Our Country's Debt

[X. Benedict]

Not seeing inflation any time real soon. I define inflation as "An increase in the money supply chasing goods and services." "Money supply" includes cash and credit (household and business). The "chasing" refers to the concept of velocity of money.

 

The supply of cash is certainly increasing, but at a much smaller rate than credit is being destroyed (both for households and businesses). On the other side the supply of available goods and services is net decreasing and will accelerate as the commercial real estate disaster unfolds.

 

Net economic activity (the "chasing") is way down and will continue to be down for a while. I really don't think inflation will be much of a problem over the next 12-18 months. Of course, you may see commodity spikes such as in oil, but that is not indicative of widespread inflation.

 

This has given me enough to think about for the day.

[bills_fan]

Well for one thing, just look at the overwhelming historical evidence where a hyperinflationary process was completely unsympathetic to how much money Average Joe Schmoe had. Did it care in 1920's Germany? Post-WW2 China? Pre-Pinochet Revolution Chile? Zimbabwe?

 

But I also think you're forgetting the key point that some people ARE still improving in an economy undergoing inflation...namely, all those who are owed money from the government and being remunerated with unsound currency! Their increased activity in the pre-inflation market is, in fact, the very driving force for the resultant widespread rise in equilibrium prices that the rest of us schmucks must endure.

 

Historical comparisons are iffy at best since they did not have widespread and proliferated credit card use. Credit=money, especially with the way many Americans have used it. Which is why there is a good argument that the traditional money measures (M1, M2, M3) are ineffective since they do not measure credit available.

 

If your credit line gets cut by $10k, it is, in effect, decresing the money supply by $10k. Many credit lines have been shrunk. Add to that the "value" of homes that are getting destoyed and the foreign demand for dollars and I am not seeing inflation here anytime soon. The "money" the Fed is "printing" is only partially offsetting the loss of credit.

[HopsGuy]

This seems like as good a place as any to put this.

 

Ladies and Gentlemen,

[finknottle]

This seems like as good a place as any to put this.

 

Ladies and Gentlemen,

 

I like this one better:

[IDBillzFan]

I like this one better:

That's some depressingly funny stuff right there.

 

I'm sure he's wrong though in both videos. He probably didn't hear precisely what Obama said, and only heard what he wanted to hear, so those examples are simply more conservative bias to discuss something he simply didn't understand in the first place.

[VABills]

You guys worry too much. We'll just go attack the country that holds most of our debt when the next warhawk gets into office. Invade and wipe out our debt. Spoiles of war.

 

See problem solved. Dems run up the bill, Repubs burn down the restaurant before it's time t pay the check.

[Magox]

Not seeing inflation any time real soon. I define inflation as "An increase in the money supply chasing goods and services." "Money supply" includes cash and credit (household and business). The "chasing" refers to the concept of velocity of money.

 

The supply of cash is certainly increasing, but at a much smaller rate than credit is being destroyed (both for households and businesses). On the other side the supply of available goods and services is net decreasing and will accelerate as the commercial real estate disaster unfolds.

 

Net economic activity (the "chasing") is way down and will continue to be down for a while. I really don't think inflation will be much of a problem over the next 12-18 months. Of course, you may see commodity spikes such as in oil, but that is not indicative of widespread inflation.

I agree that we won't see widespread inflation for at least a year and most likely 2-3, but the supply of money is rising at a much greater rate than the rate of credit destruction. Have you seen a chart of the M2 supply recently? There was one that was supplied from the St Louis Fed I saw a couple months ago that I think paints the picture perfectly.

 

http://research.stlouisfed.org/fred2/series/AMBNS?cid=124

 

However you are correct in saying that credit extension is getting destroyed.

Some economists forecast over $2 Trillion dollars over the next couple years, couple that with plummeting housing prices, commercial realestate and massive credit card losses, we do have some massive deflationary pressures in front of us.

 

This is why in my view you are seeing a huge disconnect in the bond markets. I have been telling my clients this since March that we would see a widening of the yields in the 2-10 year treasury yields.

 

There is still a large demand for the shorter dated treasury bonds because of the fears of short term deflationary pressures, and fears of inflation going further out causing investors to dump their longer dated bonds.

 

This trend will continue. Now the Fed is in a new pickle. They need rates to be low to spur lending but if there are signs of "green chutes" or recovery you will see investors dump bonds causing yields and rates to go higher. At this stage the Fed can not risk what they have "accomplished" by lowering rates to just allow them to go back up higher again. My guess is that sometime very soon we will be hearing an announcement from the fed that they will be increasing their purchases of Treasuries and Mortgage Backed Securities. This is going to be a very costly process.

 

If all this newly created money does not cause inflation it will be the first time in "fiat" money that it hasn't occured.

 

The dollar will be heading south and their will be massive inflation down the pipeline. You can bet on it!

[Acantha]

Historical comparisons are iffy at best since they did not have widespread and proliferated credit card use. Credit=money, especially with the way many Americans have used it. Which is why there is a good argument that the traditional money measures (M1, M2, M3) are ineffective since they do not measure credit available.

 

If your credit line gets cut by $10k, it is, in effect, decresing the money supply by $10k. Many credit lines have been shrunk. Add to that the "value" of homes that are getting destoyed and the foreign demand for dollars and I am not seeing inflation here anytime soon. The "money" the Fed is "printing" is only partially offsetting the loss of credit.

But isn't there a reason that credit and property value is decreasing? And isn't creating money from nothing in order to fill the void feading right into those same problems?

 

I also think that one of the big things people miss is that we are already (and have been for some time) standing on very shaky ground. Even if there is zero inflation, if the world decides to come off the dollar standard (not even the world, just a couple of important countries) the dollar will be destroyed. If the world doens't want to hold our currency, it's end game.

 

My point here being that it doesn't even matter if we inflate, both because we've already inflated more than enough, and also because all it takes is for the world to believe that we are destroying our dollar. If they believe enough, they will decide to take their bumps and bruises and go another way. At that point, we are at their mercy to help us out of bankruptcy.

 

I think it's a dangerous game Bernanke (and everyone behind him) is playing right now.

[ExiledInIllinois]

After the inflation gets done, that magic $250k number will be about what minimum wage workers make

 

Enjoy your fries from the $20 menu

 

 

At least we won't be buying unecessary crap. Wonder why China is scared sh*tless.

[Gavin in Va Beach]

If we had a revolution/coup, would the new government be on the hook for the old government's debts?

[finknottle]

If we had a revolution/coup, would the new government be on the hook for the old government's debts?

 

Historically speaking, yes. That's one of the things that gets negotiated.

 

In recent decades, the most notable case was the situation of the former Soviet Union, which dissolved into several countries. They had to settle who held the foreign assets as well as the debt - Russia took them all on.

[VABills]

Historically speaking, yes. That's one of the things that gets negotiated.

 

In recent decades, the most notable case was the situation of the former Soviet Union, which dissolved into several countries. They had to settle who held the foreign assets as well as the debt - Russia took them all on.

So if we split up all the debt goes on the NE states, and west coast states (Cal, Ore, Was) and Mich.

[finknottle]

So if we split up all the debt goes on the NE states, and west coast states (Cal, Ore, Was) and Mich.

 

As long as they get the assets too - Gitmo, and the fancy new 200 acre Embassy complex in Baghdad.

[GG]

Historically speaking, yes. That's one of the things that gets negotiated.

 

In recent decades, the most notable case was the situation of the former Soviet Union, which dissolved into several countries. They had to settle who held the foreign assets as well as the debt - Russia took them all on.

 

Of course, there's still the issue of old pre-revolution Russia debt, which IIRC hasn't been settled. Neither has Saddam era Iraq debt, I think.

[VABills]

As long as they get the assets too - Gitmo, and the fancy new 200 acre Embassy complex in Baghdad.

You can have whatever assets you want. NE Patriots*, NY Jets, Toronto Bills, Ted Kennedy. But Gitmo and Bagdhad isn't part of them, so I guess no.

 

Wine? I can get better wine in italy or south america. Cheaper too.

Cars? Sure I can get better made ones in Alabama, Kentucky and South Carolina.