed by nothing under a Fed Chairman who will continue to inflate at all costs?
Don't want to burst your bubble, but money hasn't been backed by anything in a while. And if we're suffering deflation, that's the opposite of inflation.
If given a choice between a Wiemar Republic or a Japanese scenario, I'll take Japan every time.
What if your choice was 2% annual inflation for the next 15 years, or 2% annual deflation for the next 15 years?
Can a deflation more severe than the recent experience in Japan occur. Certainly. But helicopter money even as a metaphor?
Then please, give us your top 5 deflation fighting tools.
I guess I missed the pictures of the soup kitchens in Japan. It depends on the severity.
"Don't want to burst your bubble, but money hasn't been backed by anything in a while. And if we're suffering deflation, that's the opposite of inflation."
Your bubble, not mine [pun intended.] True -- since the Nixon administration the dollar has been a confidence game in the truest sense [and your point is?] Thirty years is a long time in the life of a man, but it isn't long enough to prove the desirability or even the true viability of the concept. Fiat money experiments have always ended badly in the past and if the goal is monetary stability this one is not looking too good. If the goal was orchestrated theft, the Fed [Burns and Greenie -- not really Volker] has done a great job since the gold window closed.
"What if your choice was 2% annual inflation for the next 15 years, or 2% annual deflation for the next 15 years?"
A two percent annual deflation would give us an opportunity to work out of or if necessary liquidate a lot of malinvestments. A two percent inflation might not be a disaster, but the more debt loads expand that harder it will be to maintain anything even vaguely resembling monetary stability. Given a continuation of the current inflation it is IMO likely that tipping point will be reached where it go one way or the other ... and do it with a vengeance.
"Then please, give us your top 5 deflation fighting tools."
??? Refer to my previously expressed preference for Japan over Wiemar Germany.
I guess you missed the 15 years of no growth in Japan?
A two percent annual deflation would give us an opportunity to work out of or if necessary liquidate a lot of malinvestments.
So you really see no dangers to deflating asset prices? What if housing prices dropped 2% a year for 15 years? Would that be good or bad? Would deflating prices for automobiles make GM more or less likely to survive?
Refer to my previously expressed preference for Japan over Wiemar Germany.
You should refer to Bernanke's remarks (referencing Friedman's remarks) about dropping money from a helicopter.
You don't drop money to fight deflation if you've got inflation. Inflation is too much money chasing too few goods. Deflation is too many goods chasing too little money. Too little money can be cured with more money, hence the helicopter.
You guessed wrong. Parties end. Japan go nailed by demographics in addition to the hangover from a very long debt driven party.
"You really see no dangers to deflating asset prices? What if housing prices dropped 2% a year for 15 years?"
Then at the end of 15 years houses would cost less in nominal terms and [because they are currently beneficiaries of inflation] probably in real terms.
"Would that be good or bad?"
Good for new buyers if houses deflated in real terms. Bad for existing owners although they should never really have expected their house to be an investment ... and whatever amount they realized from the sale in nominal dollar terms would be worth more in real terms.
"Would deflating prices for automobiles make GM more or less likely to survive?"
The flippant answer is it makes no difference [near zero chance either way without some sort of recapitalization / bankruptcy / renegotiation of retiree benefits & union contracts.] GM is where it is because partly because of bad management but mostly because of expediencies years ago that had a lot to do with behaviors facilitated by inflation. Once again, the debt which is more onerous after a deflationary period would be the problem.
" You should refer to Bernanke's remarks (referencing Friedman's remarks) about dropping money from a helicopter."
I noted earlier that Brenake's lame remark wasn't even an original expression of thought. What other point are you trying to make?
"You don't drop money to fight deflation if you've got inflation.
Agreed. I don't advocate this particular act of stupidity under any circumstance.
"Inflation is too much money chasing too few goods. Deflation is too many goods chasing too little money. Too little money can be cured with more money, hence the helicopter."
Too little money? Deflation is not a problem. Too much debt in a deflation is a problem. It is suicidal to advocate an action that would result in a loss of confidence in a currency that has only a measure of confidence going for it. By destroying the underlying confidence in the currency, the helicopter represents the death of the dollar. To advocate the death of the dollar is about as asinine a position as a future Fed chairman could ever make.
So the 70% of Americans who own a house would be hurt, but that's not a problem. Profits would crash. Stocks drop. Unemployment would increase. But that's not a problem. Good to know where you stand.
The flippant answer is it makes no difference
Would any business want to borrow money to expand if prices were declining long term? Would there be more bankruptcies? Business and personal? Would people delay purchases because prices were falling? Would that hurt GDP?
Too little money? Deflation is not a problem.
No it's not. But it was in Japan. And it hurt them. If you think it didn't, you're wrong.
By destroying the underlying confidence in the currency, the helicopter represents the death of the dollar.
You still don't get it. Deflation is bad for the economy. Really bad.
To advocate the death of the dollar is about as asinine a position as a future Fed chairman could ever make.
Do you think Americans during the Great Depression were hurt by deflation? Did it cause more unemployment? Would the economy have done better if the deflation was less severe?
There are two choices. Either try to sustain the unsustainable and rely on the theory that "in the long run we are all dead" or manage the problem by weaning the addict off the drug.
We don't need housing inflation. We don't need NASDAQ bubbles. We don't need big fat labor arbitrage targets painted on the backs of Americans.
Some people gain immediate benefit from inflation [it appears that you are one of them.] Some are hurt in the short run. A lot more will be hurt in the long run [you are apparently convinced that you are not one of these] -- but remember that the deflation that you fear is just another manifestation of the monetary fiddling not some sort of law of nature.
Inflation is theft. Our current crop of inflation fighters are frauds.
"Would any business want to borrow money to expand if prices were declining long term?"
Why would any borrower want to lend in an inflationary environment? Same basic question. Same answer. Because they believe that they can earn a real return [Note: A more complete response would go into the magic of fractional reserve banking where the money being passed around arises from the loan .... ]
"Would there be more bankruptcies? Business and personal?"
Bankruptcies are going up anyway as a consequence of unsustainable debt. Smaller bankruptcies now, or bigger ones later, or runaway inflation. Take your pick.
"Would people delay purchases because prices were falling? Would that hurt GDP?"
Horrors! Savings. Mustn't have those .. not ever.
"No it's not. But it was in Japan. And it hurt them. If you think it didn't, you're wrong."
Did I write that there was no pain involved. There is going to pain either way. Wiemar or Japan. The helicopter man man may be able to find the true middle, but the longer our inflation continues the less likely that becomes.
By destroying the underlying confidence in the currency, the helicopter represents the death of the dollar.
"You still don't get it. Deflation is bad for the economy. Really bad."
Yup, and inflation is like crack cocaine. Occasional weekend use may seem harmless to the user / addict. Forty five years [or maybe that should be 93 or maybe 30 something years] of serious crack usage is not a good thing. You seem to think it can continue forever.
"Do you think Americans during the Great Depression were hurt by deflation? Did it cause more unemployment? Would the economy have done better if the deflation was less severe?"
It would have been less severe if the unsustainable debts and other malinvestments and economic distortions of World War I and the twenties had been cleaned up sooner. The U.S. was in the process of having a very mild deflation in the early 1920's. There was a lot of pain and agriculture got hit hard due to the deflation, general fallout from the Great War, and the new labor saving inventions the came on stream.
The Fed inflated its way out of that one setting up the boom which led to the bust we refer to as the great depression. Now or later [and More severe] pain?
Well I guess if you kill the addict that is one way to wean him off the drug.
Why would any borrower want to lend in an inflationary environment?
It's easier to adjust interest rates higher to account for inflation than to adjust rates lower to account for deflation. You usually can't borrow for less than 0%.
It's also easier to give employees COLAs during inflationary periods than it is to reduce their salary during deflationary periods. And if you were able to overcome the "stickiness" of salary, how does deflation benefit the average worker again?
If you've ever heard the phrase "pushing on a string" , it refers to the difficulty of interest rate cuts to stimulate the economy. Notice how long the Japanese Central Bank has held rates near zero and how that has failed to stimulate their economy.
Bankruptcies are going up anyway as a consequence of unsustainable debt.
Who has unsustainable debt? Is debt easier to service with rising or shrinking earnings? Easier to service if you're employed or if you're unemployed?
Horrors! Savings. Mustn't have those .. not ever.
So a recession would be a small price to pay to boost the savings rate? You're funny!
Did I write that there was no pain involved. There is going to pain either way. Wiemar(sic) or Japan.
So it has to be one of the other? Hyperinflation or 15 years of dragging economic performance? Are you comparing our current situation with Weimar? Would 2% inflation every year be like Weimar?
The helicopter man man may be able to find the true middle, but the longer our inflation continues the less likely that becomes.
Have you ever talked to an economist in person? Boy, they are funny guys. Always joking around. That's what the helicopter speech was about. It was just a joke. Because deflation is no problem at all. It's just a coincidence that we had crippling deflation and 25% unemployment during the Great Depression.
So, do we need to go back on the gold standard? For the children?
... and how well does continually stepping up the dosage work?
" It's easier to adjust interest rates higher to account for inflation than to adjust rates lower to account for deflation. You usually can't borrow for less than 0%."
"Adjustment" mechanisms associated with loans are generally for the benefit of the debtor. If loans were pegged to an accurate measure of inflation plus a real interest rate, ... well maybe ... but then the motive [theft by deception] would go out of inflation.
It's also easier to give employees COLAs during inflationary periods than it is to reduce their salary during deflationary periods. And if you were able to overcome the "stickiness" of salary, how does deflation benefit the average worker again."
??? You are the one advocating the continuation of monetary scams, not me.
If you've ever heard the phrase "pushing on a string" , it refers to the difficulty of interest rate cuts to stimulate the economy. Notice how long the Japanese Central Bank has held rates near zero and how that has failed to stimulate their economy.
I've heard the term. You mistake the effect with the cause. Japan had a debt explosion in the eighties. The current pain did not come from deflation, it came as the inevitable consequence of the inflation [debt is money in fiat money regimes -- debt that cannot be serviced must be liquidated] that preceded it. The Japanese still haven't written off all their bad commercial loans, but have written off or restructured a lot of them. That part of their debt structure has improved.
"Who has unsustainable debt? Is debt easier to service with rising or shrinking earnings? Easier to service if you're employed or if you're unemployed?"
The U.S. If you are employed, but the chances of almost everyone who works for wages being unemployed at some point in time is very high. Too much leverage means bankruptcy if anything goes wrong.
" So a recession would be a small price to pay to boost the savings rate? You're funny!"
Thanks, so are you. Recessions serve the purpose of working off excesses. The business cycle is not a thing of the past. As long as there are credit expansions there will be periods of liquidation in the aftermath. A zero savings rate is not healthy. IIRC the U.S. hit a zero percent savings rate in the fourth quarter of 2005.
"So it has to be one of the other? Hyperinflation or 15 years of dragging economic performance? Are you comparing our current situation with Weimar? Would 2% inflation every year be like Weimar?"
After years of inflation, debt and couple of bubbles? Being somewhat optimistic, we might be able pull back from the brink without a major deflation. However, if we keep mainlining monetary cocaine much longer those will be the choices. If we can have two percent inflation every year we can have no inflation. The Fed gods are not omnipotent [I for one do not even believe that they are real gods.]
BTW, if you believe the two percent inflation number, consider hedonic adjustments, substitution, and the "core rate" concepts. Then tell me again what the real inflation rate is currently.
" Have you ever talked to an economist in person? Boy, they are funny guys. Always joking around. That's what the helicopter speech was about. It was just a joke. Because deflation is no problem at all. It's just a coincidence that we had crippling deflation and 25% unemployment during the Great Depression."
Fed Board members know that their speeches will draw attention. IIRC Helicopter Ben was a Fed governor at the time and if so he was sending a message. It might have been a joke if he had said it in conversation. In a prepared speech before the press? Yeah right.
"So, do we need to go back on the gold standard? For the children?"
No, although it would impose discipline for the long haul. Helicopter man claims to be a proponent of inflation targeting. If he can hit that mark, a target of zero within the current fiat money regime would be just fine with me. And no, the prime beneficiaries would be pensioners or for that matter anyone else who never realized they were on the wrong side of a crooked game.
You might appreciate this quote I saw recently which was attributed to your hero Greenie [sorry no link]: "This vast increase in the market value of asset claims [stocks, bonds, houses] is in part the indirect result of investors accepting lower compensation for risk. Such an increase in market value is too often viewed by market participants as structural and permanent. But what they perceive as newly abundant liquidity can readily disappear … history has not dealt kindly with the aftermath of protracted periods of low risk premiums."[emphasis added]
Actually inflation has come down nicely since 1980. So that'd be reducing the dose.
The current pain did not come from deflation
Deflation hurt corporate earnings and reduced employment. How did that not cause pain? And then the government went on a massive spending spree to try to stimulate the economy. So now they have an insane level of government debt.
The Japanese still haven't written off all their bad commercial loans, but have written off or restructured a lot of them.
Is it easier to service or renegotiate your debt when your company has growing earnings or shrinking earnings and losses? Are banks more likely to write off bad debt when they have earnings and reserves or losses and no reserves?
The U.S.
The U.S. has unsustainable debt? How do we compare to Japan after their 15 years of "not-a-problem-deflation"?
Do you think our debt will be more sustainable after the unemployment and losses caused by deflation?
Too much leverage means bankruptcy if anything goes wrong.
Yes, deflation is bad when you're leveraged.
If we can have two percent inflation every year we can have no inflation. The Fed gods are not omnipotent.
No they are not. They cannot fine tune the inflation rate. That's why 2% is safer than 0%.
Then tell me again what the real inflation rate is currently.
I'll take the Fed's word for the inflation rate unless you can show me a better one. What do you think the real inflation rate is?
Fed Board members know that their speeches will draw attention. IIRC Helicopter Ben was a Fed governor at the time and if so he was sending a message.
Yes. The message was that we would not suffer the same deflation as Japan. We would not stop at cutting the Fed Funds rate. If we needed to, we would increase the supply of high powered money.
No, although it would impose discipline for the long haul.
It would impose deflation for the long haul.
Volker did a decent job. Greenie just got out at the right time and left a time bomb on the doorstep of the Helicopter Man. I hope Greenie gets the credit he deserves someday [serious ridicule or maybe a three months of continuous testimony with Ron Paul as the committee chair.]
"The U.S. has unsustainable debt? How do we compare to Japan after their 15 years of "not-a-problem-deflation"?
I though you were the one applauding leveraged asset speculation? That is how the Japanese problem arose. U.S. household debt as a percentage of income is now at a level last seen in the 1920s. U.S. savings rates are the lowest since the mid 1930s.
"Is it easier to service or renegotiate your debt when your company has growing earnings or shrinking earnings and losses? Are banks more likely to write off bad debt when they have earnings and reserves or losses and no reserves?"
If you need to renegotiate your debt when times are good for your company [or you personally] you are well into the realm of ponzi finance. Banks may try to wait out an upside down situation, but economically the result is same. No more figurative "crack cocaine".
"Do you think our debt will be more sustainable after the unemployment and losses caused by deflation?"
I think under those circumstances many our debts would need to be liquidated as unsustainable. A significant deflation would serve to expose the problems, but with or without the deflation the excesses are present. Without the deflation some of them may be salvaged, but as of now the problem is not improving it is getting worse.
Does the term "moral hazard" mean anything to you. [If not, please refer to the Greenie quote I included in my last posting.] Should the world always work in favor of the reckless and the monetary criminals?
"Yes, deflation is bad when you're leveraged."
And inflation is bad if you put any faith in the "full faith and credit" of the Government. Theft is theft Inflation also promotes reckless over leveraging associated with the moral hazard fallacy.
"No they are not. They cannot fine tune the inflation rate. That's why 2% is safer than 0%."
If two percent is good why not twenty percent? Much safer than two if your concern is to never ever have even the tiniest bit of deflation ... and think of all the economic activity that would ensue from people frantically trying to unload rapidly depreciating FRNs ... maybe a wheelbarrow to go along with the helicopter?
"I'll take the Fed's word for the inflation rate unless you can show me a better one. What do you think the real inflation rate is?"
Yikes, I am wondering whether to feel sorry for you or conclude that you are putting me on. Assuming that you are serious, I would start with the real CPI inflation number [from the Government not the Fed] not the "core" / headline number. If you were going to honestly label something as the "core" would it include Chinese imports and exclude things that are so obviously not important such as food and gasoline [after all who needs food and energy]? Then you might want to do some research on hedonics -- and substitution. The latter is pure nonsense. The former is a valid concept, but can be used to achieve a broad range of desired results. The punch line is: "Pay no attention to the man behind the curtain."
"Yes. The message was that we would not suffer the same deflation as Japan. We would not stop at cutting the Fed Funds rate. If we needed to, we would increase the supply of high powered money."
In your last post he was just kidding around. Which is it? [Rhetorical question.]
Great. Direct monetization of treasury debt by exchange of bodily fluids between the Fed and the Treasury. This would save some the expense associated with the helicopter rental, paper, and ink ... but why deprive the rest of us of the spectacle since the goal of increasing the money supply without significant effort can be achieved either way? With a real printing press and a helicopter we could count the costs of the event as part of the GDP! Wait, sell tickets to the event -- more GDP.
"It would impose deflation for the long haul."
Serious semantic error detected. The absence of continuous inflation is not deflation.
BTW, your preferred path [Weimar] is where I believe we are heading. Your belief about the relative amount of pain involved is prevalent and debtor constituencies are dominant.
The thing that most likely to keep us from a runaway inflation is the absolute terror even the Fed Heads should be able to foresee of trying to run this country without any ability to import any goods. [Especially oil as even after a fifty percent drop in usage domestic production would not be sufficient.]
Really? How much debt? What % of income?
A significant deflation would serve to expose the problems, but with or without the deflation the excesses are present.
And only bad, over leveraged corporations and people would be harmed? No "innocent" corporations or people will be harmed? How much unemployment do you think is necessary to correct the "excess"?
If two percent is good why not twenty percent?
Where did I say 2% was good? I said 2% is less risky than 0%. And 2% inflation is better than 2% deflation.
Assuming that you are serious, I would start with the real CPI inflation number [from the Government not the Fed] not the "core" / headline number.
You know that the CPI number is released every month? There is no conspiracy to hide it from you. You understand the logic behind calculating the Core CPI?
Then you might want to do some research on hedonics -- and substitution.
So quality does not improve? A 1980 auto is the same as a 2006 auto? No one substitutes? Check out high fructose corn syrup in products that used to contain cane sugar.
The punch line is: "Pay no attention to the man behind the curtain."
So after all that you don't have the real inflation rate? :^(
The absence of continuous inflation is not deflation.
No, but a gold standard with money growing much less slowly than output is deflation.
BTW, your preferred path [Weimar] is where I believe we are heading.
Yeah, our 2% inflation is obviously just a short step from Weimar Germany. LOL!!
Not a problem from your perspective in any event. Party hardy dude.
"And only bad, over leveraged corporations and people would be harmed? No "innocent" corporations or people will be harmed? How much unemployment do you think is necessary to correct the "excess"?
I never wrote anything that would imply the only the perpetrators and beneficiaries of inflation would be hurt. That is the real problem. It will end badly. If the financial community was pulling this sort of idiocy in Argentina I would not care, but they are doing it where I live.
" Where did I say 2% was good? I said 2% is less risky than 0%. And 2% inflation is better than 2% deflation.
You did write "safer". My apologies. But by what objective measure is 2 percent inflation better or "safer" than 2 percent deflation [try to be objective and consider the end result of the sorts of behaviors reinforced by the quasi Governmental Fed enabling and propping up asset bubbles?]
"You know that the CPI number is released every month? There is no conspiracy to hide it from you. You understand the logic behind calculating the Core CPI?
Yup. By the BLS. Take a look [the two percent you keep talking to is a nice round number, but it is not really the correct number.] The theory is that food and energy are more volatile hence changes in the CPI ex food and energy are a better indication of the general trend and the most recent period ... and your point is?
"So quality does not improve? A 1980 auto is the same as a 2006 auto? No one substitutes? Check out high fructose corn syrup in products that used to contain cane sugar."
Quality does improve, but a 1980 model had 4 wheels and got you from place to place in roughly the same degree of comfort and at any legal speed. A 2006 PC is much faster that a 2002 PC, but most people don't use the extra processor speed very often. I did not write that the concept of quality improvements was totally without merit, only that it is subjective and allows a lot of latitude in reporting the inflation numbers.
You corn syrup example is an argument for diminished quality not the benefits of substitution. ADM advertisements aside it is not as good, and the benchmark product is readily available and sold in quantity.
If you want to believe what the Great Oz has to say, you are welcome to do so.
"So after all that you don't have the real inflation rate?
I think that was my point concerning the real numbers ... For the official numbers go to http://www.bls.gov/cpi/#tables and take your pick.
"No, but a gold standard with money growing much less slowly than output is deflation."
OK, but off point. What part of my statement that we do not need a gold standard didn't you understand?
"Yeah, our 2% inflation is obviously just a short step from Weimar Germany. LOL!!
Theft is funny isn't it. Party hardy. People on fixed incomes? Who cares. [For the record, I am not on a fixed income.]
One last question: What other parts of the Constitution do you believe should ignored when special interests deems it expedient?
Pat...ROTFLMAO...is...FOTFLOL...the...hysterical laughter...Win...more hysterical laughter...ston...*gasp*...Chuuuuuuuuuuuu...OMG...hill...tears rolling down my face, as I laugh hysterically...of...*gasp, gasp, oh gasp*...oh my, oh hahahahahahahahahahahahahahahahahahahahaha
Disclaimer: Opinions posted on Free Republic are those of the individual posters and do not necessarily represent the opinion of Free Republic or its management. All materials posted herein are protected by copyright law and the exemption for fair use of copyrighted works.