Shared Top Border
sdcia_head3.jpg (14795 bytes)
SDCIA Message Board
Register Latest Topics
 
 
 


Reply
  Author   Comment   Page 3 of 238      Prev   1   2   3   4   5   6   Next   »
JohnnyCash

Senior Member
Registered:
Posts: 4,617
Reply with quote  #61 

Quote:
Originally Posted by siamcat1
Quote:
Originally Posted by kaihacker
Back on topic to the original post...dose anyone out there know what data indicators to watch to determine if our economy is experiencing inflation or deflation?  Anyone know of a better site/forum to obtain this info?



There are two competing definitions of inflation and deflation which folks are arguing about right now.  Some folks say that if the monetary base is expanding then we are experiencing inflation.  Other folks say that we are only experiencing inflation if prices are rising.  We are at an unusual moment in economic history in which the monetary base is expanding extraordinarily rapidly (inflation!), but.... prices are falling (deflation!).  Prices are falling for almost all financial assets, technology, commodities, oil, etc. etc.  But the monetary base is exploding.  Personally, I wouldn't get caught up in the semantics of this issue.  Rather try to understand what's happening and what the implications are.

Expansion of the monetary base (inflation) will only be effective if the money finds it's way out of the financial intermediaries (Fed & big banks) to the economy. At this point the large banks have held on to their TARP loans to back up their existing overvalued shaky loan assets. In addition borrowers are not borrowing as others here have noted. What we have is a serious breakdown in the Federal inflation mechanism. Usually this monetary approach to funneling money into the economy works. The fact that it isn't is a clear sign things are different ---- in a very bad way.

The new Stimulus plan before Congress is another attempt to push dollars into the economy through fiscal means (direct spending on projects built by private sector companies). Ever since previous Treasury Secretary Paulson had the gall to ask for $700 billion with no strings attached our Federal politicians have grabbed on to the idea too. In fact so have many other governments around the world. Previous to Paulson such enourmous sums were beyond reality or allocation. Now people in Congress who don't even know the difference between a trillion and a billion are spending with abandon.

In normal times it takes about 18 months or longer for monetary stimulus to be felt in the economy. We are not in normal times. Fiscal stimulus could take much longer because of the long lead times to approve, federally monitor and complete construction projects. The deflationary forces were first manifest in Real Estate a couple of years ago. In July of last year oil collapsed and was the harbinger for a general collapse in all commodities, later followed by the August - January steep decline in stocks. Deflation definitely has the headstart on inflation. This is further corroborated by the rise in the dollar since mid-July of 08, deflation = fewer dollars therefore each dollar is worth more. The dollar has risen against the Euro, the Pound, Swiss Franc, Canadian and Aussie dollar, but it has fallen against the Yen. US exports were the one bright spot in the US economy last year.

Unfortunately the deflation/inflation question does not have an "either or" answer but both, and probably in that sequence, deflation then inflation. The battle between these two forces is intense, inflation driven by Federal efforts and deflation driven by money destroying economic fundamentals. By this I mean that money is destroyed every time a loan defaults, every time the Dow Jones tumbles and billions in stock equity are erased, every time a home falls in value, every time a CMBS, CDO, CDS, debenture or municipal bond is downgraded by the rating companies, every time a long futures contract is hit by a massive decline in the underlying commodity --- oil, wheat, copper, corn, rice,barley, soybeans, lumber, every time an insurance company is unable to pay a beneficiary -- the list goes on and on.

In simple terms we have a rate dynamic. Which rate is fastest --- the rate at which the Federal Gov can pump money into the economy or the rate at which the natural deflationary forces can destroy money?

The answer is unpleasant and in the interest of brevity I will just give the numbers. The natural deflationary forces can destroy money at a rate between one to two orders of magnitude greater than the Federal Government can inject money. One order of magnitude is 10, two is 100. In more dramatic terms deflation is a ski resort avalanche, inflation is a couple of bulldozers at the bottom pushing the snow back up the mountain.

Investing in a deflationary world is very different from an inflationary one. For all of our lives we have had an inflationary world, there could be much confusion.


__________________
"Nothing knits man to man like the frequent passage, from hand to hand, of cash." Walter Richard Sickert
Kingside

Senior Member
Registered:
Posts: 523
Reply with quote  #62 

Quote:
Originally Posted by JohnnyCash

In simple terms we have a rate dynamic. Which rate is fastest --- the rate at which the Federal Gov can pump money into the economy or the rate at which the natural deflationary forces can destroy money?

The answer is unpleasant and in the interest of brevity I will just give the numbers. The natural deflationary forces can destroy money at a rate between one to two orders of magnitude greater than the Federal Government can inject money. One order of magnitude is 10, two is 100. In more dramatic terms deflation is a ski resort avalanche, inflation is a couple of bulldozers at the bottom pushing the snow back up the mountain.

Please explain your answer, no need to be brief around here. I am particularly interested in your assumptions as to the rate at which the Federal Gov can pump money into the economy

larrywww

Senior Member
Registered:
Posts: 2,123
Reply with quote  #63 

Interesting stuff.  So if deflation is avalanching down the economy, thereby resulting in a devaluation of assets (like commercial and residential real estate), does this mean that you try to sell all RE (since it's going to be devalued even more---especially since the stimulus is going to take to so long to counteract the effects of the deflation?

RobertCampbell

Senior Member
Registered:
Posts: 6,814
Reply with quote  #64 
Johnny Cash,

Thank you, good sir, for visiting our discussion board and sharing your views.  In general, I find them to be both excellent and true.

I'd like to offer some comments and ask a few questions as well.

Expansion of the monetary base (inflation) will only be effective if the money finds it's way out of the financial intermediaries (Fed & big banks) to the economy. At this point the large banks have held on to their TARP loans to back up their existing overvalued shaky loan assets. In addition borrowers are not borrowing as others here have noted. What we have is a serious breakdown in the Federal inflation mechanism. Usually this monetary approach to funneling money into the economy works. The fact that it isn't is a clear sign things are different ---- in a very bad way.

Absolutely true.  What you are describing is a "liquidity trap" - no?  Or is it something a little different.

The new Stimulus plan before Congress is another attempt to push dollars into the economy through fiscal means (direct spending on projects built by private sector companies). Ever since previous Treasury Secretary Paulson had the gall to ask for $700 billion with no strings attached our Federal politicians have grabbed on to the idea too. In fact so have many other governments around the world. Previous to Paulson such enormous sums were beyond reality or allocation. Now people in Congress who don't even know the difference between a trillion and a billion are spending with abandon.

In normal times it takes about 18 months or longer for monetary stimulus to be felt in the economy. We are not in normal times. Fiscal stimulus could take much longer because of the long lead times to approve, federally monitor and complete construction projects. The deflationary forces were first manifest in Real Estate a couple of years ago. In July of last year oil collapsed and was the harbinger for a general collapse in all commodities, later followed by the August - January steep decline in stocks.

Regarding oil, all things equal, most people don't realize that rapidly rising oil prices are deflationary, not inflationary.  Plus, when oil went from $10 per barrel in 1998 to $147 in 2008, this was a clear historical sign that a recession was imminent.

Deflation definitely has the headstart on inflation. This is further corroborated by the rise in the dollar since mid-July of 08, deflation = fewer dollars therefore each dollar is worth more. The dollar has risen against the Euro, the Pound, Swiss Franc, Canadian and Aussie dollar, but it has fallen against the Yen. US exports were the one bright spot in the US economy last year.

Unfortunately the deflation/inflation question does not have an "either or" answer but both, and probably in that sequence, deflation then inflation.

We don't have to experience any serious inflation in the future, do we?  I'm thinking, of course, of the Japanese experience from 1990 to 2008 - where they have essentially been caught in a liquidity trap for almost 18  years.

The battle between these two forces is intense, inflation driven by Federal efforts and deflation driven by money destroying economic fundamentals. By this I mean that money is destroyed every time a loan defaults, every time the Dow Jones tumbles and billions in stock equity are erased, every time a home falls in value, every time a CMBS, CDO, CDS, debenture or municipal bond is downgraded by the rating companies, every time a long futures contract is hit by a massive decline in the underlying commodity --- oil, wheat, copper, corn, rice,barley, soybeans, lumber, every time an insurance company is unable to pay a beneficiary -- the list goes on and on.

In simple terms we have a rate dynamic. Which rate is fastest --- the rate at which the Federal Gov can pump money into the economy or the rate at which the natural deflationary forces can destroy money?

The answer is unpleasant and in the interest of brevity I will just give the numbers. The natural deflationary forces can destroy money at a rate between one to two orders of magnitude greater than the Federal Government can inject money. One order of magnitude is 10, two is 100. In more dramatic terms deflation is a ski resort avalanche, inflation is a couple of bulldozers at the bottom pushing the snow back up the mountain.

I like your bulldozer analogy - good one!  I understand the process but I'm curious how you arrived at your estimated rates of price destruction.

Investing in a deflationary world is very different from an inflationary one. For all of our lives we have had an inflationary world, there could be much confusion.

Yes, I couldn't agree with you more.  What we are experiencing right now is the collapse of a massive expansion of credit - which is highly deflationary - and not your normal run-of-the-mill economic down cycle.

Again, thanks for the excellent post. 

Robert Campbell

rlc

Senior Member
Registered:
Posts: 1,084
Reply with quote  #65 

Well put JohnnyCash

reijoe

Senior Member
Registered:
Posts: 696
Reply with quote  #66 
Quote:
Originally Posted by JohnnyCash

Quote:
Originally Posted by siamcat1
Quote:
Originally Posted by kaihacker
Back on topic to the original post...dose anyone out there know what data indicators to watch to determine if our economy is experiencing inflation or deflation?  Anyone know of a better site/forum to obtain this info?



There are two competing definitions of inflation and deflation which folks are arguing about right now.  Some folks say that if the monetary base is expanding then we are experiencing inflation.  Other folks say that we are only experiencing inflation if prices are rising.  We are at an unusual moment in economic history in which the monetary base is expanding extraordinarily rapidly (inflation!), but.... prices are falling (deflation!).  Prices are falling for almost all financial assets, technology, commodities, oil, etc. etc.  But the monetary base is exploding.  Personally, I wouldn't get caught up in the semantics of this issue.  Rather try to understand what's happening and what the implications are.

Expansion of the monetary base (inflation) will only be effective if the money finds it's way out of the financial intermediaries (Fed & big banks) to the economy. At this point the large banks have held on to their TARP loans to back up their existing overvalued shaky loan assets. In addition borrowers are not borrowing as others here have noted. What we have is a serious breakdown in the Federal inflation mechanism. Usually this monetary approach to funneling money into the economy works. The fact that it isn't is a clear sign things are different ---- in a very bad way.

The new Stimulus plan before Congress is another attempt to push dollars into the economy through fiscal means (direct spending on projects built by private sector companies). Ever since previous Treasury Secretary Paulson had the gall to ask for $700 billion with no strings attached our Federal politicians have grabbed on to the idea too. In fact so have many other governments around the world. Previous to Paulson such enourmous sums were beyond reality or allocation. Now people in Congress who don't even know the difference between a trillion and a billion are spending with abandon.

In normal times it takes about 18 months or longer for monetary stimulus to be felt in the economy. We are not in normal times. Fiscal stimulus could take much longer because of the long lead times to approve, federally monitor and complete construction projects. The deflationary forces were first manifest in Real Estate a couple of years ago. In July of last year oil collapsed and was the harbinger for a general collapse in all commodities, later followed by the August - January steep decline in stocks. Deflation definitely has the headstart on inflation. This is further corroborated by the rise in the dollar since mid-July of 08, deflation = fewer dollars therefore each dollar is worth more. The dollar has risen against the Euro, the Pound, Swiss Franc, Canadian and Aussie dollar, but it has fallen against the Yen. US exports were the one bright spot in the US economy last year.

Unfortunately the deflation/inflation question does not have an "either or" answer but both, and probably in that sequence, deflation then inflation. The battle between these two forces is intense, inflation driven by Federal efforts and deflation driven by money destroying economic fundamentals. By this I mean that money is destroyed every time a loan defaults, every time the Dow Jones tumbles and billions in stock equity are erased, every time a home falls in value, every time a CMBS, CDO, CDS, debenture or municipal bond is downgraded by the rating companies, every time a long futures contract is hit by a massive decline in the underlying commodity --- oil, wheat, copper, corn, rice,barley, soybeans, lumber, every time an insurance company is unable to pay a beneficiary -- the list goes on and on.

In simple terms we have a rate dynamic. Which rate is fastest --- the rate at which the Federal Gov can pump money into the economy or the rate at which the natural deflationary forces can destroy money?

The answer is unpleasant and in the interest of brevity I will just give the numbers. The natural deflationary forces can destroy money at a rate between one to two orders of magnitude greater than the Federal Government can inject money. One order of magnitude is 10, two is 100. In more dramatic terms deflation is a ski resort avalanche, inflation is a couple of bulldozers at the bottom pushing the snow back up the mountain.

Investing in a deflationary world is very different from an inflationary one. For all of our lives we have had an inflationary world, there could be much confusion.



Given a certain money supply, deflation of assets (not destruction of assets) does not destroy the money supply. In fact, deflation of one asset group has an inflating effect on other asset groups because it frees up the money supply to be used on other assets. So if many common asset groups are deflating (houses, oil, etc) then what asset groups are inflating? Federal government bonds (and perhaps others I haven't looked into). Just look at the historical return on the 10 year treasury note: it is at record lows. This yield is a direct representation of the money supply chasing those treasury notes. Especially for federal government bonds that have a constant low risk associated with them, unlike the commercial bond world. If money supply were truly being destroyed on the magnitude you speak of, federal government bond yields would be through the roof. As the money supply is decreasing, bond yields would have to rise to entice people to invest their fewer and fewer dollars there.




Further, you claim that "This is further corroborated by the rise in the dollar since mid-July of 08, deflation = fewer dollars therefore each dollar is worth more."

This is entirely false. Just look at the money supply numbers yourself: M2 and MZM. There are NOT fewer dollars out there. There are more dollars out there than there has ever been in the history of this country.





The rise of the dollar relative to other currencies is not this simplistic. It is a much more complicated mechanism that involves the demand for currencies, inflation rates in the respective countries (due to their respective central banks if they have a central banking system), and the foreign or domestic sentiment of the stability of the country's economy and government. In fact, the dollar has risen in spite of an increasing money supply. These means that dollars are more desirable for all those other reasons. Study Iceland's central bank for an example of this. They've published their latest economic report from January 2009.

http://www.sedlabanki.is/?pageid=194
http://www.sedlabanki.is/lisalib/getfile.aspx?itemid=6767

Here's a plot of their M3 money supply as well as the exchange rates for the USD, GBP, and EUR. Throughout 2007 the money supply was increasing, yet you can see a slight decrease in all of the exchange rates.



Now this isn't to say that an inflating or deflating money supply does not decrease or increase the exchange rates for that currency. In fact it is a direct contributing factor just as you thought. And in late 2009 the money supply and exchange rates for Iceland sky rocket. But, it is also not the sole contributing factor. Therefore, you can not assume a change in money supply from a change in exchange rates.

The risk in investing in a deflationary environment is that you pick the wrong asset and your asset is the one that does deflate ... or deflates faster than everyone else's ... so that the equivalent money supply your assets represent is redistributed to the those who own the inflating assets, or the assets deflating at a slower pace.

The only way I can imagine the deflation of assets having an inhibiting effect on the money supply is if the money supply is pulled out of depository institutions in the fractional reserve banking system. Since fractional reserve banking has a reserve ratio that is a direct contributing factor to the liquidity of the system, it allows people to pull demand deposits out of a bank when that bank has made loans based on the reserve ratio for those demand deposits. For a reserve ratio of 10%, that means that for every $1 people pull out, the bank either has to gain $1 from another depositor, or decrease its loans by $0.90. If people like the risk-return ratio of a 3% 10 year treasury note over the risk-return ratio of a 3% savings account, then less loans are being made by the banks to the general public that is requesting loans. Hence, an apparent decrease in the money supply (this is part of the money multiplier effect).

http://en.wikipedia.org/wiki/Money_creation#Money_multiplier

This is also along the lines of the "subset money supply" that pasadena had brought up earlier.

So what does this mean? Since a deflating asset does not decrease the money supply, it means that the money supply is increasing even more significantly than you would think. And that inflation is an even bigger problem than you have alluded to. And once we see a restoration of the demand deposits in the fractional reserve banking system, and the subsequent restoration of the consumer lending system ... watch out. We will see a tsunami of inflation.

Carefully examine this inflation and deflation of the money supply relative to increases and decreases of asset prices. It is fundamental to the function of the broader economy, and provides you with direct insights as to where the economy will move.

My concern, and what I have been trying to investigate lately, is who exactly owns the debt on all of these deflating assets? Because most of these talks about inflation and deflation revolve around the United States as a closed economy. But it's not a closed economy, and money flows to / from other countries. Since the deflating asset is a transfer of money supply, then when loans default with the asset as the lender's sole collateral (which they then liquidate) ... that means there was an effective transfer of money supply from the lender to the borrower to the previous owner.

If China owns a lot of these loans, then I can't say that I really care if the asset collateral for their loan deflates. Given our massive trade deficit with them, we've been seeing a massive outflow of money supply anyways. Let the loan default, let them liquidate the asset collateral, and let us get some of that money supply back. The problem is that our government does not see it that way and is seemingly attempting to step in and protect the loss of money supply from those lenders in the name of "protecting the system". Or if you subscribe to conspiracy theories, you could say it's some sort of personal relationship lawmakers have with the wealthy of China. But I don't know about that. Or perhaps most of the loans are actually owned domestically (through the CDOs and MBSs held in 401(k) accounts). And the government is simply trying to protect those.

Whether the system needs protecting is another discussion. Say we don't "protect the system" and most of the lenders go bankrupt. Would the risk-return ratio in the post-bankruptcy world be enough to entice people to invest their money supply in the post-bankruptcy lenders? Would new lenders materialize in the post-bankruptcy world? I think so.
kaihacker

Avatar / Picture

Senior Member
Registered:
Posts: 4,864
Reply with quote  #67 
reijoe,

Interesting post.  I actually read it a few times to try to understand everything you (and the data) were saying.  Its a lot to think about...


__________________
Gene Hacker

Passive and active real estate investment opportunities.
http://RiverLakeRE.com riverlakere@gmail.com

Home Inspections in Bakersfield and all of kern county:
http://bakersfieldinspections.com
JohnnyCash

Senior Member
Registered:
Posts: 4,617
Reply with quote  #68 
Quote:
Originally Posted by Kingside

Quote:
Originally Posted by JohnnyCash

In simple terms we have a rate dynamic. Which rate is fastest --- the rate at which the Federal Gov can pump money into the economy or the rate at which the natural deflationary forces can destroy money?

The answer is unpleasant and in the interest of brevity I will just give the numbers. The natural deflationary forces can destroy money at a rate between one to two orders of magnitude greater than the Federal Government can inject money. One order of magnitude is 10, two is 100. In more dramatic terms deflation is a ski resort avalanche, inflation is a couple of bulldozers at the bottom pushing the snow back up the mountain.

Please explain your answer, no need to be brief around here. I am particularly interested in your assumptions as to the rate at which the Federal Gov can pump money into the economy

There is a brief answer, fractional reserve banking, which is fine and useful. We all know that in normal times (which we are not in now) banks re-lend most of what they receive in deposits. For example I make a $100 deposit in Bank X. The bank (by Federal and State regs) is only required to keep 5% to 2.5% on hand and then lend the rest. For simplicity let's assume Bank X is required to keep 10% on reserve, therefore it can lend 90%. So Bank X lends $90 to you, which you promptly deposit in your bank, Bank Y. Bank Y of course has the same reserve requirements, it keeps 10% ($9) on hand and re-lends the rest, $81. Carry this on for several more steps and this produces approximately a 10:1 ratio. In other words $10 in new loan money is created by the banking system for each $1 in my original deposit to Bank X.

Of course no State or Federal regulators would be so draconian to demand 10% reserves --- they typically only require 5% to 2.5% or less, this means the supply of loanable funds can be increased at even greater rates. 5% is 20:1, 2.5% is 40:1!

So as we can see in the forward direction, $1 on deposit can be the basis for
$10, $20 or even $40 in loanable funds. Now what happens when our banking-loan machine works in the backwards direction? In other words for every defaulted loan there is only $1 currency for each $10, $20 or $40 of unpaid loan balance??  The answer is deflation, but not a linear deflation, something much worse, something which gathers momentum as it proceeds.

Take this one step further, instead of my having deposited my own money in Bank X it was instead the Federal Reserve extending new currency to the bank. The Fed inflation engine's capacity is designed for a banking/lending system running in the forward direction, ie; "normal times". In the forward direction the Fed takes advantage of the leverage offered by the lenders to achieve it's liquidity goals. In the reverse direction however the Fed engine has nowhere near the capacity to run at 10, 20 or 40 times faster within the short time period required by accelerating deflation. In other words the Fed would have to inject money at rates of 1,000%, 2,000% or 4,000% faster than it was designed to do.

We haven't even considered the money multiplying effects of credit cards, which don't even require an initial deposit to begin lending on behalf of the borrower. The leverage in these loans is far in excess of those of the more "conservative" banking sector. Just like the banks, credit card liquidity will deflate but at even faster rates.

The real 600 pound gorilla in the deflation story are the CDSs, Credit Default Swaps, which may be well North of $60 Trillion. Real Estate is a mere piker in comparison with the potential CDS implosion. This was what scared the stuff out of Ben Bernanke and led him to takeover AIG insurance in one brief weekend. AIG had written $billions in CDSs, which insure a bondholder against default.

Listen carefully to Mr. Bernanke the next time he speaks to a Congressional panel. His voice quivers. In his position so would yours.

Given all of the above, 1 or 2 orders of magnitude seemed a reasonable estimate of the money destroying power of deflation over inflation.



__________________
"Nothing knits man to man like the frequent passage, from hand to hand, of cash." Walter Richard Sickert
ogden

Senior Member
Registered:
Posts: 663
Reply with quote  #69 
JohnnyCash, keep posting people need to hear this message.

The main reason I haven't bought more property recently is the fear of what is going to happen to this enourmous world-wide amount of derivatives which is estimated to be in the quadrillions.

I have brought it up before, seems like it gets brush under the rug.  I don't know enough of economics, but from what I have heard and read it is pretty scary.

JohnnyCash

Senior Member
Registered:
Posts: 4,617
Reply with quote  #70 
Quote:
Originally Posted by larrywww

Interesting stuff.  So if deflation is avalanching down the economy, thereby resulting in a devaluation of assets (like commercial and residential real estate), does this mean that you try to sell all RE (since it's going to be devalued even more---especially since the stimulus is going to take to so long to counteract the effects of the deflation?

There is no better expert on California real estate than Bruce Norris. He has divested of all commercial real estate. He expects to regain the same properties in the future at greatly reduced prices.

Bruce is still purchasing and flipping California residential real estate. Of course Bruce has a well-oiled flipping machine outside the grasp of the average SDCIA member. Bruce can move quickly and can take a hit or two without breaking stride.

You asked for my opinion not Bruce's but I always take his opinion with the utmost respect. Certain parts of San Diego real estate have held up well under the price declines of the last two years. Bruce thinks this may change soon. Florida, Arizona and Nevada have suffered far worse than San Diego. There are strong regional differences in the real estate decline. Within a Crescent shape starting below Carlsbad, ending above Chula Vista and circling inland from the coast 10 to 15 miles prices have held up best. I think this will continue to be some of the most desirable real estate in the United States. Yet prices will most likely trend down over the next couple of years.

A 50% price decline from the top would put the average SD home at about $250,000. This is a 1998 - 2000 price, prices could well fall below that limit. If you bought before then, have positive cash flow and didn't refinance to the hilt then you may want to consider keeping the property. If you are upside down on a property then you will in 6 months probably be more upside down and should ask your lender about loan modification. I know this is primarily for O/O homes but if Bruce is right the lenders in this area are soon going to be more accommodating as prices decline. As an investor if you default or declare BK you must consider the long term effects on your investor profession.

IF you are not yet upside down but approaching this condition and you have no personal attachments to the property then this may be the last opportunity in several years to get away unscathed or at minimal cost. BN averages 10% to 15% profit on his rehabbed properties and in some instances much more for a well refurbished home.

At some point in the future I expect a lot of our trading partners' overseas dollars will come home to roost in American real estate. However real estate prices will have to stabilize before this can happen.



__________________
"Nothing knits man to man like the frequent passage, from hand to hand, of cash." Walter Richard Sickert
siamcat1

Senior Member
Registered:
Posts: 399
Reply with quote  #71 
Quote:
Originally Posted by JohnnyCash
Quote:
Originally Posted by Kingside

Quote:
Originally Posted by JohnnyCash

In simple terms we have a rate dynamic. Which rate is fastest --- the rate at which the Federal Gov can pump money into the economy or the rate at which the natural deflationary forces can destroy money?

The answer is unpleasant and in the interest of brevity I will just give the numbers. The natural deflationary forces can destroy money at a rate between one to two orders of magnitude greater than the Federal Government can inject money. One order of magnitude is 10, two is 100. In more dramatic terms deflation is a ski resort avalanche, inflation is a couple of bulldozers at the bottom pushing the snow back up the mountain.

Please explain your answer, no need to be brief around here. I am particularly interested in your assumptions as to the rate at which the Federal Gov can pump money into the economy


Of course no State or Federal regulators would be so draconian to demand 10% reserves --- they typically only require 5% to 2.5% or less, this means the supply of loanable funds can be increased at even greater rates. 5% is 20:1, 2.5% is 40:1!



I actually agree with good parts of this post, but... the statement above gets me wondering what you actually understand regarding banking.  I think you've forgotten about a small item called "capital" (as in, equity).  The reason that a bank can't leverage a deposit 40x is that there are capital requirements that prevent it. 20x is possible, but that would be high leverage (a la Citi, which is unusual) indeed.  So, your general point is correct - fractional reserve banking creates and destroys money (via credit) in the system in a magnified fashion in both directions.  But when you overstate the case with an important and obvious error, I begin to ponder what else you're missing.
JohnnyCash

Senior Member
Registered:
Posts: 4,617
Reply with quote  #72 
Quote:
Originally Posted by RobertCampbell
Johnny Cash,

Hi Robert, it's a pleasure to hear from you.

Thank you, good sir, for visiting our discussion board and sharing your views.  In general, I find them to be both excellent and true.

I'd like to offer some comments and ask a few questions as well.

Expansion of the monetary base (inflation) will only be effective if the money finds it's way out of the financial intermediaries (Fed & big banks) to the economy. At this point the large banks have held on to their TARP loans to back up their existing overvalued shaky loan assets. In addition borrowers are not borrowing as others here have noted. What we have is a serious breakdown in the Federal inflation mechanism. Usually this monetary approach to funneling money into the economy works. The fact that it isn't is a clear sign things are different ---- in a very bad way.

Absolutely true.  What you are describing is a "liquidity trap" - no?  Or is it something a little different.
 
I think this may be similar to a "liquidity trap", but I've forgotten the exact definition.

The new Stimulus plan before Congress is another attempt to push dollars into the economy through fiscal means (direct spending on projects built by private sector companies). Ever since previous Treasury Secretary Paulson had the gall to ask for $700 billion with no strings attached our Federal politicians have grabbed on to the idea too. In fact so have many other governments around the world. Previous to Paulson such enormous sums were beyond reality or allocation. Now people in Congress who don't even know the difference between a trillion and a billion are spending with abandon.

In normal times it takes about 18 months or longer for monetary stimulus to be felt in the economy. We are not in normal times. Fiscal stimulus could take much longer because of the long lead times to approve, federally monitor and complete construction projects. The deflationary forces were first manifest in Real Estate a couple of years ago. In July of last year oil collapsed and was the harbinger for a general collapse in all commodities, later followed by the August - January steep decline in stocks.

Regarding oil, all things equal, most people don't realize that rapidly rising oil prices are deflationary, not inflationary. 
 
Well, right now we have low oil prices, about $38/barrel last time I checked. I have never seen anything collapse as fast as oil last summer. This was a genuine collapse due to falling consumption. Americans did something very unusual, they drove millions of miles less and forced themselve to use less gasoline. I read this as a clear deflationary confirmation of other trends.
 
In March/April of last year a West Coast refinery was shut down for a few weeks because of falling demand (probably the one in Carson adjacent to the 405). This tip was an early warning of the collapse and saved me from taking a dangerous offer from a fast talking oil futures salesman. I am sure he "lost his rear-end" about 60 days later.
 
Plus, when oil went from $10 per barrel in 1998 to $147 in 2008, this was a clear historical sign that a recession was imminent.
 
You could read the historical high in prices of $147 as a sign of a market top. Yet Goldman-Sachs issued a projection at that time that oil was headed to $200/barrel. Certainly the world was not consuming 14.7 times more oil in 08 than '98 nor had inflation jumped that much. However China and India were buying much more during that period than anytime in their history. In addition the Saudi's cost of pulling a barrel of oil out of the ground is estimated at about $3.00. Incidentally the Saudi's are pumping seawater into the Ghawar field to extract the remaining oil. There are serious doubts from Western oil analysts that the Saudis have anywhere near the oil they now claim.
 
There was a lot of speculation in the price of oil. Speculation that Goldman-Sachs was right. I have nothing against speculators. I am sure many of them made money during the rise and I am equally sure most of them were wiped out by the unexpectedly rapid collapse in their long futures contracts.

Deflation definitely has the headstart on inflation. This is further corroborated by the rise in the dollar since mid-July of 08, deflation = fewer dollars therefore each dollar is worth more. The dollar has risen against the Euro, the Pound, Swiss Franc, Canadian and Aussie dollar, but it has fallen against the Yen. US exports were the one bright spot in the US economy last year.

Unfortunately the deflation/inflation question does not have an "either or" answer but both, and probably in that sequence, deflation then inflation.

We don't have to experience any serious inflation in the future, do we?  I'm thinking, of course, of the Japanese experience from 1990 to 2008 - where they have essentially been caught in a liquidity trap for almost 18  years.

This is an excellent point. We have many things in common with the Japanese situation of 1990-92. Remember when we all thought the Japanese would take control of all global business? There was a popular song with the phrase "I think I turning Japanese -uh". The real estate in Tokyo was more valuable than all the real estate in California. That all came to a quick end and Japanese real estate prices plummeted but the govenrment allowed the banks to keep the loan values intact as if prices hadn't fallen. (hmmm... sounds like our current "mark to market" debate). The price collapse spread to other parts of the economy, in particular the Nikkei stock market. (this is sounding familiar!)
 
The Bank of Japan and the Japanese Government tried lowering interest rates to 0% to stimulate demand and increase prices. (hmmm.... I believe short term US treasuries are paying about 0.025% --- pretty close to zero). Their interest rates remained close to zero until very recently (last couple of years).
 
The Japanese government engaged in large infrastructure projects to inject massive liquidity into the economy. (Washington do you read me? repeat-- Do you read me? over.... )
 
None of these measures worked. the Nikkei Stock Index is only 20% of it's pre-1990 peak, it has never recovered. Real Estate prices remain way below their peak. Interest rates are still low (1.5 - 2%) but not zero. Inflation has not yet taken hold and it is almost 20 years after the deflationary spiral.

We may follow the Japanese on this path or we may diverge after the deflationary period. The Fed is working overtime to invent new ways to inflate the money in circulation, such as buying shares in banks and other companies, buying shaky loan portfolios, perhaps even buying risky car loan and credit card portfolios.

The battle between these two forces is intense, inflation driven by Federal efforts and deflation driven by money destroying economic fundamentals. By this I mean that money is destroyed every time a loan defaults, every time the Dow Jones tumbles and billions in stock equity are erased, every time a home falls in value, every time a CMBS, CDO, CDS, debenture or municipal bond is downgraded by the rating companies, every time a long futures contract is hit by a massive decline in the underlying commodity --- oil, wheat, copper, corn, rice,barley, soybeans, lumber, every time an insurance company is unable to pay a beneficiary -- the list goes on and on.

In simple terms we have a rate dynamic. Which rate is fastest --- the rate at which the Federal Gov can pump money into the economy or the rate at which the natural deflationary forces can destroy money?

The answer is unpleasant and in the interest of brevity I will just give the numbers. The natural deflationary forces can destroy money at a rate between one to two orders of magnitude greater than the Federal Government can inject money. One order of magnitude is 10, two is 100. In more dramatic terms deflation is a ski resort avalanche, inflation is a couple of bulldozers at the bottom pushing the snow back up the mountain.

I like your bulldozer analogy - good one!  I understand the process but I'm curious how you arrived at your estimated rates of price destruction.

Other people asked this question too. I thought this would be the one thing most people wouldn't care about. I underestimated the SDCIA members.
Basically it is the principle of reverse leverage. The banking system leverages the Fed in it's inflation attempts by a factor of 10 to 40 to one as a result of fractional reserve banking. As we all know leverage cuts both ways. When deflation sets in the leverage works backwards and the Fed must inject money 10 to 40 times faster than it was designed to do to compensate for the reverse leveraged money destruction.

Investing in a deflationary world is very different from an inflationary one. For all of our lives we have had an inflationary world, there could be much confusion.

Yes, I couldn't agree with you more.  What we are experiencing right now is the collapse of a massive expansion of credit - which is highly deflationary - and not your normal run-of-the-mill economic down cycle.

Again, thanks for the excellent post. 

Robert Campbell

 
Best Regards,
John



__________________
"Nothing knits man to man like the frequent passage, from hand to hand, of cash." Walter Richard Sickert
JohnnyCash

Senior Member
Registered:
Posts: 4,617
Reply with quote  #73 

Quote:
Originally Posted by ogden
JohnnyCash, keep posting people need to hear this message.

The main reason I haven't bought more property recently is the fear of what is going to happen to this enourmous world-wide amount of derivatives which is estimated to be in the quadrillions.

I have brought it up before, seems like it gets brush under the rug.  I don't know enough of economics, but from what I have heard and read it is pretty scary.

Thanks Ogden.  Bruce Norris is still buying properties but only for flipping or wholesaling. He has sold all his commercial property. He issued a sell order to all his subscribers in April of '05 I believe. However he encourages investors to get into this market, following his lead.

I was unable to attend his last seminar at the end of January. I believe this current economic mess has added another layer of complexity to his model of the California real estate market. This current mess has all the markings of a generational event, once in a lifetime. I am curious about Bruce's comments on this.

__________________
"Nothing knits man to man like the frequent passage, from hand to hand, of cash." Walter Richard Sickert
JohnnyCash

Senior Member
Registered:
Posts: 4,617
Reply with quote  #74 
Quote:
Originally Posted by reijoe
Quote:
Originally Posted by JohnnyCash

Quote:
Originally Posted by siamcat1
Quote:
Originally Posted by kaihacker
Back on topic to the original post...dose anyone out there know what data indicators to watch to determine if our economy is experiencing inflation or deflation?  Anyone know of a better site/forum to obtain this info?



There are two competing definitions of inflation and deflation which folks are arguing about right now.  Some folks say that if the monetary base is expanding then we are experiencing inflation.  Other folks say that we are only experiencing inflation if prices are rising.  We are at an unusual moment in economic history in which the monetary base is expanding extraordinarily rapidly (inflation!), but.... prices are falling (deflation!).  Prices are falling for almost all financial assets, technology, commodities, oil, etc. etc.  But the monetary base is exploding.  Personally, I wouldn't get caught up in the semantics of this issue.  Rather try to understand what's happening and what the implications are.

Expansion of the monetary base (inflation) will only be effective if the money finds it's way out of the financial intermediaries (Fed & big banks) to the economy. At this point the large banks have held on to their TARP loans to back up their existing overvalued shaky loan assets. In addition borrowers are not borrowing as others here have noted. What we have is a serious breakdown in the Federal inflation mechanism. Usually this monetary approach to funneling money into the economy works. The fact that it isn't is a clear sign things are different ---- in a very bad way.

The new Stimulus plan before Congress is another attempt to push dollars into the economy through fiscal means (direct spending on projects built by private sector companies). Ever since previous Treasury Secretary Paulson had the gall to ask for $700 billion with no strings attached our Federal politicians have grabbed on to the idea too. In fact so have many other governments around the world. Previous to Paulson such enourmous sums were beyond reality or allocation. Now people in Congress who don't even know the difference between a trillion and a billion are spending with abandon.

In normal times it takes about 18 months or longer for monetary stimulus to be felt in the economy. We are not in normal times. Fiscal stimulus could take much longer because of the long lead times to approve, federally monitor and complete construction projects. The deflationary forces were first manifest in Real Estate a couple of years ago. In July of last year oil collapsed and was the harbinger for a general collapse in all commodities, later followed by the August - January steep decline in stocks. Deflation definitely has the headstart on inflation. This is further corroborated by the rise in the dollar since mid-July of 08, deflation = fewer dollars therefore each dollar is worth more. The dollar has risen against the Euro, the Pound, Swiss Franc, Canadian and Aussie dollar, but it has fallen against the Yen. US exports were the one bright spot in the US economy last year.

Unfortunately the deflation/inflation question does not have an "either or" answer but both, and probably in that sequence, deflation then inflation. The battle between these two forces is intense, inflation driven by Federal efforts and deflation driven by money destroying economic fundamentals. By this I mean that money is destroyed every time a loan defaults, every time the Dow Jones tumbles and billions in stock equity are erased, every time a home falls in value, every time a CMBS, CDO, CDS, debenture or municipal bond is downgraded by the rating companies, every time a long futures contract is hit by a massive decline in the underlying commodity --- oil, wheat, copper, corn, rice,barley, soybeans, lumber, every time an insurance company is unable to pay a beneficiary -- the list goes on and on.

In simple terms we have a rate dynamic. Which rate is fastest --- the rate at which the Federal Gov can pump money into the economy or the rate at which the natural deflationary forces can destroy money?

The answer is unpleasant and in the interest of brevity I will just give the numbers. The natural deflationary forces can destroy money at a rate between one to two orders of magnitude greater than the Federal Government can inject money. One order of magnitude is 10, two is 100. In more dramatic terms deflation is a ski resort avalanche, inflation is a couple of bulldozers at the bottom pushing the snow back up the mountain.

Investing in a deflationary world is very different from an inflationary one. For all of our lives we have had an inflationary world, there could be much confusion.



Given a certain money supply, deflation of assets (not destruction of assets) does not destroy the money supply.

This is best answered by a definition of money. Here is the one which best suits our purpose. Money is anything that is an accepted store of value and can be converted into goods or services at will. In simpler but somewhat circular terms, money is anything that is used as money.
 
In our economy the greatest creators of money are banks and credit card companies. Fractional Reserve banking allows banks to create money, specifically loans. Credit cards are money, I can buy anything with a credit card that I can with cash. Likewise 1st and 2nd mortgages can be directly exchanged at face value for other goods and services or sold at a premium/discount for cash. Gold and silver coins (and in some places, bars) can be used for purchases.
 
Often as you suggest we confuse the destruction of money with the destruction of assets. The assets remain intact, but their dollar value falls and this may cause their ownership to change.

In fact, deflation of one asset group has an inflating effect on other asset groups because it frees up the money supply to be used on other assets.

In a deflationary economy the only asset class to benefit is the money class (more below), as we are now witnessing in the economy. Here is a conceptual view of the issue. Imagine the money supply to be all the things mentioned in the previous paragraph plus more, ie; cash, bank deposits, CDs, gold, US Treasuries,silver, diamonds etc., put them all in one big "bag". Now look at the current price level, as estimated by your favorite index, or create your own index based on relevant market basket items: Homes, gasoline, groceries, medical services, airline tickets, cars, clothes etc.
 
The price level for each item in the index is directly tied to the total level of money available in the "bag". IF you add more gold or credit cards to the bag without a commensurate increase in the number of market basket goodies then the price of all the goods and services in the basket will proportionately increase. Prices increase because there are more units of money to distribute across the same number of goodies, more units of money for a good or service is a price increase.
 
If you remove lines of credit, and diamonds from the bag without a commensurate decrease in the number of market basket goodies then the price of all goods and services will proportionately decrease. Prices decrease because there is now less money in ratio to the same amount of goods and services, which means fewer units of money dedicated to each good and service which means a lower price.

So if many common asset groups are deflating (houses, oil, etc) then what asset groups are inflating?

Money is an asset, but a very special kind of asset. All money is an asset but not all assets are money. Money is an asset which can readily be converted into any other asset at a predetermined rate or value. TYpically money assets have only two uses, 1) as a portable store of value 2) as an instant claim on any other asset.
 
The balance scale is divided in two. On one side are all the money assets, on the other all the goods and services assets, the productive assets.

 Federal government bonds (and perhaps others I haven't looked into). Just look at the historical return on the 10 year treasury note: it is at record lows. This yield is a direct representation of the money supply chasing those treasury notes.

Federal government bonds are considered a form of money in econ texts. When you say the money supply is chasing treasury notes what really happens is that one form of money, cash, is converted into another form of money, bonds. Net money assets remain unchanged, therefore the general price level remains unchanged.
 
The low yield on treasuries is directly related to the fear of deflation in the productive asset classes.
 
Especially for federal government bonds that have a constant low risk associated with them, unlike the commercial bond world. If money supply were truly being destroyed on the magnitude you speak of, federal government bond yields would be through the roof.

Bond prices have (and will) go through the roof, bond yields would do just the opposite, decrease or go through the floor. Whenever there is an increased demand for something the price rises (all other things remaining constant), when bond prices rise their yields always decrease.

As the money supply is decreasing, bond yields would have to rise to entice people to invest their fewer and fewer dollars there.

We are getting close to an answer. Remember the division between the money assets and productive assets. When one increases the other falls. If there are fewer and fewer dollars this means dollars (money asset) are increasing in value relative to the productive assets. Since dollars and money assets in general are rising in value then everyone will want into money assets for that reason alone. No extra yield will be necessary. This rush to convert productive assets to money assets will receive greater and greater resistance as cash becomes harder to find, then discounting of productive assets will be necessary just to get some cash but perhaps not all the previous cash value of that asset. This will accelerate the deflaltionary spiral.

So in a deflationary economy it is the money assets that increase in value, and as we have seen here there will be a flight away from the productive assets. This is the basis for an investment strategy.





Further, you claim that "This is further corroborated by the rise in the dollar since mid-July of 08, deflation = fewer dollars therefore each dollar is worth more."

This is entirely false. Just look at the money supply numbers yourself: M2 and MZM. There are NOT fewer dollars out there. There are more dollars out there than there has ever been in the history of this country.

Yes, but it takes time, so far this monetary expansion has not hit the economy. MZM is actually decreasing indicating a decrease in the velocity of money. In other words Americans are hanging on to their dollars much longer than before. A reduction in money velocity reduces the money supply. If there are more dollars "out there" then why have oil prices, car prices, commodity prices, real estate prices etc. collapsed, why are the price indexes CPI PPI etc. showing the lowest increases in decades or even slight decreases?





The rise of the dollar relative to other currencies is not this simplistic. It is a much more complicated mechanism that involves the demand for currencies, inflation rates in the respective countries (due to their respective central banks if they have a central banking system), and the foreign or domestic sentiment of the stability of the country's economy and government. In fact, the dollar has risen in spite of an increasing money supply.

Our difference here is based on the long lag time between the reporting of monetary expansion by the Fed and it's delayed impact on the economy.

These means that dollars are more desirable for all those other reasons. Study Iceland's central bank for an example of this. They've published their latest economic report from January 2009.

http://www.sedlabanki.is/?pageid=194
http://www.sedlabanki.is/lisalib/getfile.aspx?itemid=6767

Here's a plot of their M3 money supply as well as the exchange rates for the USD, GBP, and EUR. Throughout 2007 the money supply was increasing, yet you can see a slight decrease in all of the exchange rates.



Now this isn't to say that an inflating or deflating money supply does not decrease or increase the exchange rates for that currency. In fact it is a direct contributing factor just as you thought. And in late 2009 the money supply and exchange rates for Iceland sky rocket. But, it is also not the sole contributing factor. Therefore, you can not assume a change in money supply from a change in exchange rates.

Correct but when all indicators (with the exception of Fed reports) show the same trend at the same time the evidence is about as conclusive as econ gets. Currency trends tend to be long-lived, 1 to 5 years, not daily or monthly like other commodities. It's like the old analogy about the steamship, once it gets moving in one direction it's because of very powerful forces below the water line.

The risk in investing in a deflationary environment is that you pick the wrong asset and your asset is the one that does deflate ... or deflates faster than everyone else's ... so that the equivalent money supply your assets represent is redistributed to the those who own the inflating assets, or the assets deflating at a slower pace.

The only way I can imagine the deflation of assets having an inhibiting effect on the money supply

It's the decrease in the money supply that has the inhibiting effect on the productive assets (deflation), not the other way around.
 
 is if the money supply is pulled out of depository institutions in the fractional reserve banking system. Since fractional reserve banking has a reserve ratio that is a direct contributing factor to the liquidity of the system, it allows people to pull demand deposits out of a bank when that bank has made loans based on the reserve ratio for those demand deposits. For a reserve ratio of 10%, that means that for every $1 people pull out, the bank either has to gain $1 from another depositor, or decrease its loans by $0.90. If people like the risk-return ratio of a 3% 10 year treasury note over the risk-return ratio of a 3% savings account, then less loans are being made by the banks to the general public that is requesting loans. Hence, an apparent decrease in the money supply (this is part of the money multiplier effect).

http://en.wikipedia.org/wiki/Money_creation#Money_multiplier

This is also along the lines of the "subset money supply" that pasadena had brought up earlier.

So what does this mean? Since a deflating asset does not decrease the money supply,

This puts the cart before the horse. A shrinking money supply (given a constant asset base) deflates the asset value, the deflating asset is the symptom not the cause.

it means that the money supply is increasing even more significantly than you would think. And that inflation is an even bigger problem than you have alluded to. And once we see a restoration of the demand deposits in the fractional reserve banking system, and the subsequent restoration of the consumer lending system ... watch out. We will see a tsunami of inflation.

We could at some point in the future see a hyper-inflationary spiral, but we will experience a deflationary one first. In Japan the inflationary spiral has yet to occur even though the deflationary spiral ended almost 20 years ago.

Carefully examine this inflation and deflation of the money supply relative to increases and decreases of asset prices. It is fundamental to the function of the broader economy, and provides you with direct insights as to where the economy will move.

My concern, and what I have been trying to investigate lately, is who exactly owns the debt on all of these deflating assets?

Pension funds, hedge funds and foreign investment funds were big purchasers.

Because most of these talks about inflation and deflation revolve around the United States as a closed economy.

True the US is not a closed economy, but the dollar is our currency and we are the ones who have the most control over it.
 
But it's not a closed economy, and money flows to / from other countries. Since the deflating asset is a transfer of money supply, then when loans default with the asset as the lender's sole collateral (which they then liquidate) ... that means there was an effective transfer of money supply from the lender to the borrower to the previous owner.

If China owns a lot of these loans, then I can't say that I really care if the asset collateral for their loan deflates. Given our massive trade deficit with them, we've been seeing a massive outflow of money supply anyways. Let the loan default, let them liquidate the asset collateral, and let us get some of that money supply back. The problem is that our government does not see it that way and is seemingly attempting to step in and protect the loss of money supply from those lenders in the name of "protecting the system". Or if you subscribe to conspiracy theories, you could say it's some sort of personal relationship lawmakers have with the wealthy of China. But I don't know about that. Or perhaps most of the loans are actually owned domestically (through the CDOs and MBSs held in 401(k) accounts). And the government is simply trying to protect those.

Whether the system needs protecting is another discussion. Say we don't "protect the system" and most of the lenders go bankrupt.

Bankruptcy is an option, in the long run, 5 years, it is probably the best option. The wild money spending Congress is doing will create a much bigger problem later .
 
Would the risk-return ratio in the post-bankruptcy world be enough to entice people to invest their money supply in the post-bankruptcy lenders? Would new lenders materialize in the post-bankruptcy world? I think so.

Indeed so do I, and the post BK lenders would be very disinclined to follow the lead of their predecessors, it may even start a trend -- honest, reasonable banking!


__________________
"Nothing knits man to man like the frequent passage, from hand to hand, of cash." Walter Richard Sickert
rickencin

Avatar / Picture

Senior Member
Registered:
Posts: 971
Reply with quote  #75 
Quote:
Originally Posted by ISamson
For those of us who mostly ignore the News and watch the Charts instead  ( which reflect reality versus speculation of what the news  "means" )  . . .

$ 7,197  is the key support level that the Big Dogs are watching in the Dow,  so today's move down is not a reflection of long term likelihoods,  but just a knee jerk on the news.

However,  back in September a more than  20  year up trend line was broken,  a line that even survived the dot com crash of the Nasdaq more than half a decade ago,  so it was much more important than even the pending  7,200  test.

That is why the October was a big crash month and why the Market as a whole right now is in a bearish condition.

There is a high percentage likelihood that we will go down and test that support around  7,200  and if it breaks we will likely see another leg down in the markets altogether.

We all know the fundamentals are weak,  and the news is bad,  but it is the point of view of the Traders,  those who control billions of dollars,  that actually move the markets.

Yet of course they make their decisions on which way to push and test the markets based on the news  . . .  quite an intricate web. 

So how does this affect you Investors ?

Get out !    Remember Amityville ?    Lol    Just kidding.  Well sort of,  or maybe not.




Today:
DJIA 7,552
S&P500 789
NASDAQ 1,470

What specific trend line was broken last Sept. (DOW something)?

Another regular bad day could cross 7,197.  Do you expect the DOW to plunge and if so, how far?

The problem with trend lines is that the argument to buy or sell makes equal sense to me no matter which direction it is crossed.

I've actually held out on buying an S&P500 index fund.  Has my patience been rewarded or should I wait for some other event?

I'm guessing the line to punch one's stock broker in the nose is out the door and down the hall .

__________________
Rick
reijoe

Senior Member
Registered:
Posts: 696
Reply with quote  #76 
Johhny, while it seems like we come to the same conclusion, the definitions along the way are being mixed up. In our fiat dollar system, money supply has a precise economic definition that does not include things like gold. The federal reserve prints dollars, it doesn't create gold. And those dollars are what we use for payment of goods and services. While someone could certainly facilitate a transaction with gold, the amount of transactions that are facilitated with $'s dwarfs this in comaparison. And even if someone were to facilitate a transaction with gold, they would figure the equivalent amount of $'s required, and exchange that amount of gold. Just think about it - if you were to buy a car but wanted to pay with gold, how would you figure out how much gold to pay?

So if you're going to include gold, silver, diamonds, etc in your definition of money supply - then why not other things that are also worth money? Stockpiles of coal, steel, cars, livestock, houses, etc? At that point you might as well include anything of value, which means all assets are included in the money supply and no assets exist otherwise. This is pointless and it doesn't make sense. And that's why gold is not part of the money supply.

If we were in a gold-backed dollar system, then you would have a case for gold. But still not silver, diamonds, etc. I'll refer to the Wikipedia definitions of each to solidify this point:

Quote:
In economics, money supply, or money stock, is the total amount of money available in an economy at a particular point in time.


Quote:
Money is anything that is generally accepted as payment for goods and services and repayment of debts.


People "generally" accept dollars ... very seldom do they "generally" accept pieces of gold. We're not talking your local pawn shop here, we're talking the entire economy. You can't make your house payment by shipping in pieces of gold to Bank of America. Or pulling up a trailer of livestock to Bank of America's doors and dropping off a bunch of cows. Even though the cows are worth $'s.

As well, credit card purchases do not add to the money supply by definition. Because when I make a credit card purchase, actual existing real dollars are transferred from the credit card bank to the merchant. Every single $1 of credit card purchases is $1 that is actually exchanged from the credit card bank to the merchant. Credit cards are simply a convenient way for a bank to make a loan directly to me on demand. Therefore, any purchase made with credit cards must be grouped with all the other loans made in the economy, by definition.

So while loans don't have an effect on the money supply by definition, they are a result of the money multiplier. I think you are confusing money supply and money multiplier. I'll refer you to these 2 notes to explain it:

http://en.wikipedia.org/wiki/Money_multiplier#Credit_expansion

Quote:
People sometimes jump to conclusions when considering money going through a series of banks. If the Federal Reserve Bank buys a $100 government bond, the seller deposit’s the check in a bank. If that bank loans the money to someone, the money could end up in another bank, which might then loan the money, and so on -- maybe creating $400 in loans. However, thinking of lending and re-lending the money distracts from remembering the seller of the bond. The seller plans on withdrawing the original $100, which is therefore not available to lend. Although the Federal Reserve Bank may have increased cash to buy the bond, the resulting deposit is not what created the money. Supposing that commercial banks can do what the Federal Reserve does is an example of the fallacy of composition, and might result in someone becoming insolvent.


http://en.wikipedia.org/wiki/Money_multiplier#Creation_or_supply

Quote:
Creating money is sometimes confused with supplying money. If someone borrows $80 from a bank and receives $16 of it in cash, $16 of the bank’s money is gone. If the remaining $64 is deposited, the bank didn’t get any new money. It supplied that money to the borrower. Since the bank already lent that money, the money is unavailable to the bank. Also, because loans are able to be spent by borrowers, the money is sometimes misunderstood as “created.” This is because some argue commercial banks “create” money because they create a form of money, checking account deposits. However, the number added to the borrower’s checking account actually represents money that was already in existence.


With the money multiplier, a series of deposits-loans-deposits-loans could theoretically multiply $1 into $10 (for a reserve ratio of 10%) ... there still only ever exists $1 of reserves that a person can physically spend on goods and services. Look at the table in the link below showing the money being deposited-lent-deposited-lent. No single entity ever has more than the the amount of the original deposit to spend on goods or services. Once they subsequently deposit it (for the next subsequent loan), it's out of their hands.

http://tinyurl.com/deynst

This is important to understand, because what we are experiencing is a decrease in the money multiplier, not a decrease in the money supply. Money supply is actually increasing, but the money multiplier is actually decreasing. Because money being given from the federal reserve to the banks is offsetting existing loans, not generating new deposits that can then be multiplied. Here's the graph to prove it:



Remember, I'm not making this stuff up. This data comes directly from the federal reserve. There's no denying it unless you want to get into conspiracy theories about misrepresentation of data.

By your definition of deflating assets = decreasing money supply, people could conclude that we should focus on the money supply. But if the money multiplier is decreasing faster than the money supply, this won't help. We must focus on the money multiplier (and the reasons for it dropping like it is). The easiest way to do this is to let the banks fail so that there is no incentive to hang onto the money (due to reserve requirements and the old bad debt that can't be supported by the liquidated collateral). This will alleviate the money multiplier. And among other actions, will restore the system.

I think I'm going to make this my motto ... Treat the causes, not the symptoms.

Below is a link to an excellent article written in 2002 from the Ludwig von Mises Institute that describes the problem with Japan's 1985-2000 recession. I suggest you give the entire article a thorough read. The funny thing is, if you replace 1985 with 2007 and Japan with USA, it very nearly describes what is happening right now. Which is exactly the wrong response to the problem. Keynesian and monetarist theory of economics didn't work for Japan, it won't work for us.

http://mises.org/story/1099
ISamson

Avatar / Picture

Senior Member
Registered:
Posts: 2,301
Reply with quote  #77 
My statements were about the Dow,  which is the most important index in the world from the point of view of the Big Dogs who actually move the market.  Of course they look at the  S&P  and Nasdaq  all day long too,  but the Dow is the primary communication subject and driver.

The specific trend line that was broken I already named,  the  20  year up trend line in the Dow.  Please elaborate on how I can be more clear on what that means,  other than a basic description of what trendlines are and how they are drawn and operate ?    Forgive me for not knowing your level of education and experience.

You used the word  "expect"  which is a  BIG  no no in the Trader world.  We never expect the market to do anything,  or our capital is doomed.  We merely act on increased likelihoods of future behavior based on past behavior.

So if the Dow hits  $ 7,197  it will break through or bounce off that solid horizontal support.  If it breaks through then the likelihood that it will continue down is greatly increased and Put and Short trades are in order.  If it bounces off then there is an increased likelihood that a bullish run will begin  so calls and buying are in order,  but keep tight stops on that because the  20  year trend line break of September is more significant than the  $ 7,197  horizontal support.

"Equal sense"  is not a  "problem",  but an opportunity,  I will go bullish if it bounces and bearish if it breaks,  both occurrences offer an increased likelihood of profit in the marketplace,  so it is a good thing rather than a problem,  from the Trader point of view of course.  If it breaks suicide watches will increase dramatically for Investors.

Yes,  you have done well,  do  NOT  buy anything long term in the stock market place until the bearish trend is reversed !

Plus,  if you are an Investor considering buying,  not only do you want the long term trend to be bullish but by definition the fundamentals should be good as well,  which of course in this sad economy most of them are terrbile.

That line for nose punching is growing perhaps,  but no where near like the line after the Tech bubble of  2000 - 2003 !

In this climate the line is longer in places like the bank and the real estate offices I would surmise  . . .






reijoe

Senior Member
Registered:
Posts: 696
Reply with quote  #78 
Quote:
Federal government bonds (and perhaps others I haven't looked into). Just look at the historical return on the 10 year treasury note: it is at record lows. This yield is a direct representation of the money supply chasing those treasury notes.

Federal government bonds are considered a form of money in econ texts. When you say the money supply is chasing treasury notes what really happens is that one form of money, cash, is converted into another form of money, bonds. Net money assets remain unchanged, therefore the general price level remains unchanged.
 
The low yield on treasuries is directly related to the fear of deflation in the productive asset classes.
 
Especially for federal government bonds that have a constant low risk associated with them, unlike the commercial bond world. If money supply were truly being destroyed on the magnitude you speak of, federal government bond yields would be through the roof.

Bond prices have (and will) go through the roof, bond yields would do just the opposite, decrease or go through the floor. Whenever there is an increased demand for something the price rises (all other things remaining constant), when bond prices rise their yields always decrease.

As the money supply is decreasing, bond yields would have to rise to entice people to invest their fewer and fewer dollars there.

We are getting close to an answer. Remember the division between the money assets and productive assets. When one increases the other falls. If there are fewer and fewer dollars this means dollars (money asset) are increasing in value relative to the productive assets. Since dollars and money assets in general are rising in value then everyone will want into money assets for that reason alone. No extra yield will be necessary. This rush to convert productive assets to money assets will receive greater and greater resistance as cash becomes harder to find, then discounting of productive assets will be necessary just to get some cash but perhaps not all the previous cash value of that asset. This will accelerate the deflaltionary spiral.

So in a deflationary economy it is the money assets that increase in value, and as we have seen here there will be a flight away from the productive assets. This is the basis for an investment strategy.



Also, w.r.t. your bonds comments. Yes, bond price and yield are inversely proportional. But I believe that graph incorporates all of the following:

- Discount price paid.
- Coupon payments, if any.
- Interest on the note.

Such that the number quoted is actually a total ROI, even though its called a yield.

Also, please cite this:

Quote:
Federal government bonds are considered a form of money in econ texts.


The 10 year note is a very non-liquid asset. It doesn't get paid back for 10 years! I've never seen it considered a form of "money" in any of my econ texts. Unless the bond is a callable bond. But I've read that the Treasury doesn't issue many callable bonds today. Still, even if it is callable, calling is at the discretion of the Treasury not the investor. So its use as money is incredibly limited.
ogden

Senior Member
Registered:
Posts: 663
Reply with quote  #79 
REIJOE, what is the answer to the small time investor like most of us?

If we stay in cash our cash get defaced/devalued, if we buy assets they also get devalued.

The article on Japan sure sounds like what is happening in the US.

I've found a nice four unit, I may buy 100% bank funds.  I can hedge future inflation with RE, I have the tenants paying down this asset if it doesn't raise in value, and I can hold on to more of my cash.

Going back to Mr. Buffett, there was a time when he basically dissolved his partnerships because he felt all the asset classes he was looking at were severely inflated.  During this time he was making about 2% return on his assets. We may just be in that type of cycle, where assets are depresses and will be for some time.  We may need to just hold tight and protect our capital.
rickencin

Avatar / Picture

Senior Member
Registered:
Posts: 971
Reply with quote  #80 
Thank you ISamson.  My question was perhaps too simple.  200 day unweighted moving average is the likely answer.  People also talk a lot about the 50 day average.  It seems to me that if you are going out 200 days, why not go out 365 days and eliminate yearly cycles?  Of course weighted averages have appeal as the most recent data seems like it is worth more than old data.  This all looks like electrical engineering filtering.  Convolution, Finite Impulse Response and Infinite Impulse Response math.  But in the end there is still the uncertainty of what crossing the moving average means.  I suspect that my future stock market investing will be part of a strategy of surviving inflation or deflation and good economy or bad economy.  Still "the trend is your friend" is something to think about.  Think how stupid I am going to feel if the DOW goes back to 14,000 and I didn't buy now.

As to reijoe's comments I think the money multiplier IS very important. If we pump a bunch of cash (M0 or M1) into the economy with say a multiplier of 4 we still have risk.  If the economy gets good and everyone is playing "Happy Days Are Here Again" the multiplier booms with extensive borrowing we could face inflation with no further change in the cash supply.  On the other hand the economy could falter, everyone hunkers down and pays off debt and the multiplier falls and we have deflation.  We have had a half century of paying off debt with cheaper money (inflation).  It will be very strange to pay off debt with more valuable money (deflation).

I kind of got the impression that over a long period of time new money is introduced slowly and Fractional Reserve Banking tends to produce a money multiplier of 10 (10% reserve) with low volatility.  Perhaps there is some lower but reasonably constant value.  With no changes to the cash supply if the money multiplier is in the middle it could change rapidly to either side, a highly volatile situation.



__________________
Rick
kaihacker

Avatar / Picture

Senior Member
Registered:
Posts: 4,864
Reply with quote  #81 
Quote:
Originally Posted by reijoe

Below is a link to an excellent article written in 2002 from the Ludwig von Mises Institute that describes the problem with Japan's 1985-2000 recession. I suggest you give the entire article a thorough read. The funny thing is, if you replace 1985 with 2007 and Japan with USA, it very nearly describes what is happening right now. Which is exactly the wrong response to the problem. Keynesian and monetarist theory of economics didn't work for Japan, it won't work for us.

http://mises.org/story/1099


Great article.  I agree that it is one that everyone should read.

Here is a quote from the article:

"The Austrian description of the boom's timing and cause seems similar to the monetarist theory, but there is an important difference. Both schools agree that the contraction of the monetary expansion triggered the recession, but the monetarists view this contraction as something that should be avoided so that prosperity can continue. In Austrian theory, the contraction is necessary to restore balance to the real economy—the preceding expansion is the problem. This is one reason why the two schools differ in their policy recommendations."

The conclusion is a pretty good summery. 

Conclusion

"Austrian theory, like the Keynesian and monetarist theories, can give a reason for the start of the Japanese recession. Unlike the other schools, the Austrian policy recommendation of laissez-faire has not been tried. One prediction that Austrian business cycle theory provides has been accurate. The industries in the earliest stages of production have had the worst growth rates throughout the entire decade.

 

Japan's development model over the past 50 years has emphasized government intervention and planning in the economy. During its recession, government interventions have manifested themselves as fiscal stimulus packages involving large amounts of public works, increases in the monetary base, interest-rate cuts, bailouts and nationalization of some banks, direct government lending to businesses, and increases in government spending despite some tax cuts. These interventions have tried to maintain the existing structure of production preventing the necessary market processes from working to correct the artificial boom's malinvestments.

 

Japan has experienced an Austrian business cycle. The initial boom was created by a central bank-induced monetary expansion. Because of repeated interventions, the economy has not recovered. The greatest malinvestments took place in capital-intensive industries in the earlier stages of production. For Japan's economy to recover the government must stop intervening in the economy and allow the market process to realign the structure of production to match consumer preferences."




__________________
Gene Hacker

Passive and active real estate investment opportunities.
http://RiverLakeRE.com riverlakere@gmail.com

Home Inspections in Bakersfield and all of kern county:
http://bakersfieldinspections.com
RobertCampbell

Senior Member
Registered:
Posts: 6,814
Reply with quote  #82 

Japan has experienced an Austrian business cycle. The initial boom was created by a central bank-induced monetary expansion. Because of repeated interventions, the economy has not recovered. The greatest malinvestments took place in capital-intensive industries in the earlier stages of production. For Japan's economy to recover the government must stop intervening in the economy and allow the market process to realign the structure of production to match consumer preferences."

Ding, ding, ding.  We have a winner folks.  Simple, clear, and true.

Now place your bets accordingly.


[Simple explanations are usually the best explanations.]

JohnnyCash

Senior Member
Registered:
Posts: 4,617
Reply with quote  #83 
Quote:
Originally Posted by reijoe
Quote:
Federal government bonds (and perhaps others I haven't looked into). Just look at the historical return on the 10 year treasury note: it is at record lows. This yield is a direct representation of the money supply chasing those treasury notes.

Federal government bonds are considered a form of money in econ texts. When you say the money supply is chasing treasury notes what really happens is that one form of money, cash, is converted into another form of money, bonds. Net money assets remain unchanged, therefore the general price level remains unchanged.
 
The low yield on treasuries is directly related to the fear of deflation in the productive asset classes.
 
Especially for federal government bonds that have a constant low risk associated with them, unlike the commercial bond world. If money supply were truly being destroyed on the magnitude you speak of, federal government bond yields would be through the roof.

Bond prices have (and will) go through the roof, bond yields would do just the opposite, decrease or go through the floor. Whenever there is an increased demand for something the price rises (all other things remaining constant), when bond prices rise their yields always decrease.

As the money supply is decreasing, bond yields would have to rise to entice people to invest their fewer and fewer dollars there.

We are getting close to an answer. Remember the division between the money assets and productive assets. When one increases the other falls. If there are fewer and fewer dollars this means dollars (money asset) are increasing in value relative to the productive assets. Since dollars and money assets in general are rising in value then everyone will want into money assets for that reason alone. No extra yield will be necessary. This rush to convert productive assets to money assets will receive greater and greater resistance as cash becomes harder to find, then discounting of productive assets will be necessary just to get some cash but perhaps not all the previous cash value of that asset. This will accelerate the deflaltionary spiral.

So in a deflationary economy it is the money assets that increase in value, and as we have seen here there will be a flight away from the productive assets. This is the basis for an investment strategy.



Also, w.r.t. your bonds comments. Yes, bond price and yield are inversely proportional. But I believe that graph incorporates all of the following:

- Discount price paid.
- Coupon payments, if any.
- Interest on the note.

Such that the number quoted is actually a total ROI, even though its called a yield.

Also, please cite this:

Quote:
Federal government bonds are considered a form of money in econ texts.


This takes me back many years to college economics. At that time it was taught that T-bills, T-notes and T-Bonds fell into a class of money called "cash-equivalents and near money". Items in this class had a very short conversion time to cash as described below.

The 10 year note is a very non-liquid asset.

Not really, there is an active daily market in Treasury bills, notes and bonds. They can be liquidated within hours on the major bond exchanges. That liquidation will take place at the current days rate of interest for that bill, note or bond. If the current interest rate is less than the instrument rate it will sell at a premium over face value. If the current interest rate is greater than the instrument rate it will sell at a discount from face value.
 
It doesn't get paid back for 10 years!

The original lender (Fed Gov in this case) will not pay the balance for 10 years but the bond market will pay it off immediately as described above.

I've never seen it considered a form of "money" in any of my econ texts.

We were taught different things about money. It depends on the text author chosen by the economics department chair at our respective universities.
 
Unless the bond is a callable bond. But I've read that the Treasury doesn't issue many callable bonds today. Still, even if it is callable, calling is at the discretion of the Treasury not the investor.

A bond with a "call" option works to the benefit of the lender as you say. However the bond markets give the investor a sort of "reverse-call" option by allowing immediate liquidation.
 
So its use as money is incredibly limited.

Not really, the T-bond/bill/note is easy and quick to liquidate.


__________________
"Nothing knits man to man like the frequent passage, from hand to hand, of cash." Walter Richard Sickert
ISamson

Avatar / Picture

Senior Member
Registered:
Posts: 2,301
Reply with quote  #84 
Oh,  I see.  You were asking what type of line was broken.  Well,  it is a straight line,  a trend line,  that is the primary vehicle the big dogs use for their trading decisions.

Now the institutional traders use the  50  and  200  for their pre-established big buy and sell orders,  but they are not quite the same as the big dogs,  the big dogs play off their predictability though,  and use their clout in those big mutual funds to their advantage to move markets.

You cannot use  365  days because the market is only open  5  days per week so if you really wanted an  "annual"  MA  then you would need around a  260  . . .  lol.

Weighted averages are for short term traders,  the  50 / 200  combo that institutions use is for mutual fund movements. 

What I love about Trading is that it doesn't matter what crossing it means,  we simply follow whatever the big dogs say it means by their trades,  literally flies on the elephant's back,  but with much greater ease and speed of change when warranted.

I have been reading all this debate about the different  "flations",  and it is stretching my logic capabilities,  but in the end I'll just stick with making profits and beating whatever flation is ruling the day.

Now if the Dow  ( or any other market )  is going to move to  14,000  or  4,000  no one has to miss it,  they simply need to bracket the pivot points and then go long or short according to which way the big dogs push it and have your stops in place if you're wrong and use the key strategies of money management and reward to risk ratio and technical analysis and  . . .  ok,  slightly complicated,  but there are plenty of gurus to teach the details,  my favorite is Ryan Litchfield.






 




JohnnyCash

Senior Member
Registered:
Posts: 4,617
Reply with quote  #85 
Quote:
Originally Posted by JohnnyCash
Quote:
Originally Posted by reijoe
Quote:


The 10 year note is a very non-liquid asset. It doesn't get paid back for 10 years!

This is a correction --- borrower should have been used below, not lender.

The original BORROWER (Fed Gov in this case) will not pay the balance for 10 years but the bond market will pay it off immediately as described above.

I've never seen it considered a form of "money" in any of my econ texts.

We were taught different things about money. It depends on the text author chosen by the economics department chair at our respective universities.
 
Unless the bond is a callable bond. But I've read that the Treasury doesn't issue many callable bonds today. Still, even if it is callable, calling is at the discretion of the Treasury not the investor.

A bond with a "call" option works to the benefit of the BORROWER as you say. However the bond markets give the investor a sort of "reverse-call" option by allowing immediate liquidation.
 
So its use as money is incredibly limited.

Not really, the T-bond/bill/note is easy and quick to liquidate.



__________________
"Nothing knits man to man like the frequent passage, from hand to hand, of cash." Walter Richard Sickert
kaihacker

Avatar / Picture

Senior Member
Registered:
Posts: 4,864
Reply with quote  #86 
Quote:
Originally Posted by RobertCampbell

Japan has experienced an Austrian business cycle. The initial boom was created by a central bank-induced monetary expansion. Because of repeated interventions, the economy has not recovered. The greatest malinvestments took place in capital-intensive industries in the earlier stages of production. For Japan's economy to recover the government must stop intervening in the economy and allow the market process to realign the structure of production to match consumer preferences."

Ding, ding, ding.  We have a winner folks.  Simple, clear, and true.

Now place your bets accordingly.


[Simple explanations are usually the best explanations.]


I wonder what they will do this time around...

Today's headline from Market Watch:

BOJ meets with Japan in worst slump since 1970s

HONG KONG (MarketWatch) -- The Bank of Japan's policy board began its two-day meeting Wednesday under pressure to come up with creative answers to the nation's deepening economic crisis.


__________________
Gene Hacker

Passive and active real estate investment opportunities.
http://RiverLakeRE.com riverlakere@gmail.com

Home Inspections in Bakersfield and all of kern county:
http://bakersfieldinspections.com
JohnnyCash

Senior Member
Registered:
Posts: 4,617
Reply with quote  #87 
Quote:
Originally Posted by siamcat1
Quote:
Originally Posted by JohnnyCash
Quote:
Originally Posted by Kingside

Quote:
Originally Posted by JohnnyCash

In simple terms we have a rate dynamic. Which rate is fastest --- the rate at which the Federal Gov can pump money into the economy or the rate at which the natural deflationary forces can destroy money?

The answer is unpleasant and in the interest of brevity I will just give the numbers. The natural deflationary forces can destroy money at a rate between one to two orders of magnitude greater than the Federal Government can inject money. One order of magnitude is 10, two is 100. In more dramatic terms deflation is a ski resort avalanche, inflation is a couple of bulldozers at the bottom pushing the snow back up the mountain.

Please explain your answer, no need to be brief around here. I am particularly interested in your assumptions as to the rate at which the Federal Gov can pump money into the economy


Of course no State or Federal regulators would be so draconian to demand 10% reserves --- they typically only require 5% to 2.5% or less, this means the supply of loanable funds can be increased at even greater rates. 5% is 20:1, 2.5% is 40:1!



I actually agree with good parts of this post, but... the statement above gets me wondering what you actually understand regarding banking.  I think you've forgotten about a small item called "capital" (as in, equity).  The reason that a bank can't leverage a deposit 40x is that there are capital requirements that prevent it. 20x is possible, but that would be high leverage (a la Citi, which is unusual) indeed.  So, your general point is correct - fractional reserve banking creates and destroys money (via credit) in the system in a magnified fashion in both directions.  But when you overstate the case with an important and obvious error, I begin to ponder what else you're missing.

This is an interesting question. The capital requirements put an upper limit on the total dollar amount of loans a bank may issue. Let's look at mortgage loans. A typical risk weighting for this asset class is about 50%. If a bank has $100 million in mortgage loans the risk adjusted value is 0.50 x $100 million = $50 million. The Fed will ask for about a 10% total capital requirement on this risk adjusted value, 0.10 x $50 million = $5 million.
 
If our bank only has this one asset class (for simplicity) then it must maintain $5 million in capital. If the bank does not increase it's capital then it is limited to only $100 million in mortgage loans.
 
Now as long as it maintains this $100 million in loans it must also maintain $5 million in capital. If a loan defaults it still remains on the books as an asset, though admittedly a bad one, but the capital requirement must still be maintained at $5 million. In other words the $5 million can't be used to liquidate all or part of the bad debt. Only the reserves could be used to replenish deposits which may have supplied the cash for the loan. But the reserves are only 2.5% to 5% of the loan amount.
 
The capital requirement limits the total value of all outstanding mortgages for this particular bank but doesn't reduce the overall multiplier effect. So we are back to the original situation with 10x, 20x or 40x leverage.

__________________
"Nothing knits man to man like the frequent passage, from hand to hand, of cash." Walter Richard Sickert
JohnnyCash

Senior Member
Registered:
Posts: 4,617
Reply with quote  #88 

Quote:
Originally Posted by reijoe
Johhny, while it seems like we come to the same conclusion, the definitions along the way are being mixed up. In our fiat dollar system, money supply has a precise economic definition that does not include things like gold.

This is true, I chose to use the broadest definition of money. We can use a smaller more generally agreed definition.
 
The federal reserve prints dollars, it doesn't create gold. And those dollars are what we use for payment of goods and services. While someone could certainly facilitate a transaction with gold, the amount of transactions that are facilitated with $'s dwarfs this in comaparison.

True, however it was only about 120 years ago that gold and silver coins were the most common form of money. For hundreds of years all the world's economies ran on this form of money. Of course there were many problems with this system, primarily availability of specie.
 
 And even if someone were to facilitate a transaction with gold, they would figure the equivalent amount of $'s required, and exchange that amount of gold. Just think about it - if you were to buy a car but wanted to pay with gold, how would you figure out how much gold to pay?

Well, I actually know someone who did just that in 1980. The car dealer accepted gold coins at about $800/ounce.

So if you're going to include gold, silver, diamonds, etc in your definition of money supply - then why not other things that are also worth money?

Everything is worth some amount of money. Recall the definition we used before. Money has two main properties 1) a portable store of value 2) an immediate claim on all other asset classes.

Stockpiles of coal, steel, cars, livestock, houses, etc?

These don't meet the portability requirement. By portable I mean something that could hold the value of a lifetime's wages yet still be carried in a pocket or knapsack.
 
The assets you are suggesting only become money in a barter economy which is much less efficient. Money was invented just for this reason.

At that point you might as well include anything of value, which means all assets are included in the money supply and no assets exist otherwise. This is pointless and it doesn't make sense.

This also describes a barter economy, and it isn't very efficient and you're right it doesn't make sense for modern times. Though barter societies which create their own "Barter Dollar" money for transactions can be effective and useful.

And that's why gold is not part of the money supply.

I'm not a gold bug but it is a fact that for the 6,000 years of recorded history
gold and silver were the most common form of money for about 5,880 of those 6,000 years.

If we were in a gold-backed dollar system, then you would have a case for gold. But still not silver, diamonds, etc. I'll refer to the Wikipedia definitions of each to solidify this point:

We can reduce the definition of money to a smaller class of items but all of our conclusions will remain the same as in the previous posts. As a historical point both silver and diamonds have been used as money and they are very portable.

Quote:
In economics, money supply, or money stock, is the total amount of money available in an economy at a particular point in time.


Quote:
Money is anything that is generally accepted as payment for goods and services and repayment of debts.


People "generally" accept dollars ... very seldom do they "generally" accept pieces of gold.
 
It is also true that they are very seldom offered pieces of gold (or silver).
 
We're not talking your local pawn shop here, we're talking the entire economy. You can't make your house payment by shipping in pieces of gold to Bank of America. Or pulling up a trailer of livestock to Bank of America's doors and dropping off a bunch of cows. Even though the cows are worth $'s.

As well, credit card purchases do not add to the money supply by definition. Because when I make a credit card purchase, actual existing real dollars are transferred from the credit card bank to the merchant.

But this is exactly what happens with any loan. You have received a loan which you have not paid till the end of the month (or later ..). As long as you have a balance on your credit card you have an outstanding loan. If you buy a house the mortgage money goes immediately to the seller from the bank. There is no difference between this and a credit card purchase except for the amount (typically smaller) and time length (typically shorter) of the loan.

Every single $1 of credit card purchases is $1 that is actually exchanged from the credit card bank to the merchant. Credit cards are simply a convenient way for a bank to make a loan directly to me on demand.

We've seen before that banks create money through loans, by your own words "way for a bank to make a loan directly to me on demand." you have received a bank loan. Bank credit card operations are also leveraged just as bank mortgage loans, only more so.

Therefore, any purchase made with credit cards must be grouped with all the other loans made in the economy, by definition.

Yes.

So while loans don't have an effect on the money supply by definition,

No, not true. Banks create money through fractional reserve lending as we mentioned in other posts.

 they are a result of the money multiplier. I think you are confusing money supply and money multiplier. I'll refer you to these 2 notes to explain it:

Money multiplier can include or mean money velocity. A dollar which has a velocity twice that of a slower economy would do the same work as 2 slow dollars.

http://en.wikipedia.org/wiki/Money_multiplier#Credit_expansion

Quote:
People sometimes jump to conclusions when considering money going through a series of banks. If the Federal Reserve Bank buys a $100 government bond, the seller deposit’s the check in a bank. If that bank loans the money to someone, the money could end up in another bank, which might then loan the money, and so on -- maybe creating $400 in loans. However, thinking of lending and re-lending the money distracts from remembering the seller of the bond. The seller plans on withdrawing the original $100, which is therefore not available to lend. Although the Federal Reserve Bank may have increased cash to buy the bond, the resulting deposit is not what created the money. Supposing that commercial banks can do what the Federal Reserve does is an example of the fallacy of composition, and might result in someone becoming insolvent.


http://en.wikipedia.org/wiki/Money_multiplier#Creation_or_supply

Quote:
Creating money is sometimes confused with supplying money. If someone borrows $80 from a bank and receives $16 of it in cash, $16 of the bank’s money is gone. If the remaining $64 is deposited, the bank didn’t get any new money. It supplied that money to the borrower. Since the bank already lent that money, the money is unavailable to the bank. Also, because loans are able to be spent by borrowers, the money is sometimes misunderstood as “created.” This is because some argue commercial banks “create” money because they create a form of money, checking account deposits. However, the number added to the borrower’s checking account actually represents money that was already in existence.


With the money multiplier, a series of deposits-loans-deposits-loans could theoretically multiply $1 into $10 (for a reserve ratio of 10%) ... there still only ever exists $1 of reserves that a person can physically spend on goods and services. Look at the table in the link below showing the money being deposited-lent-deposited-lent. No single entity ever has more than the the amount of the original deposit to spend on goods or services. Once they subsequently deposit it (for the next subsequent loan), it's out of their hands.

http://tinyurl.com/deynst

This is important to understand, because what we are experiencing is a decrease in the money multiplier, not a decrease in the money supply. Money supply is actually increasing, but the money multiplier is actually decreasing. Because money being given from the federal reserve to the banks is offsetting existing loans, not generating new deposits that can then be multiplied. Here's the graph to prove it:



Remember, I'm not making this stuff up. This data comes directly from the federal reserve. There's no denying it unless you want to get into conspiracy theories about misrepresentation of data.

By your definition of deflating assets = decreasing money supply, people could conclude that we should focus on the money supply. But if the money multiplier is decreasing faster than the money supply, this won't help. We must focus on the money multiplier (and the reasons for it dropping like it is). The easiest way to do this is to let the banks fail so that there is no incentive to hang onto the money (due to reserve requirements and the old bad debt that can't be supported by the liquidated collateral). This will alleviate the money multiplier. And among other actions, will restore the system.

I think I'm going to make this my motto ... Treat the causes, not the symptoms.

Below is a link to an excellent article written in 2002 from the Ludwig von Mises Institute that describes the problem with Japan's 1985-2000 recession. I suggest you give the entire article a thorough read. The funny thing is, if you replace 1985 with 2007 and Japan with USA, it very nearly describes what is happening right now. Which is exactly the wrong response to the problem. Keynesian and monetarist theory of economics didn't work for Japan, it won't work for us.

http://mises.org/story/1099

Thanks, I'll read it.


__________________
"Nothing knits man to man like the frequent passage, from hand to hand, of cash." Walter Richard Sickert
reijoe

Senior Member
Registered:
Posts: 696
Reply with quote  #89 
Quote:
Originally Posted by JohnnyCash
Quote:
Originally Posted by reijoe


Also, w.r.t. your bonds comments. Yes, bond price and yield are inversely proportional. But I believe that graph incorporates all of the following:

- Discount price paid.
- Coupon payments, if any.
- Interest on the note.

Such that the number quoted is actually a total ROI, even though its called a yield.

Also, please cite this:

Quote:
Federal government bonds are considered a form of money in econ texts.


This takes me back many years to college economics. At that time it was taught that T-bills, T-notes and T-Bonds fell into a class of money called "cash-equivalents and near money". Items in this class had a very short conversion time to cash as described below.

The 10 year note is a very non-liquid asset.

Not really, there is an active daily market in Treasury bills, notes and bonds. They can be liquidated within hours on the major bond exchanges. That liquidation will take place at the current days rate of interest for that bill, note or bond. If the current interest rate is less than the instrument rate it will sell at a premium over face value. If the current interest rate is greater than the instrument rate it will sell at a discount from face value.
 
It doesn't get paid back for 10 years!

The original lender (Fed Gov in this case) will not pay the balance for 10 years but the bond market will pay it off immediately as described above.

I've never seen it considered a form of "money" in any of my econ texts.

We were taught different things about money. It depends on the text author chosen by the economics department chair at our respective universities.
 
Unless the bond is a callable bond. But I've read that the Treasury doesn't issue many callable bonds today. Still, even if it is callable, calling is at the discretion of the Treasury not the investor.

A bond with a "call" option works to the benefit of the lender as you say. However the bond markets give the investor a sort of "reverse-call" option by allowing immediate liquidation.
 
So its use as money is incredibly limited.

Not really, the T-bond/bill/note is easy and quick to liquidate.



It sounds like you're talking individual economics. Rather I'm talking system economics. If one person liquidates their bond, they get money for it. But that money came from someone else's pocket. Meaning 0 net change for the system. So given that a bond market exists, yes ... for an individual person the bonds can be liquid. But for the entire system, those notes are not paid back for 10 years, hence they are not liquid for the system.

I'm concerned with the system economics because that is where all the current government decisions are being made.

But even for the individual, you're talking about liquidating bonds for money and then using that money for other activities. That in itself means that it's not money. Because you must first convert to money. Although in some larger business transactions, I can see bonds being exchanged in such a way that they look similar to money. But overall, they are generally not accepted as payment for goods and services.
ISamson

Avatar / Picture

Senior Member
Registered:
Posts: 2,301
Reply with quote  #90 
Request :

Could we possibly not copy and paste everything that has been said before into new posts ?

It is making these threads super extra un-necessarily long and difficult to find where the new information is.

I understand sometimes you are answering a particular question,  perhaps just copy and paste that  . . . 


Previous Topic | Next Topic
Print
Reply

Quick Navigation:

Easily create a Forum Website with Website Toolbox.

Policy