Wealth, Income, and Money

It makes no difference at all. A larger narrow money supply can only subtract from real economic growth by first showing up in higher prices for consumer goods. We measure those prices directly, they are not a deduction from an amount of currency in circulation.

There are probably a few hundred billion in US dollars in currency form circulating abroad, in Russia, Latin America, eastern Europe, etc. They are valued by people operating below the legal radar or in countries with weak currencies or primitive banking systems, as a medium of exchange that will more or less hold its value (compared to soft currency alternatives, I mean) and above all that will be accepted anywhere as money.

That circulation effectively earns the Fed a modest income, because issuing it funded the purchase of some bonds originally, which pay it interest. It doesn't have to pay any interest on their being out there. If they were all presented to buy US exports, they might force our savings rate higher momentarily, but only by providing us extra business at the same time. Unlikely anyway, and no big deal.

What you say makes sense at the aggregate level, but not at the individual level. There will be sizable winners and losers depending on how the government elects to resolve this huge mismatch between its promises and ability to pay for them.

Under current circumstances (i.e., no change in SS financing or benefits and assuming our projections are correct), for example, SS benefits will have to be cut 25% in 2041 OR the government has to pull sizable amounts from the general fund to bankroll the difference, which requires either more borrowing or higher taxes. To a prospective SS
recipient who had arranged their financial affairs on the presumption that the government would honor its promises, a 25% cut in benefits will be a sizable hit. Conversely, if the mismatch is resolved through higher taxes, it means that the next generation will pay far higher taxes for the identical benefits compared to this generation. Neither resolution is particularly “fair” given that the politicians who created the mess will be long gone.

You could say that anyone counting on SS for retirement is a fool. Perhaps that’s so, but where do you draw the line? If someone in good faith saved thousands a year in a 401(K) that went belly-up on the day they retired and the Pension Benefits Guarantee Fund couldn’t bail them out because the Feds had raided it too to bankroll unfunded SS liabilities, would you tell that person they were foolish to rely on PBGF as well? We expect private sector institutions to behave responsibly and fulfill their future promises. Indeed, we have strict accounting standards to ensure that their liabilities do not outstrip their assets, else many innocent victims will be left holding the bag.

If it really were the case that we could rack up unlimited debt without it being a big deal on grounds we “owe it to ourselves” or “we’re one big happy family” then we could literally afford to bankroll the entire wish-list of progressives, ranging from universal health care to universal pre-school to fully-paid maternity leave to 6 weeks of paid vacation etc. We’d just keep borrowing as needed and never worry about paying any of it back. I trust it’s obvious why this could never be a sustainable strategy. We can’t possibly borrow more than we own and we certainly can’t rely on foreign lenders to keep providing funds to a nation whose ability to repay declines with each new borrowed trillion.

That is why $99.2 trillion in unfunded liabilities is emphatically something taxpayers not only should worry about, but should be screaming about. Those who will get hurt the most in the train wreck that will ensue if it is not resolved soon enough for responsible financial planning will be those for whom SS SHOULD have provided the greatest protection.

The good alternative is well known, it is the discounted present value of the future cash flows

OK, you know it and I know it, but just try saying this to the IRS, the SEC, or the FDIC.

The SEC requires asset values be announced at the latest 'market' price AKA completed transaction price. The FDIC might be willing to take something like some county assessed value but market prices carry a lot of weight there. Finally, the IRS only cares about the purchase and final sales prices.

Our opinion really doesn't matter much here...

Thanks for the expanation.

If someone in good faith saved thousands a year in a 401(K) that went belly-up on the day they retired and the Pension Benefits Guarantee Fund couldn’t bail them out

The PBGF has nothing to do with 401(K)s.

Good work, JasonC. I have openly and vocally disagreed with your economic / financial projections in this forum, but I respect that you come from a position of knowledge and not rumor-mongering.

A couple of quibbles:

First on net worth outlook...

I still say that using Q2-2008 as a comparison point is not appropriate, since we now know (and some of us have been warning for a while) that we were in a “over-valued sitiuation”... a time of asset bubbles, if I can be so bold. We we assume 2002 is a “corrected” recovery period (since that was post-dot-com and also post 9/11), it makes more sense to compare it to the post-2008 trough. Not having a chrystal ball, indulge me with my projections for what a Q2/Q3-09 trough might look like... feel free to provide an alternate projection, I’m open. My simple projection starts with Q2 2008, but makes some adjustments:
1. Assume real estate asset valuation drops 35% from its highwater mark in 2006 to the trough.
2. Assume Corp equities drop 40% from Q207 high to trough.
3. Assume pension and mutual funds drop 20% from Q207 to trough.
4. Assume non-corp business equity drops 10% b/c of the recession.
5. Assume liabilities drop 10% as result of deleveraging.

in addition to total assets & related ratios, also look at quick assets by excluding non-liquid real estate, non-corp biz equity and pensions. The total assets view measures basic solvency, the quick assets view measures emergency solvency, is case of catatrophic events.

2002 had liabilities at 20% of total assets, 45% of quick assets. Actual Q208 had those ratios at about 26% and 52%... an annualized 3% decrease in solvency and 5% increase in emergency solvency. So yes, I still think that trend was unsustainable, and would lead to either correction or something worse. So now we’re having a correction. According to my rough projection (see assumptions above), Q2/Q3-09 should see Total Assets of $58.5T, quick assets of $26.7T, Total Liabilities of $12T. Liabilities are back to 20% of assets, 45% of quick assets. So far so good.

Now here’s where I see the problem. Total Net Worth in my projection is $46.5T - inflation adjusted that is basically flat from 2002. If you measure Quick Assets - Liabilities, thats actually an inflation adjusted drop in quick liquidity. You mention real GDP growth averaging 3% annualized. But CPI-U is a poor measure of inflation, regardless of how you measure inflation. Its inclusions / exclusions, its sampling method and its commodity weighting have the combined effect of under-reporting both inflation and deflation. Take a look at CPI-U housing from 1995 through present - there’s no housing price inflation or deflation there. Same with medical costs. In fact, anything that is paid via taxes, anything that is subsidized (like medical-related expenses), and anything that is financed long-term (like housing) is poorly captured. Since we’ve been mildly inflationary for some time, the net effect is that real inflation has been higher than CPI-U reports (until about Q308), so that real GDP growth is at least somewhat lower that 3%/year.

How will the general public react to perceptions (or reality) of seeing their expectations about the economy, real estate, and financial investments undermined? Will we go from “every will grow forever” to “it’s futile, why even try”? Unless DJIA/S&P surge back to 11000/1100 before the trough, equities will also be (inflation adjusted) flat since 2002- not even a little crumb for risk premium during risky times. Will investors (household, corporate, bank, etc) start demanding higher risk premia or simply reduce risk profiles? If you have a substantial public loss of confidence plus add to that baby boomers retiring, you get a pretty decend domestic migration of demand from growth-oriented to lower-risk income-oriented investment. Will foreign sources of capital make up with their own demand for risk-based growth, or will they look to emerging markets as the source for growth?

Second on methodology...

I haven’t read all your posts on this subject, but I will warn anyone who’ll listen... Beware the limitations of historical analysis... they are a vital & necessary tool for analysis, and the only real tool we have for prediction, but they only reflect was has happened in our past under different conditions. History rhymes, but it doesn’t repeat itself. Like the black swan, just because we don’t have a record of something happening doesn’t mean it never will.

Additionally, post-WW2 has been a unique period - with social programs, new safety-nets, new financial complexities, shifting fundamentals, lots of policy measures that BTW have not all been tested enough under similar conditions to be truly proved/disproved. The US never previously had the conbination of post-war economics & regulation, deflationary / credit crisis / liquity trap circumstances, simultaneous quantitative easing (increasing Fed balance sheet) and qualitative easing (changing the composition of Fed balance sheet to a riskier profile), plus the aggresiveness of the easing. That’s a pretty unique situation, different from 1974, from 1981, from 1991 and from 2001.

There *are* debts to foreign holders of financial claims, and they total about $13.5 trillion gross - but they are almost matched by our holdings of foreign financial claims running in our favor. The net is under $4 trillion, and dwarfed by household assets.

How did you get those ##? Treasury's "IFS-2.—Selected U.S. Liabilities to Foreigners" from http://www.fms.treas.gov/bulletin/index.html, which shows "contains statistics on liabilities to foreign official institutions, and selected liabilities to all other foreigners" shows a total for Jun07 of $7.2T and for Sep08(p) of $7.8T. But I can't make out how that is supposed to match with Fed's "D.3 Debt Outstanding by Sector" numbers.

The reason I stop at 2Q 2008 is simple, it is the last data set released. There will be another quarter released this week, 3Q 2008. I expect it to show the stock account down only marginally, however, as the big fall only came in October, which is 4Q. We will see the numbers on that in March of next year.

But your expectation about the real estate account being down by a third is very far from correct. The value of that account as of the end of the summer of 2008 was less than $100 billion below the value at the end of 2006, around the house price top. How can that be? Aren't home prices down, and by a lot?

Sure they are down, but houses are not all real estate, for one. Commercial property continued to appreciate through most of 2007. In addition, we didn't stop making either houses or commercial properties. We invest nearly $1 trillion a year in real estate in this country. Those additions have not shown up in higher values for the real estate account - but they have kept it from falling materially. Basically, we've been shoveling new savings into real estate, and diversifying, and it has kept our total real estate account about level.

Certainly individuals who bought at peak prices got killed, and their difficulties fill the financial press. But people hold houses for a long time. There are more people who bought before the bubble as a whole, who took the whole ride, not just the last drop. They are marginally ahead overall, not down. There are people who borrowed more than they could afford to pay peak prices and stiffed their banks. But there are others who bought earlier, who didn't pay so much, stay current, etc. And there are many late life types who have paid their mortgages off completely. They still had a volatile asset value ride, of course, but in equity only.

The 2000 to 2002 stock market crash wiped out $7 trillion in asset value on its own. But if you look at the accounts in 1995 and in 2005, you won't see much sign of it. The asset owned top line for the household sector shows the same growth it does in other decades, up about 7% per year, enough to double every 10 years. Even with blow off tops and epic crashes and recoveries along the way. In fact, there hasn't been a single decade since WW II when that hasn't happened.

In the grand scheme of things, the US economy is a mighty wealth creation engine that has steamrolled straight through world wars, cold wars, inflations, recessions, stock market crashes, bubbles of all descriptions. And gone right on doubling nominal asset values every decades, and real ones every generation. This doesn't mean it isn't important for individuals to react to its swings. But it does mean there is nothing at bottom broken about it, it is in fact about the most successful thing on the planet, today.

Gross external debt is reported by the Treasury rather than the Fed. You can find the account statements here -

US gross external debt

Note that that figure covers portfolio investment and banking, but may not include all equity in business subsidiaries and the like ("foreign direct investment").

The net capital position of the US, including US holdings of foreign securities, direct investment in foreign countries by US companies, etc, is tracked by the Bureau of Economic Analysis, and you can find that data here -

US international asset position

In particular, if you get the PDF file under the link for "full release" on the upper right menu bar on that page, you can get a more updated figure than the one I gave above. Investment both ways continues at a rapid clip, and the foreign assets including direct, they report now at $20.1 trillion, while US holdings abroad are $17.6 trillion, balance $2.5 trillion negative. See especially the graphic on page 5 for the historical time series, plotted, for assets each way and the net figure.

I hope this helps.

More on CPI and M1...

I mentioned above how CPI has a bias towards the mean, undermeasuring both inflationary and deflationary effects. Illustration: 2000-2008 CPI-U housing was steadily between 2.5%-4%, while house price indexes ranged from 15% inflationary to 12% deflationary (no correlation bet the 2 indexes' highs/lows), and CPI-U medical was between 3.5% and 5%, while total national mdeical expenses / capita was increasing bet 6.5% and 8% (again, no correlation between index highs/lows). The methodology changes in (IIRC) 1983 and 1993 added to that bias. So the logarithmic view of that CPI chart shows a slight slope approx 1950-1970, a step slope 1974-1982, and a not-so steep slope 1985 to present. For that last slope to negate the CPI bias, it really should be slightly steeper, though not as steep as in the 70's. Moral of the story: use a larger deflator to calculate real changes. (and it's corollary is that deflation will also be more dramatic than CPI numbers indicate)

On M1, the changes to Regulation Q have made it difficult to track & compare historical M1, as teh distinction bet time & demand deposits seem to have become less clear. M2 should be historically comparable, I think. M3 is gone except for questionable 3rd party guesstimates, and prob not that useful anyway. Moral of the story: Is it getting more difficult to track & manage balance sheets? I *think* so.

Monetary trends at http://research.stlouisfed.org/publications/mt/page10.pdf show that the target fed funds rate was pinned down to an implied inflation rate (assuming constant multiplier & velocity) of 7-8% from mid-03 to almost mid-05, then popped to negative-inflation territory briefly in Q1/Q2-07, and in Q208 went to the astronomical 10-12% range. The chart literally looks like a car oversteering & driving off the road. Sounds horrible, but then looking further down the same page, monetary base growth 2003-2005 (that same pdf) was pinned at 0% inflation 2003-2005, gently slid to 1-2% 2006-2007, and gently went again to 4% in 2008. What the heck is going on? Long-term deflationary trends, or a deliberate and obscured Fed-induced bubble-popping (with expected recession, this time more than the Fed bargained for)?

Meanwhile, http://research.stlouisfed.org/publications/mt/page12.pdf shows M2 velocity surged from 1.8 in the mid90s to about 2.1 through 2001, and returned to a relatively stable 1.8-1.9 until now (when is the lastest data represented? Velocity on this chart can't possibly reflect Q408). But look at the velocity of MZM (M2 minus time deposits plus money market funds)... it went fom the 2.3-2.5 range through 1997, to 1.75 in 2003, up again to 1.9 in 2006, down again to 1.7 today. Again, what is happening? Is the MZM velocity chart a long-term down trend that the Fed is fighting against? Or are the shifts in MZM just a shift in asset allocations in response to economic conditions or to the Fed?

Final moral of the story: It almost seems like traditional Fed policy is starting to lose effectivemess - either because of a longer-term trend towards lower velocity or because of increased counter-reactive market reactions to the Fed. A long-term deflationary trend would - as with Japan - undermine quantitative and qualitative easing while requiring increasing foreign debt. The market counter-reaction theory implies a sling-shot effect in 09, and potentially a cycle over over-reaction/over-response until we have it figured out.

we didn't stop making either houses or commercial properties

Duh! OK, my problem solving skills took a little hit there. Hopefully some of my credibility is still intact.

the US economy is a mighty wealth creation engine... there is nothing at bottom broken about it.. it is the most successful thing on the planet

Oh, I know. I'm not saying broken. I'm just wondering about rate of growth, appropriate policy and appropriate personal financial planning over the next 5-10 years, as compared to the previous 20.

gone right on doubling nominal asset values every decades, and real ones every generation.

Aggregate valuations, definitely. Real per-capita... not always. But still better than the competition.

The "velocity" of broad money measures is a meaningless number, since broad money is not spent, it is a form of savings or an asset preference item. As I explained above in the original post, it is mathematically impossible for households to keep a desired, fixed portion of their wealth in savings, in a progressive economy, without *broad* money growing appreciably faster than prices, forever. The belief that the price level "should" track changes in *broad*, savings forms of money, is equivalent to disbelief in the very possibility of *real* economic growth. It also has no *empirical* warrant whatsoever. There is *no* tendency of prices to track the full rate of change of broad money, there is no tendency of "velocity" of broad money forms (which can't be spent anyway, so "duh") to remain constant, etc.

M1 is not at all difficult to define. It is the measure that banks actually require Fed *reserves* against. No bank needs to hold any more vault cash or Fed reserves, when it issues another CD or increases a savings account balance. But they do require one or the other, when they increase checking account balances, or (naturally) when cash physically walks out the door (or ATM machine).

By design. Those are the forms actually spent, and long term inflation grows no faster than narrow, spendable money. Econometrically as well as theoretically. The Fed controls M1, because reserve requirements force it to grow no faster than the Fed's own balance sheet. It does not control the balance sheet growth of commercial banks, counting their savings, CDs, commercial paper, and bond forms of funding their loans and other commitments.

As for recent monetary history, the Fed tightened to halt the real estate bubble begining in earnest in early 2005, having already signalled to market participants that it was embarking on a long tightening cycle. It deliberately forecast the move and deliberately spread it over a very large number of small quarter-point moves. There is no excuse whatever for anyone to pretend to have been caught napping. M1 was forced utterly flat from March 2005 until March 2008, specifically Bear Stearns day. The Fed Funds rate compatible with that policy rose to 5.25%, then the real estate market rolled over. As soon as it did, a significantly lower rate was compatible with that policy and the Fed loosened rapidly.

In the period *after* the Fed sent M1 flat, and *before* the mortgage and real estate markets tolled over, July 2007 as the date for the latter crisis reaching a head in the financial markets, the markets had 2 years and change of sound money and rising short rates. Did they pull back? They did not.

Instead, precisely in that period, commercial banks extended themselves $2 trillion further. Virtually all of that $2 trillion flew back at them, almost instantly, as bad debt. Commodity speculators betting on a huge inflation, despite narrow money growth having already *ceased*, recklessly bid the prices of all industrial goods into the stratosphere. This was completely irrational. Men scrambled to use a vanishing low financing rate period to bet that real goods would go on increasing in price by 15 to 25% per year, when M1 wasn't moving *at all*.

Since spendable money did not increase, neither did final demand for the goods to be produced using those commodities. The markets bet on a hyperinflationary event that the Fed had already forstalled, entirely effectively. The overshoot of commodity prices that resulted, was *entirely* the fault of speculators themselves, and their lenders. The Fed had already taken away the punch bowl and told everyone to cut it out.

They didn't, and there is hell to pay.

long term inflation grows no faster than narrow, spendable money

Assuming a relatively constant multiplier and velocity. But long-term cumulative CPI-U growth over the past decade has been 15-25 %% points higher that M0 or M1 growth, even when you factor in policy lag. This chart shows an increasingly tentative correlation between Fed Funds & M1 and CPI-U since the mid/late 1990s:

* Averaging out 1995-2005 shows a total of 20% M1 growth and 35% CPI-U growth.
* 1995-Q208 shows 20% M1 growth and 45% CPI-U growth. Some mild price deflation over a couple of years won't offset that difference.

This chart shows how a very gradual contractionary pull has been with us for a decade, but that the aggressively expansionary Fed policy of 2002-2005 corresponded with the instability that brought us to this point:

* Broad money growth trended narrow money pretty closely from the mid-80's until about 95, then grew much more rapidly, and plummeted in 2002. No, broad money isn't the driver of inflation, but it should normally be a useful data point to understand underlying dynamics.
* M1 was struggling to stay positive durign the late-90's period of Asian deflation and 5-6% fed funds rates. This was when MZM first started surging vs M1.
* 2001-2005 was the most aggressively expansionary Fed Funds Rate on the chart, corresponding with an initial massive spike in M1 and MZM, and then a long-term downward trend starting in 2002.
* The recent downward pressures on both narrow and broad money started in 2002, *during* the *early stages* of aggressive Fed expansion. The massive 5% point 1-year funds rate drop to 1% in 2002 caused 2 rapid surges in M1, but broad & narrow money were trending back to 0% *before* the post-2004 increases in Fed Funds rates.

M1 is not at all difficult to define. It is the measure that banks actually require Fed *reserves* against. No bank needs to hold any more vault cash or Fed reserves, when it issues another CD or increases a savings account balance. But they do require one or the other, when they increase checking account balances....
...The Fed controls M1...

The measure of the thing is not the thing itself. Yes there is a simple *technical* way that banks can define CDs and savings and checking accounts for marketing purposes and for reserve management purposes. But that need not equal the theoretical definition of M1 ("assets that can be directly used to pay for a good or service or to repay debt"), which is the more important one for policy. My bank offers interest-paying checking accounts that are effectively indistinguishable (during normal times) from their savings accounts & money market accounts "with the added convenience of limited check writing privileges." So if I have $1,000 in an interest-bearing checking / demand account and $10,000 in a savings account w/ check-writing privileges and $10,000 in a money market account with check writing prileges, and I regularly use checks from the "savings" & money-markets to pay off credit cards that I use for cash-flow management of typical monthly expenses, precisely how much of that is M1 "money" and how much is M2-M1 ("close substitutes") and MZM-M1?

From a behavioral economic perspective - how people and banks use those things in the normal course of their lives - they're becoming more blurred and interchangeable at a time when we need more clarity. And the plunge in rates and yields is likely to cause more dramatic shifts in the stock of narrow and broad monies in the near future that make prediction and management more complex and less certain.

the Fed tightened to halt the real estate bubble begining in earnest in early 2005...
M1 was forced utterly flat from March 2005 until March 2008...
the markets had 2 years and change of sound money and rising short rates. Did they pull back? They did not

That irrational market response is highly predictable. The fever induced by loose policy rarely evaporates the whent we return to tight policy; it tends to continue burning until some tipping point causes a dramatic reversal, in the form of credit crises and recessions. This is shockingly consistent of post-war policy:
* http://papers.ssrn.com/sol3/papers.cfm?abstract_id=150071
* http://papers.ssrn.com/sol3/papers.cfm?abstract_id=227216

Today's contractionary pressures were already there when the Fed unleashed counter-cyclical loosening, and all indications are that it the Fed was one source of irrational behavior, instead of a claming factor.

I agree with you that the economic fundamentals of the US are still strong, and that only policy stupidity can cause real problems. Unfortunately, the ability of policy-makers to measure and manage monetary trends seems to have deteriorated since the days Volker tamed stagflation.

Policy isn't stupid, investors are, private ones, and bankers, and journalists, and people looking at the wrong indicators and unable to reason about economics or econometrics.

If you take enough derivatives of anything you get noise and all relationships between series evaporate. This reduces to my earlier statement that there is no close time correspondance between price changes and even narrow money changes. There is only such a relationship over the proper time scales, which are of order decades, and it concerns only the levels, not the second or third derivatives as yearly series.

If you want to understand *broad* money growth you need to grok that it is utterly unrelated to the price level, but *is* related to total *wealth*. The total assets line of the household sector in the Z.1 data set is the best single measure of that.

And you will find that it has spent its entire series life from 1945 to now in a channel defined by 7.1% to 8.1% compounded. It last hit the lower figure over 30 years ago, and has spent all the time since in the narrower pipe defined by 7.6 to 8.1 compounded since it 1945 level. It hit the lower of those at the post 2002 crash lows, and the higher of them at the pre-crash highs. The uncertainty in the long run growth of nominal wealth in the US economy is less than 1% per year on a time scale of half a century. And less than 0.5% per year on a time scale of a generation. This isn't erratic anything, it is a Swiss watch.

The rate of increase can sometimes be higher year on year, but such periods will be followed by others lower year on year. Asset growth is capped, to within about 1% per year above it, by overall nominal GDP growth. Which runs 7% a year in the postwar period, with very gentle undulations about that trend rate, cumulative.

Do not take four derivatives of that cumulative wealth series and expect to find information. You are instead throwing all of it away. All the macroeconomic stability is in that long trend, and not in momentary and ephermal deviations from it, which *always* correct to the mean.

And broad money growth? The MZM series goes back to 1959. Over the period 1959 to now, it grew at an average compound annual rate of 7.32%. With the asset growth in that period clocking in at 7.74%. The total ratio of broad money to total household sector assets remains within 20% of the 1959 level. Why? Put on an economist hat, easy. Broad, savings form money balances are a savings form preference, period. People are quite close to wanting to keep a constant portion of their *total assets*, in a safe and liquid form. Deviations from the average desired proportion of assets in savings money are modest and temporary and mean reverting.

But notice, this is a relation to *total assets*, and not to *prices*. Total assets to prices *increases* continually in any progressive economy. Necessarily, definition of progress. There isn't any net change in wealth with time in real terms unless total assets divided by the price level, rises. And there emphatically *is* real increase in wealth with time. There are more people, a higher portion of them work, they produce more per hour with their higher tech, skills, and capital equipment, and asset value per unit of income also rises modestly with time, as capital "deepens".

Now, instead, look at M1. It has growth 4.88% a year since 1959, much slower than assets. Naturally. Prices have grown only 4.22%. Both processes are wandering around a channel around 4.5% a year nominal. Yes they sometimes go up faster, and they sometimes move sideways. But all such periods mean revert to that trend. They can meander at different times, but they are both clocking in at between 1/2 and 2/3 rds of both economic growth and total asset growth.

It is outright crazy to expect prices to move to the rate of broad money growth --- tantamount to the denial of the existence of economic growth. It is perfectly sensible to expect the overall price level to approximate the growth in *spendable* money, over decade time scales (*not* yearly rates of change).

When the Fed calls a bubble, orders bankers to tighten lending procedures, raises short rates repeated and a long way with warning and telegraphing, continues doing so until the yield curve inverts, and keeps narrow money utterly flat for a 3 year period as it does so --- then you need to be some kind of madman to expect 15-25% annual inflation and an instant general doubling of the price level. If you then extend yourself to 30, 40, or 50 to 1 leverage betting on that outcome, you have passed mad several exits back and entirely the realm of merely silly.

But that is what our illustrious bankers and hedge fund speculators did. All of them predicting the demise of the dollar in hyperinflationary collapse, at the very moment M1 growth *halted* and all their bubble schemes were objectively and clearly set to immediately implode. Nor was it hard to see a particle of this. I was telling colleagues about it, down to the failure of asset backeds and the bankrupcty of New Century Financial and its like and urging avoidance of overpriced real estate, from the moment the Fed began to tighten.

There is no policy failure here. There is market rationality failure. The Fed might be criticized, marginally, for leaving rates a bit too low too long in say 2004, or for making the increases so quarter-point gradual. But if they hadn't, everyone would have screamed instead that they had no warning and called it all a policy failure. It is utter rot. The bankers and speculators had every possible warning and they flat ignored them and bet against the Fed, willfully and violently and with deliberate editorial malice. And predictably, the 800 pound gorilla ripped their freaking heads off.

And the moral of the story? Put down your crank-populist crack pipe, stop pretending you are smarter than the best economists on the planet, and *stop fighting the Fed*. It knows what it is doing, it will win *every* time, and those who ignore the directions it points will not gloriously triumph as Randian superheros in a crusade against Bilderbergerism --- they will just be wrong and go broke.

Great post. Speculators lost and had to unwind. It is time to take possession of their unwound positions via ‘bank-like’ risks, as you mentioned.

Sorry JC. I thought you posted this in order to share meaningful information and increase the level of available knowledge on this forum. I should have realized you were more interested in propping up your ego and hurling baseless insults.

economic education marker