Alarm bells ring at Fed (deflation alert)

Financial Review ^

[Capt. Tom]

These are my comments on an earlier FR thread discussing homeland security.

I wonder what the sentiment would be if the economy was booming, the 401s were flush and Bush wanted to attack Iraq. A move that could crash a good economy.

I think the good economy and the money in the swollen 401s is why Clinton didn't get impeached. The sheeple were worried about losing their assets if he got impeached, and the uncertainty might cause the top heavy stock market to crash.

It has crashed since then and now they don't have to worry about that, so they are ready for a war. - Tom

ps Don't get me wrong I think we have to do in Saadam, it's just that it is an easier sell now. Americans given the choice of worrying about their asses or assets will come down on the assets side. But now that the assets are gone they will worry about their asses. - Tom

[bvw]

Good 'un.

[headsonpikes]

Paper and ink bump.

Real deflation? Please.

The State's foolery will end in inflation, as always.

[David]

First place, I think everyone needs to understand that we don't have 1-2% inflation any more--we haven't had any inflation for almost two years. The CPI measures the market trading price of a specified group of commodities which show a net increase in this range--but that is not inflation. Inflation is where you have too much money in too many transactions chaseing a limited supply of goods--we don't have that.

The basket of goods we trace prices on includes goods that are in markets with structural market factors forcing prices up (food grains--weather; oil and gas--supply; steel--tarrifs etc.). Nothing to do with inflation, we have deflation right now and have had it for around two years and the rate of deflation is accelerating.

" Besides lowering interest rates, how does the fed actually increase the money supply? If they are giving away "freea" money...who do they give it too???"

That is of course the real question. And Richard has given you the fed's best answer--they print money and buy government bonds, usually from bank reserves, on the assumption that the bank with an implicit cost of the cash in its reserves with no revenue from the cash will then lend it out; or the marketplace, on the assumption that the recipient of the proceeds of bond purchases will be under similiar pressure to invest or spend. That is not however what investors are doing with excess cash so that is not going to happen either.

I don't know who coined the term "helicopter money" but it's a wonderful term because it forces people to think about the problem the fed has in giving away money. The real way they do it is credit every checking account in America with $10,000--but if they did that, no one would ever again use the dollar for money; it would defeat their purpose.

Bottom line? Deflation is here and there is nothing the fed can do about it. What do we do? Conserve cash; be sure it is located in a secure place: Few banks are worthy; few money funds are safe; some T-Bill only funds are ok; best is Treasury Direct investments in T-Bills.

[austrianecon]

The last thing we need is tariffs. Tariffs are one of the things that contributed to the Great Depression. If the government would have stepped back and allowed the market to adjust instead of passing Smoot-Hawley, instituting wage and price controls/supports, and increasing taxes, the depression would have been deep and probably painful but also of a shorter duration.

I agree cutting taxes would help; it's the only thing the government can do any more. The ability to cut spending, like it should, is not an option after LBJ put about 70% of the budget in the non-discretionary category. If you look back to Harding and the depression of 20-21 (I think), he cut taxes AND the budget 25%. Depression was over in about 12 months.

[austrianecon]

Milton Friedman coined the term "helicopter" money.

[bvw]

Disagree about tariffs -don't think that they added much one way or the other to the Great Depression, but are a convenient place for people supporting big Government to place the blame. Dynamics are different today -- in the 20's WE were China in industrial production -- tariffs then had as much negatory effect as any positive. Today, we are deficient and need import tariffs to allow new growth of basic industries and manufacturing. I only hope the old domestic dinsosaurs still not yet dead don't eat the most of any new tariff foliage.

[Deuce]

Many people have argued that the reinflation will fail because you are trying to cure an economic illness with the very same measures that caused the illness to begin with.

Right on---but I would have said it with less modesty:

Those who understand what's going on have correctly argued that the reinflation will fail because you are trying to cure an economic illness with the very same measures that caused the illness to begin with.

[arete]

What about the cash that was used by the holder to pay for the bond in the first place? And when the Fed buys that bond, it isn't retired. The government (really the taxpayer) still has to pay it off.

With deficit spending, I think that you know the answer to that. The trick is to keep putting off the day of reckoning. Kinda like consumers do when they rollover their credit card balances on to a different card.

Richard W.

[Deuce]

We are in a slightly deflationary period due to increased productivity and cheaper imports. This is the type of deflation that was prevelent for roughly 120 yrs prior to the creation of the Federal Reserve System. There is absolutely nothing wrong with this type of deflation.

We would be in such a situation---if we had an honest monetary system. However, those that can create money from nothing will find such a temptation/privilege too tempting to pass up

[austrianecon]

Actually I have to say you're wrong. The tariffs of 1930 resulted in a collapse of global trade. All tariffs reduce supply, it's a basic economic law; reduced supply then affects jobs. Reduced supply due to tariffs affects export jobs more than domestic jobs. Who /what defaulted the most during the Great Depression? Farms (the producers of our largerst export sector) and farm banks. Were tariffs the sole reason? no, of course not. Were they a big contributing reason? Definitely. Tariffs are the wrong answer.

[austrianecon]

Oh I agree. Buty here's the thing. Productivity in many industries can offset the increase in money creation by the Fed. Look at computers, semiconductors and many other high-end electronics. How can this happen when during the 90's the Fed was at the press cranking out dollars left and right? It's because the manfacturers are able to produce them much more efficiently and numerously as well.

We also have something called cash-balance deflation occuring. That's when consumers are more prone to maintain high have cash balances relative to income instead of purchasing goods. The Fed can create as many reserves as they want, if no one wants to use the money for purchasing then there is no inflation. It's only when it begins to circulate that money causes inflation. Make sense?

[austrianecon]

Actually, it reduces demand. Don't know how I got that backward.

Credibility shot, oh no!! :)

[Deuce]

It's only when it begins to circulate that money causes inflation. Make sense?

This, of course, is true by definition. However, I question whether there will truly be an absence of borrowers or an absence of commercial bank money creators. It appears like this may have happened in the 1930s, but my sense is that the collapse in the 30's had more to do with the massive bankruptcies and international defaults than conscious decisions to cut back on new borrowing and/or lending. With regard to the Fed cranking out dollars left and right during the 90s, those dollars were used, primarily, to create asset bubbles rather than inflationary consumer prices. But I do take your point that the increased productivity engender by the technology boom tempered price inflation. We are basically in agreement.

[Fury]

Bottom line? Deflation is here and there is nothing the fed can do about it. What do we do? Conserve cash; be sure it is located in a secure place: Few banks are worthy; few money funds are safe; some T-Bill only funds are ok; best is Treasury Direct investments in T-Bills.

I just signed up for this. Not a bad deal considering that many banks are now paying ~.50-.75% on Savings Accounts. You can do better than that with a 4-week T-bill.

[Aracelis]

A fascinating discussion for the grossly uninformed. Thank you very much!

[Bobby777]

we have a winner ...

[Capt. Tom]

With deficit spending, I think that you know the answer to that. The trick is to keep putting off the day of reckoning. Kinda like consumers do when they rollover their credit card balances on to a different card.

Charles Ponzi would be proud of our Govt. today. - Tom

[fogarty]

Ultimately, "the US government has a technology, called a printing press ... that allows it to produce as many US dollars as it wishes at essentially no cost ... Sufficient injections of money will always reverse a deflation", he says.

BWAHAHAHA! Fools. They seem to think it is so easy to fix a credit and deflationary spiral. Like pumping air into a ballon that has been popped, zipping around the room.

With such short-sighted monetarists and Keynesians at the helm, the smart ones among us are doing two things: getting out of all debt and buying precious metals. Things are going to get worse before they get better. Unemployment now above 6% and another surge of layoffs coming in January.

[OldFriend]

Sorry to disagree with you regarding Kudlow. I consider him an important voice on economics. Besides, I think he's cute!