Government's Money-Manipulating Wizardry
By Mr Practical Aug 27, 2009 12:20 pm
Explaining the mechanics of Federal Reserve operations.
There's great debate about inflation versus deflation. Most who are buying stocks aren't doing so because they see good fundamentals, but are doing so because they're worried about inflation. Clearly the Federal Reserve is doing “unconventional” things (perhaps I should use better words such as crazy and irresponsible) which have a lot of people worried about a crashing dollar.
In order to clarify my position, I want to describe to you some mechanics of Federal Reserve operations, the wizardry behind the curtain. I recommend you send this to all of your friends so they can decide for themselves. This is long and tedious, but I think worth it.
The Federal Reserve is a private bank, albeit special. It has shareholders that care about profits and risk. These aren’t normal shareholders, but other banks or the boards of those banks. The Fed was given certain powers by Congress in 1913 to regulate the money supply of the US. That benign-sounding statement has vast implications on capitalism and liberty itself.
Capital can be loosely defined as wealth, unencumbered assets of various forms like cars, buildings, manufacturing plants, and land. Capital is created through productive processes that lower costs, develop new technologies, and raise living standards.
An example of a productive process might be one of specialization. Two farmers grow their own food, make their own clothes and cut down their own firewood. It takes each 15 hours a day to do all this work. They realize one has better land and the other one makes better clothes so they barter to exchange goods. This bartering results in each working only 12 hours a day. One farmer can then take the extra time and sew more clothes and thus barter it with another farmer for more firewood. The extra clothes can be described as “capital” that can be used to raise living standards. Capital can only be created through the production process.
In today’s world, non-liquid wealth in the form of hard assets can be converted into something called money. Money is merely a medium of exchanging hard assets. Money is the liquid form of wealth in only this sense: it is a store of wealth only based on this exchange value. You can’t eat or drink or live in money. Hard assets have a price in dollars to convert them to liquid money.
There's always a defined amount of wealth at any one time in the world, as created by productive processes that increase living standards. This is the real pool of savings. The more production, the more wealth is created. This is a very important statement as you will see later.
Capital can be lent to a borrower. Someone with capital would forgo its use in the present to generate a return. Normally capital is converted to money to be lent. The price of money is an interest rate, how much one charges to use the money.
It makes sense that only those with capital can lend it. Someone can borrow capital from someone else and then lend it to another, but it all starts with the person with capital.
The first red flag is this then: A government, which has no capital of its own, which produces nothing on its own, cannot lend money unless it borrows that capital from another or takes that capital in the form of taxes (but taxpayers must have capital to pay taxes). 
The Fed controls interest rates (to a certain extent in normal situations; to a large extent in special situations) to influence the demand and supply of money. Again this innocuous-sounding statement has vast implications. Here is how it works:
There are times in an economy when those with capital don’t want to lend it. It almost always is a time when they see too much risk for too little return.
If we have too many condos in Florida those with capital say I don’t want to lend money to build more condos because there is too high a risk that they won’t sell and I won’t get my money back. So they raise the price of money; they raise the interest rate they charge to compensate for too much risk.
This is how an economy naturally controls itself. It’s called capitalism: the allocation of capital based on risk and return.
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2009-08-27 13:06:19
Inflation to counter deflation
If prices go down 40%, that's like making 66.66% return on your money. Would be nice if you have money, but do you really think the government is going to let that happen, especially when all it has to do is print money to counter it? Just drop printed money from the skies; Stimilus plans, more money for houses and cars and appliances, then more and more things and more and more money. And of course more government jobs. Why can the government get away with backing all kinds of funky debt? Because it can print money. The U.S. government will never default on it's debt because it can print money to pay it off.
The government can fight deflation but it cannot create real jobs or real productivity. What will happen is that the government will continue to print money to offset deflation until nobody has a job and everyone is on the government payroll. Basically we will all eventually be slaves to the government.
The government can fight deflation but it cannot create real jobs or real productivity. What will happen is that the government will continue to print money to offset deflation until nobody has a job and everyone is on the government payroll. Basically we will all eventually be slaves to the government.
2009-08-27 13:13:48
Should we save our money or no
Reading your article made it quiet clear what is going on with all this money problem hype. In your opinion is it time to sell as much as we can and save or live a luxurious life and invest...??
2009-08-27 13:15:25
I get that debt destruction = deflation, and with all the job losses there will be much debt destruction. I just don't completely buy Prechter's argument that the Fed can't beat deflation with its own inflation. What's to prevent the Fed from simply sending out checks to each and every taxpayer in amounts totaling the amount of destroyed debt? If they're really dead set against deflation, it seems that there are presently no limits to the amount of money they can create to fight it. True, people don't want to borrow any longer (low money velocity), but direct cash infusions would not be rejected by the population. Wouldn't this prevent the deflation?
2009-08-27 13:23:42
Very Japanese, Until It Is Not?
Mr. Practical,
An excellent article.
I agree with you it is a fools journey, similar to Japans.
What concerns me (and it seem Toddo also) is that at some point the berries will not tolerate the Japanese path (10-20 yr. weak GDP due to debt destruction), and they "revalue" the dollar to quicken the process and reduce the burden.
But who know if and when this could occur?
An excellent article.
I agree with you it is a fools journey, similar to Japans.
What concerns me (and it seem Toddo also) is that at some point the berries will not tolerate the Japanese path (10-20 yr. weak GDP due to debt destruction), and they "revalue" the dollar to quicken the process and reduce the burden.
But who know if and when this could occur?
2009-08-27 13:38:04
conflation
(instead of Inflation, or deflation, let's discuss conflation.)
All commentary on monetary topics tends to conflate the US Treasury Department and the Federal Reserve. There may be some clarity in observing they are distinct actors, each playing a role. If I'm not mistaken, TARP is actually the Treasury's program; and the massive increase in bond issuance is also under their purview. The Fed, of course, owns the open market action, and the setting of the discount rate, as well as the slippery slope of lower collateral requirements.
They are acting in lockstep currently, but that is not always true, historically. It is something to be mindful of.
All commentary on monetary topics tends to conflate the US Treasury Department and the Federal Reserve. There may be some clarity in observing they are distinct actors, each playing a role. If I'm not mistaken, TARP is actually the Treasury's program; and the massive increase in bond issuance is also under their purview. The Fed, of course, owns the open market action, and the setting of the discount rate, as well as the slippery slope of lower collateral requirements.
They are acting in lockstep currently, but that is not always true, historically. It is something to be mindful of.
2009-08-27 13:39:16
Very Japanese, Until It Is Not?
I see three possible end-games:
1. They successfully reflate the debt bubble, and we have high inflation, and another future debt crisis. [I don't see any evidence of this yet solely based on the consumer]
2. We do a Japan and have 10,20, 25 yrs. of debt destruction till the debt/GDP ratio gets back to sustainable levels. But this debt destruction subtracts from GDP every year, and calculations posted on Mishs' site say it can be anywhere from 3.5-6%+. And he calculated to get unemployment reduced requires at least +2.5% GDP growth. This would mean GDP growth of 7%!
3. We go along the path of #2, but devalue the dollar at some point, to boost exports and reduce the debt burden out of desperation
1. They successfully reflate the debt bubble, and we have high inflation, and another future debt crisis. [I don't see any evidence of this yet solely based on the consumer]
2. We do a Japan and have 10,20, 25 yrs. of debt destruction till the debt/GDP ratio gets back to sustainable levels. But this debt destruction subtracts from GDP every year, and calculations posted on Mishs' site say it can be anywhere from 3.5-6%+. And he calculated to get unemployment reduced requires at least +2.5% GDP growth. This would mean GDP growth of 7%!
3. We go along the path of #2, but devalue the dollar at some point, to boost exports and reduce the debt burden out of desperation
2009-08-27 13:39:59
awareness
--Now for several reasons, like political influences---
Maybe it just doesn't matter cause we are here-and-now but has it been political influences or influences on politicians?
It would seem to matter somewhere in the future so we do not find ourselves here again. There is also an awareness
of misdirect that provides cover for those that have gained so much and have the most at stake.
The bribed, I mean influenced poor legislative decisions were made
that benefited a few (globally).
Looking ahead will the market be the arbiter of financial atonement?
Maybe it just doesn't matter cause we are here-and-now but has it been political influences or influences on politicians?
It would seem to matter somewhere in the future so we do not find ourselves here again. There is also an awareness
of misdirect that provides cover for those that have gained so much and have the most at stake.
The bribed, I mean influenced poor legislative decisions were made
that benefited a few (globally).
Looking ahead will the market be the arbiter of financial atonement?
2009-08-27 13:46:02
truly article worth passing along -
especially liked:
"This is exactly what the market wants, for prices to go down. When prices go down, real savings/capital is released as the risk for reward dynamics become more favorable. This is exactly what the government doesn't want. They want to subsidize debtors by keeping prices and collateral values high. It's a fool's journey...."
"This is exactly what the market wants, for prices to go down. When prices go down, real savings/capital is released as the risk for reward dynamics become more favorable. This is exactly what the government doesn't want. They want to subsidize debtors by keeping prices and collateral values high. It's a fool's journey...."
2009-08-27 14:30:19
If prices go down 40%,
'If prices go down 40%," is that a realistic expectation? I would be astounded if prices went down even 10%. And I mean they go down because money is more valuable, and so Harvard will lower it's tuition and your Dr. will charge less and your real estate taxes will go down. If money truly becomes more valuable those things must happen, but they wont.
So use folk nearing retirement get screwed by low interest rates. {Nominal and real)
So use folk nearing retirement get screwed by low interest rates. {Nominal and real)
2009-08-27 14:52:59
anticipating the actions of the FED
Mr Practical,
I think Sean brings up a great point. All else being equal I think you would certainly be correct about how this should unfold, however I think that assumes some sanity/restraint on the part of the FED. I certainly hope you are correct as I think deflation and debt destruction would be the best thing for the country as a whole, yet it would be to the detriment of the banks, who at the end of the day yield more control over the FED and the system than anyone else. To me that makes it exceedingly likely that the FED will resort to extraordinary and creative measures to prevent that, be it more and more bailouts, stimulus, and monetization, or other such measures. You look at the intraday drop in the dollar today (not to mention how it's been acting in recent weeks, and what the chart looks like), and I'm fearful that this is all going to become a self fulfilling prophecy... at some point if the dollar continues to weaken and some big foreign holder of dollars finally blinks, the dollar starts to drop more rapidly and this feeds on itself with other foreign holders either starting to dump or looking to sell on every rally. This sure seems like a debate for the ages...I know that Toddo is in the deflation camp but regularly expresses his opinion of a 25 percent probability of a seismic readjustment in the dollar or hyperinflation... we can only hope that as you said that when you moved back to the USA, that you are still early and not late. Kudos and many thanks for all your articles.
I think Sean brings up a great point. All else being equal I think you would certainly be correct about how this should unfold, however I think that assumes some sanity/restraint on the part of the FED. I certainly hope you are correct as I think deflation and debt destruction would be the best thing for the country as a whole, yet it would be to the detriment of the banks, who at the end of the day yield more control over the FED and the system than anyone else. To me that makes it exceedingly likely that the FED will resort to extraordinary and creative measures to prevent that, be it more and more bailouts, stimulus, and monetization, or other such measures. You look at the intraday drop in the dollar today (not to mention how it's been acting in recent weeks, and what the chart looks like), and I'm fearful that this is all going to become a self fulfilling prophecy... at some point if the dollar continues to weaken and some big foreign holder of dollars finally blinks, the dollar starts to drop more rapidly and this feeds on itself with other foreign holders either starting to dump or looking to sell on every rally. This sure seems like a debate for the ages...I know that Toddo is in the deflation camp but regularly expresses his opinion of a 25 percent probability of a seismic readjustment in the dollar or hyperinflation... we can only hope that as you said that when you moved back to the USA, that you are still early and not late. Kudos and many thanks for all your articles.
2009-08-27 15:39:01
anticipating the actions of the FED
I do not disagree; that is why I did not move back to the U.S. permanently. I describe my stay as an extended vacation. Without a fractional banking system to create "inflation", the only tool left for the Fed is monetization. They have stated they will limit this to $300 billion. We know that statement is for the benefit of our foreign lenders and none of us believes it to be true when push comes to shove, but it does show that it would happen with great consternation and as last resort. With $8-20 trillion of debt to be unwound, deflationary forces are very powerful until this trigger is pulled. I hope to be long gone by then.
2009-08-27 15:46:13
anticipating the actions of the FED
Indeed -- wink, wink, nudge, nudge... no direct intervention in treasury auctions -- but buy-backs 10 days later with guaranteed profits for their friends. Their friends are the ones who got bailed out and the ones who don't play ball are allowed to fail.
How healthy is this for the market??
How healthy is this for the market??
2009-08-27 15:50:05
truly article worth passing along -
The fool's journey ends with govt ownership of everything. Maybe that escapes Whirlybird Ben?
2009-08-27 15:53:39
truly article worth passing along -
i strongly feel it's only a fool's journey for us, and not those who know ahead of time....
2009-08-27 15:54:59
anticipating the actions of the FED
very curious, do you have a short list of places you'd prefer to go to?
of often hear of switzerland, australia, new zealand, and even france...
thanks!
of often hear of switzerland, australia, new zealand, and even france...
thanks!
2009-08-27 15:58:09
truly article worth passing along -
I suspect Ben may have figured it out. The top bankers will play an Immelt to pad their incomes and become top govt employees after Capitalism dies.... Govt Electric Czar.
2009-08-27 15:59:49
anticipating the actions of the FED
Switzerland is nice... and a short drive to France if you need some abuse.
2009-08-27 16:09:46
anticipating the actions of the FED
something about that combo and description made me laugh so my wife wanted to know what it was - she's us-born half french and half irish, so she may know what you mean better than me ;-)
2009-08-27 16:39:45
Keeping capital safe
You write:...This is why I've taken an extended vacation in the US and keeping my capital safe: I am willing to accept a very low return on that capital because if prices come down 40%, I am effectively earning 40% interest on my capital, which is real...
A question, if you will:
I totally agree it is a fool's journey, for all the cited reasons. But let me play devil's advocate: What if prices do not come down anywhere near 40%? What makes you so sure prices will come down that you return to the US to keep your capital safe?
By some gut instinct, it sounds like an oxymoron to me.
I continue to be amazed to see the patience of the populace at large with spin, financial shenanigans, corruption.
I yield to your astute and level headed assessments you have shared here. Yet this time you have me shaking my head.
A question, if you will:
I totally agree it is a fool's journey, for all the cited reasons. But let me play devil's advocate: What if prices do not come down anywhere near 40%? What makes you so sure prices will come down that you return to the US to keep your capital safe?
By some gut instinct, it sounds like an oxymoron to me.
I continue to be amazed to see the patience of the populace at large with spin, financial shenanigans, corruption.
I yield to your astute and level headed assessments you have shared here. Yet this time you have me shaking my head.
2009-08-27 17:06:33
the fed and a few q's
you are a great teacher, that is rare
where did the 750 trillion go?
if every country is doing it, does is really even matter, sometimes I think it is almost as if they woke up one day changed accounting laws, and put a total reset on the whole world, back to normal jack, what are you worried about, ie, me, lol. Are they just that incompetent or insane?
where did the 750 trillion go?
if every country is doing it, does is really even matter, sometimes I think it is almost as if they woke up one day changed accounting laws, and put a total reset on the whole world, back to normal jack, what are you worried about, ie, me, lol. Are they just that incompetent or insane?
2009-08-27 17:14:28
Where are you going ? Hopefully not to a cheese exporting central european country ! :)
2009-08-27 18:35:00
anticipating the actions of the FED
I get all the abuse I need without leaving home:-) Maybe France would offer some relief... if I left her at a truck stop.
Funny story - first time I took her to Paris I starved her all the way from Germany, saying the food is much better in Paris. Checked into a hotel and went 2 doors down to a nice-looking restaurant.
The waiter refused to speak English, of course, so I pointed to the veal on the menu to avoid misunderstanding (not that it is pronounced much differently in French).
My wife said she wanted the same thing without sauce as she is allergic to eggs. So I pointed to the menu again and said No sauce... which in French is pronounced about the same.
He made me repeat twice, shrugged his shoulders, and disappeared into the kitchen. 20 min later he returned with 2 plates... I had a nice piece of veal with sauce and her plate had a silver dollar sized piece swimming in sauce. For reasons only a married man would understand, she got mad at me and stomped out.
I had a choice - finish my meal and maybe never see her again or catch up to her outside the restaurant. The meal was lovely. I eventually found her at a fast food place on the corner.
Funny story - first time I took her to Paris I starved her all the way from Germany, saying the food is much better in Paris. Checked into a hotel and went 2 doors down to a nice-looking restaurant.
The waiter refused to speak English, of course, so I pointed to the veal on the menu to avoid misunderstanding (not that it is pronounced much differently in French).
My wife said she wanted the same thing without sauce as she is allergic to eggs. So I pointed to the menu again and said No sauce... which in French is pronounced about the same.
He made me repeat twice, shrugged his shoulders, and disappeared into the kitchen. 20 min later he returned with 2 plates... I had a nice piece of veal with sauce and her plate had a silver dollar sized piece swimming in sauce. For reasons only a married man would understand, she got mad at me and stomped out.
I had a choice - finish my meal and maybe never see her again or catch up to her outside the restaurant. The meal was lovely. I eventually found her at a fast food place on the corner.
2009-08-27 19:05:18
anticipating the actions of the FED
LOL - I'm 1/2 French and 1/2 English and a woman. (At least they haven't stopped me yet from entering women's rest rooms ...)
I'm totally with the wife on this one. No sauce like hunger to make food taste better. I'm pretty sure I would have eaten at the fast food joint and then made it back to the states in record time.
Also, some in sight on a possible perfectly logical reason why your waiter refused to speak English. He lives and works in France. Follow me here...he probably speaks French naively and English not so much. ;)
Also, the Gallic people have a perfectionist streak in them which is why the food is so good and the people so generally annoying. (And I say this with some authority as I'm a recovering perfectionist and my family are closet ones..)
So even If he did speak English, even if had some sympathy for your plight (which he might not have if you didn't even attempt to communicate in French), he might have not wanted to utter a word because then he would have sounded just like you bumbling in French. Not saying that's a good thing mind you, I just get it, for what it's worth. ;)
I'm totally with the wife on this one. No sauce like hunger to make food taste better. I'm pretty sure I would have eaten at the fast food joint and then made it back to the states in record time.
Also, some in sight on a possible perfectly logical reason why your waiter refused to speak English. He lives and works in France. Follow me here...he probably speaks French naively and English not so much. ;)
Also, the Gallic people have a perfectionist streak in them which is why the food is so good and the people so generally annoying. (And I say this with some authority as I'm a recovering perfectionist and my family are closet ones..)
So even If he did speak English, even if had some sympathy for your plight (which he might not have if you didn't even attempt to communicate in French), he might have not wanted to utter a word because then he would have sounded just like you bumbling in French. Not saying that's a good thing mind you, I just get it, for what it's worth. ;)
2009-08-27 19:34:09
"When moneydebt is destroyed by forfeitures, the dollar is being destroyed. When the dollar is being destroyed it rises in value. When the dollar rises in value relatively prices go down."
huh??? this makes no sense. how can something be destroyed and rise in value at the same time...they mean the complete opposite. i think i know what you are trying to say...that the destruction of debt increases the value of the dollar and causes deflation, but the phrase "when the dollar is being destroyed it rises in value" is incoherent.
huh??? this makes no sense. how can something be destroyed and rise in value at the same time...they mean the complete opposite. i think i know what you are trying to say...that the destruction of debt increases the value of the dollar and causes deflation, but the phrase "when the dollar is being destroyed it rises in value" is incoherent.
2009-08-27 21:21:16
anticipating the actions of the FED
great story! can only be from the kind that's not only true, but lived ;-)
2009-08-27 21:32:18
anticipating the actions of the FED
Thank you for making my point!
It wasn't so much the waiter's refusal to speak English (I expect that in France) but no sauce in French is "no sauce"... I admit to speaking limited French with an accent but have you ever met a Frenchman who speaks English without one?? For that matter, the Parisians hate the folks from the provinces, so it wouldn't have made much difference.
It was the beginning of a 3-year assignment in Germany so she couldn't go back to the States. Well she could have but has a Japanese passport.
The Parisians have perfected just about everything except maybe keeping the Germans out and their citizens from defecting to the enemy side. Oh, and any sign of gratitude.
Anyway, thanks for making my point.
It wasn't so much the waiter's refusal to speak English (I expect that in France) but no sauce in French is "no sauce"... I admit to speaking limited French with an accent but have you ever met a Frenchman who speaks English without one?? For that matter, the Parisians hate the folks from the provinces, so it wouldn't have made much difference.
It was the beginning of a 3-year assignment in Germany so she couldn't go back to the States. Well she could have but has a Japanese passport.
The Parisians have perfected just about everything except maybe keeping the Germans out and their citizens from defecting to the enemy side. Oh, and any sign of gratitude.
Anyway, thanks for making my point.
2009-08-27 21:34:20
anticipating the actions of the FED
Speaking the truth is an affectation of mine. She tells the same story with a different punchline - it was all my fault.
2009-08-27 23:16:03
Negative interest rates?!
Mr. P,
What do you make of this?
http://www.ft.com/cms/s/0/5d3f0692-9334-11de-b146-00144feabdc0.html
What do you make of this?
http://www.ft.com/cms/s/0/5d3f0692-9334-11de-b146-00144feabdc0.html
2009-08-27 23:38:44
Another lesson from my favorite professor
Mr. Practical:
You ARE the reason I read Minyanville. Thanks for the continued education!
You ARE the reason I read Minyanville. Thanks for the continued education!
2009-08-28 01:55:25
Interesting
Except that interest rates aren't the price of money. They're the price of present consumption (just how badly do you want to build those condos good sir?). It isn't about what rates the lendor is willing to lend at, it's what rates the borrower is willing to borrow at that determine what interest rates are going to be. The Fed actually has very little to do with this.
Insightful article though.
Insightful article though.
2009-08-28 09:20:17
anticipating the actions of the FED
"Anyway, thanks for making my point. "
LOL - I totally did.
LOL - I totally did.
2009-08-28 10:38:05
Learn to think like a Marxist
If you want to anticipate Fed actions in the future, learn to think like a Marxist.
Real change is coming.
Real change is coming.
2009-08-28 11:07:33
Fed Funds & REPO; JPM
Mr P,
Coulpe of questions.
"How does it do this? It lowers a very special interest rate: the federal funds rate, which is the rate large banks can borrow money from the Fed through the REPO (sale and repurchase agreement) market. The Fed arranges a loan at a lower-than-market rate to a large bank like JP Morgan (JPM). At the lower rate, JP Morgan will earn a higher spread, but assume a higher risk."
Fed funds rate and REPO operations are independent. I don't understand this point and believe it to be in error.
"JPM as a primary dealer doesn't lend directly to condo buyers, they lend to regional banks."
JPM is the second or third largest originator of mortgages in the US. So while your point may be valid I think the example fails.
Coulpe of questions.
"How does it do this? It lowers a very special interest rate: the federal funds rate, which is the rate large banks can borrow money from the Fed through the REPO (sale and repurchase agreement) market. The Fed arranges a loan at a lower-than-market rate to a large bank like JP Morgan (JPM). At the lower rate, JP Morgan will earn a higher spread, but assume a higher risk."
Fed funds rate and REPO operations are independent. I don't understand this point and believe it to be in error.
"JPM as a primary dealer doesn't lend directly to condo buyers, they lend to regional banks."
JPM is the second or third largest originator of mortgages in the US. So while your point may be valid I think the example fails.
2009-08-28 13:12:53
yes, confusing
C'mon, fellas, could not be simpler. OK instead of dollars, imagine two huge piles of wood. One catches and fire, aaanndd, it's gone. Now assuming this wood was not easily replaced, the remaining pile of wood would most certainly increase in value, assuming static demand for wood.
Not a perfect analogy, I know, but I hope it paints the picture.
Moneydebt is quantified in dollars, the worlds reserve currency, and all the yak-yak about replacing it notwithstanding, it will continue to be for a good while.
Not a perfect analogy, I know, but I hope it paints the picture.
Moneydebt is quantified in dollars, the worlds reserve currency, and all the yak-yak about replacing it notwithstanding, it will continue to be for a good while.
2009-08-28 13:36:19
yes, confusing
thank you for taking the time too reply, that anaogy is excellent and most helpfull
2009-08-28 17:24:55
If I can presume to answer...
dollars are destroyed, not the specific ones you reference, and so there are fewer of them, and so the ones that are left do rise in value... he said precisely what he meant, I imagine... and as you say, it is because of deflation, because that's what deflation is
dollars are destroyed, not the specific ones you reference, and so there are fewer of them, and so the ones that are left do rise in value... he said precisely what he meant, I imagine... and as you say, it is because of deflation, because that's what deflation is
2009-08-28 17:53:27
like i said, i know what he meant. but the sentence should read "...dollars are being destroyed. when dollars are being destroyed, THE dollar rises in value." dollars and THE dollar are not interchangable. THE dollar refers to what is left, which by definition, were not destroyed. therefore, the sentence is incoherent, similar to "one small step for man, one large step for mankind." man and mankind of course mean the same thing, just like "the dollar" and "the dollar" are the same thing and cannot self contradict in the same sentence.
2009-08-28 18:38:17
Mr. Practical
If prices fall 40% and that's IF your even. You already missed a 40% move in the market period, your not as smart as you think you are.
2009-08-28 20:09:59
Mr. Practical
Wow, look at the big brain on Mr. Hindsight.
If you can point us to an article or post of yours that predicted this run-up since March, I'll be glad to apologize.
If you can point us to an article or post of yours that predicted this run-up since March, I'll be glad to apologize.
2009-08-28 22:03:57
micro versus macro
This reminds me of econ 100. The U.S. doesn't allocate capital based on risk and return. The tax code subsidizes risk taking, regardless of return for the wealthy. U.S. capital is a system favors the accumulation of capital.
But the micro econ argument made here, fails in the macro. It's falacy of aggregation. In a normal situation a bank can fail if it lent money to a condo developer in a saturated market. If the entire financial system is on the verge of collapse, then you have two choices: liquidate everything, suffer massive deflation, destroy the national wealth or stabilize the system stimulate demand and earn your way out of the problem.
Historically, the U.S. banking class has consistently over funded certain sectors and created bubbles. In the 19th century the ABA circulated a memo gloating about how they were going to take over midwestern farms and turn the mortgagees into tenants. It's called supplyside economics.
The reason that Greenspan, a supplysider, consistently allowed bubbles to reflate the plutocracy out of the business cycle is because he believed wealth should be protected at the top and trickle down to the rest of us. Now, they have eviscerated the economy. Time to build wealth from the bottom up. Unless you want to be a slave.
But the micro econ argument made here, fails in the macro. It's falacy of aggregation. In a normal situation a bank can fail if it lent money to a condo developer in a saturated market. If the entire financial system is on the verge of collapse, then you have two choices: liquidate everything, suffer massive deflation, destroy the national wealth or stabilize the system stimulate demand and earn your way out of the problem.
Historically, the U.S. banking class has consistently over funded certain sectors and created bubbles. In the 19th century the ABA circulated a memo gloating about how they were going to take over midwestern farms and turn the mortgagees into tenants. It's called supplyside economics.
The reason that Greenspan, a supplysider, consistently allowed bubbles to reflate the plutocracy out of the business cycle is because he believed wealth should be protected at the top and trickle down to the rest of us. Now, they have eviscerated the economy. Time to build wealth from the bottom up. Unless you want to be a slave.
2009-08-29 10:26:40
International Growth
I think the threat of deflation is obviously still high given the amount of moneydebt outstanding. However, the one place you could be wrong is if Asia continues to grow and absorb commodities at a break-neck pace.
Look at the price of Sugar for instance. As countries become richer, their citizens consume more sweets. Add demand for ethanol and trade tarriffs on top of it and you have a recipe for rising prices. A falling dollar is the match that lights the inflationary flame in this case. You can make the same argument for oil and other commodities.
In a global economy the United States could stay in a quasi-recession, the rest of the world could grow, and we will end up with staflation, not deflation. Would that reduce prices by 40%? Sure, for some things that are US centric. However, for many other things, prices will continue to rise whether demand in the US is strong or weak.
Look at the price of Sugar for instance. As countries become richer, their citizens consume more sweets. Add demand for ethanol and trade tarriffs on top of it and you have a recipe for rising prices. A falling dollar is the match that lights the inflationary flame in this case. You can make the same argument for oil and other commodities.
In a global economy the United States could stay in a quasi-recession, the rest of the world could grow, and we will end up with staflation, not deflation. Would that reduce prices by 40%? Sure, for some things that are US centric. However, for many other things, prices will continue to rise whether demand in the US is strong or weak.
2009-08-29 14:43:59
anticipating the actions of the FED
Thank you Mr. Practical. I check the "Ville" every few days, just to locate your stories, print them and take home to read over the weekend. Appreciate the insights, keep it coming.....
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