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[manateefan]

I did receive an additional $13 dollars in my pay check (I get paid every other week). My big concern is all this money has gone into the banks and seems to virtually disappeared. The Cash for Clunkers hasn't lived up to its billing. I have heard of dealerships that are just about out of new cars and still have not received their money. Credit cards are either cutting your credit or shutting your card off. I had good credit and that happened to me. Never missed a payment for anything. For the third year in a row I will not get a raise. But I am thankful for having a job as my department where I work has been cut in half over the last two years. Foreclosures are still rampant. People are still losing their jobs. People are still filing bankruptcy. So prove to me that the stimulus is working.

[John Adams]

its just a matter of time before it filters out to the real economy J.A

 

Once property and commercial real estate values stop their decline, and unemployment actually turns into employment, a lot of that money will filter it's way through credit extension and then things will turn quickly

 

I actually agree, but I also agree with TPS on this. I don't think it will be as bad or good as either of you think. I bet we get inflation but it isn't through the roof.

[Magox]

I actually agree, but I also agree with TPS on this. I don't think it will be as bad or good as either of you think. I bet we get inflation but it isn't through the roof.

I think you are showing a lot of faith in Congress and the Federal Reserve to stop that from happening. It will be very difficult for both of them to put the brakes on if we have the type of growth that I am expecting, which is a slow one.

 

Raising interest rates in a slow growth period is not a popular decision for a chairman of the Federal Reserve, and since I believe Bernanke will be reappointed to another term, and that he is, how should I say? loose maybe, with his monetary policy, I don't believe that he will take strong measures to kill off inflation in a slow growth period.

 

Then there's congress, Congress would have to end the rise in the debt-to-GDP ratio and try to keep our growth in obligations in line with our growth in resources. Did you know that our net debt will increase to 56% of GDP by the end of the year? Also that government expenditures are now running at 185% of receipts, in other words we are spending much more than what we are generating in tax revenues, which would mean that we are going to have to seriously increase taxes across the board and be a frugal government in our spending to have any shot at seriously shrinking the deficit in a timely manner.

 

Considering that B.O is in his first year, and that Liberals will most likely keep control through out the next few years and that we are most likely going to have some sort of Health Care plan that both you and I know will add to the deficit, I don't have as much faith as you do, and that isn't because I am being negative, I am just being realistic.

 

We will see higher inflation, there is no doubt about it, but the question is how much, and that fate falls in the hands of the Federal Reserve and Congress, and knowing who is in charge of both chambers, I will bet that they will do what it takes to restore growth at the expense of inflation.

 

And once inflation is out well, there is an old saying

 

"Inflation is like toothpaste, Once it's out, you can hardly get it back in again. So the best thing is not to squeeze too hard on the tube."

 

Well, I would say not only have we squeezed on the tube, I think it's been run over by a mack truck.

[TPS]

I think you are showing a lot of faith in Congress and the Federal Reserve to stop that from happening. It will be very difficult for both of them to put the brakes on if we have the type of growth that I am expecting, which is a slow one.

 

Raising interest rates in a slow growth period is not a popular decision for a chairman of the Federal Reserve, and since I believe Bernanke will be reappointed to another term, and that he is, how should I say? loose maybe, with his monetary policy, I don't believe that he will take strong measures to kill off inflation in a slow growth period.

 

Then there's congress, Congress would have to end the rise in the debt-to-GDP ratio and try to keep our growth in obligations in line with our growth in resources. Did you know that our net debt will increase to 56% of GDP by the end of the year? Also that government expenditures are now running at 185% of receipts, in other words we are spending much more than what we are generating in tax revenues, which would mean that we are going to have to seriously increase taxes across the board and be a frugile government in our spending to have any shot at seriously shrinking the deficit in a timely manner.

 

Considering that B.O is in his first year, and that Liberals will most likely keep control through out the next few years and that we are most likely going to have some sort of Health Care plan that both you and I know will add to the deficit, I don't have as much faith as you do, and that isn't because I am being negative, I am just being realistic.

 

We will see higher inflation, there is no doubt about it, but the question is how much, and that fate falls in the hands of the Federal Reserve and Congress, and knowing who is in charge of both chambers, I will bet that they will do what it takes to restore growth at the expense of inflation.

 

And once inflation is out well, there is an old saying

 

"Inflation is like toothpaste, Once it's out, you can hardly get it back in again. So the best thing is not to squeeze too hard on the tube."

 

Well, I would say not only have we squeezed on the tube, I think it's been run over by a mack truck.

M,

Maybe we need to discuss in more detail what is meant by inflation? It is measured by changes in the price of various goods and services captured by an index like the CPI (or PPI). Within the index some prices are increasing and some are decreasing. Therefore, to explain "inflation" one needs to explain why each individual price is changing. Would you agree with this?

[GG]

However a bull market does drive confidence and optimism just as a bear hurts them. People tend to spend money during good times, whether they're are real or percieved so the markets do tend to be a factor in the economy.

 

.. which should cause anyone's head to be examined that 30 randomly picked stocks are the proxy for the economy. Never mind trying to determine how a stock market can have any value of the collective corporate bond market traded under par for a long while.

[Magox]

M,

Maybe we need to discuss in more detail what is meant by inflation? It is measured by changes in the price of various goods and services captured by an index like the CPI (or PPI). Within the index some prices are increasing and some are decreasing. Therefore, to explain "inflation" one needs to explain why each individual price is changing. Would you agree with this?

no offense to you, but I think that is a bull sh-- definition of inflation, and I think that the CPI and PPI don't accurately measure inflation.. Last July when Oil Prices were at $147 a barrel and soybeans at $16 a bushel and the CPI and PPI numbers were showing some where around a %6 inflation number, I got one word for that, HAAAAAA!

 

Inflation is an increase in the volume of money that leads to a substantial rise of products and services.

 

The rise of commodity prices and goods and services are a symptom of inflation. It all has to do with the volume of money.

 

You and I have had this discussion before, and we disagree on the general definition of inflation. You don't seem to believe that the volume of money plays a large role in inflation, from what I gathered, and that is false. It has everything to do with it.

 

The Germans, French, Zimbabwe and Argentinians know a little something about inflation, if you were to go back and study what happened to these countries, it all had to do with printing money.

[TPS]

no offense to you, but I think that is a bull sh-- definition of inflation, and I think that the CPI and PPI don't accurately measure inflation.. Last July when Oil Prices were at $147 a barrel and soybeans at $16 a bushel and the CPI and PPI numbers were showing some where around a %6 inflation number, I got one word for that, HAAAAAA!

 

Inflation is an increase in the volume of money that leads to a substantial rise of products and services.

 

The rise of commodity prices and goods and services are a symptom of inflation. It all has to do with the volume of money.

 

You and I have had this discussion before, and we disagree on the general definition of inflation. You don't seem to believe that the volume of money plays a large role in inflation, from what I gathered, and that is false. It has everything to do with it.

 

The Germans, French, Zimbabwe and Argentinians know a little something about inflation, if you were to go back and study what happened to these countries, it all had to do with printing money.

First, what is your definition of money? Given that definition, explain how money is created?

The formal defintion is M1 which is essentially demand deposits plus cash in circulation (outside of the banking system). How does the FED create money given this definition? Does the FED give money to you (being a member of the public)?

 

With respect to hyper-inflations, I suggest you go back and read in more detail what happened. It occurs when governments print money to finance deficits when resources are scarce. In the cases you cited, the countries did not have any excess productive capacity. As governments spend (and the central banks supplied the currency) in these cases, they increase demand in an economy that is at full capacity. Yes, in this case, government deficit spending financed by "printing money" leads to inflation. However, if there is excess capacity, then firms can expand output of goods and services, as demand is increased by government spending, even if the money used by government is simply printed.

 

Thought experiment: in the current recessionary environment, if the government printed $20,000 and gave it to you to buy a car from GM, would that cause inflation? That is, would/could GM raise prices in this case?

[John Adams]

This chart shows the relative rises in the Ms over time.

 

http://en.wikipedia.org/wiki/File:Componen...ney_supply2.svg

 

A reckoning time may come as the M2-3 makes its way to M1 but with things remaining sluggish, I hold out hope that Bernake (and his successors) will have time to pull back the money supply over a "lost" decade or so. Good result? No. Solvable mess? Probably.

 

I am not sure if repealing mark to market would have relieved the banks of their solvency problem earlier this year but I would have liked to have seen that done at the same time the FED pumped (less) money into the system. That credit crisis in 4Q2008 into early this year was really scary... not sure what other solutions were out there at the time.

 

I (with others) own a 24M/year business that has had little to no debt (only real debt is our office space) and a historically excellent cash flow...early this year we had cash issues as clients couldn't pay and banks almost laughed at us when we came seeking a short term loan. It was really rough out there. Now we have a few banks competing to give us a LOC (which we are getting to avoid that situation in the future).

[Magox]

First, what is your definition of money? Given that definition, explain how money is created?

The formal defintion is M1 which is essentially demand deposits plus cash in circulation (outside of the banking system). How does the FED create money given this definition? Does the FED give money to you (being a member of the public)?

 

With respect to hyper-inflations, I suggest you go back and read in more detail what happened. It occurs when governments print money to finance deficits when resources are scarce. In the cases you cited, the countries did not have any excess productive capacity. As governments spend (and the central banks supplied the currency) in these cases, they increase demand in an economy that is at full capacity. Yes, in this case, government deficit spending financed by "printing money" leads to inflation. However, if there is excess capacity, then firms can expand output of goods and services, as demand is increased by government spending, even if the money used by government is simply printed.

 

Thought experiment: in the current recessionary environment, if the government printed $20,000 and gave it to you to buy a car from GM, would that cause inflation? That is, would/could GM raise prices in this case?

This may be a little long

 

In regards to your first paragraph, obviously the Fed doesn't give the money to the public, but where you are failing to understand is that it is only a matter of time that the money that is being printed from the fed filters its way into the real economy. Right now the banks are holding the majority of that money, and they are not lending it, and rightfully so.

 

Banks are hoarding money right now, and they will not begin to lend more freely until property/commercial real estate values halt their decline and start showing some appreciation in value. Banks will also not lend freely until the employment situation clearly improves, why lend if there is a chance that the person you are going to lend to, may lose his job?

Banks are borrowing money from the Fed at 0-.25%, basically for free. This gives banks a lot of flexibility right now to put those funds to work for them in other areas that will net higher returns, such as treasuries, in which I don't know if you caught the last auction, the banks were major purchasers of the treasuries that were offered. This allows them to replenish and build up their capital reserve ratios.

 

Right now, credit is shrinking, which is deflationary, and I have made that argument on this message board countless times. But again, where you are failing to understand is that as a result of all these deflationary measures, the Federal reserve and Treasury are taking unprecedented steps to get us out of this mess, which have very inflationary implications.

 

Where you will get this wrong is that once the economy clearly turns the corner, that money that the banks are hoarding will start to filter it's way out to the economy. Credit extension will increase, more people will have access to loans for homes, commercial real estate, autos, appliances, furniture, business loans and etc. This is inflationary.

 

My argument to J.A is that the Federal Reserve and Congress will not have the political will to combat this likely development, simply for the fact that the growth that we will most likely see won't be that of a robust one or even average by historic standards but a muted one. Raising interest rates drastically, or raising taxes to everyone across the board is not a popular decision for an economy that is recovering.

 

In regards to this :

 

With respect to hyper-inflations, I suggest you go back and read in more detail what happened. It occurs when governments print money to finance deficits when resources are scarce. In the cases you cited, the countries did not have any excess productive capacity. As governments spend (and the central banks supplied the currency) in these cases, they increase demand in an economy that is at full capacity. Yes, in this case, government deficit spending financed by "printing money" leads to inflation.

 

Hold on a second here, are you saying that the Federal Reserve is not financing our debt obligations? The Federal Reserve is absolutely financing our deficit through the Treasury purchase program. This is a form of a monetization of our debt. Not only that, but the Federal Reserve is printing money to buy (MBS). That will be very difficult to undo, even more challenging than reversing the Treasury purchases. So yes, we are doing similar things to what happened in those cases that I had mentioned in the previous post to you. Not as extreme, but it is definitely moving in that direction.

 

I have got some quotes for you that I compiled:

 

David Einhorn who is the founder of Greenlight Capital, started it in 1996, has returned an annual average of 20.8 percent from its Greenlight Capital LP fund. “The size of the Fed’s balance sheet is exploding, and the currency is being debased.” Greenlight is turning to the centuries-old currency (gold) to mitigate the effects of the economic collapse and government efforts to end it. The Federal Reserve’s policy of taking unorthodox steps to boost the supply of credit is essentially “printing money,” Greenlight said

 

36 South Investment Managers Ltd., a New Zealand-based hedge fund firm set up by derivatives traders, will close its Black Swan Fund after it gained 236 percent in the last 12 months and start a fund that wagers on inflation. 36 South will start a fund in the second half of the year that will return “well over 100 percent” if there’s “significant” inflation worldwide. “It is not the predominant risk now but we feel in a year or two’s time it certainly could be,” , “If everybody goes cash and the governments are expanding the money supply at the rate they seem to be, the problem in the future might be that there’ll be like a Montana land-grab for assets because of inflation.”

 

John Paulsons, At the end of 2007, the Opportunities fund was up 590% and his Opportunities II fund was up 353%. At the end of 2008, his Advantage Plus fund ended the year +37.58%

"The first major move that everyone will be talking about is Paulson's big entrance into gold. His position in the Gold is brand new and is brought up to a whopping 30% of his portfolio.

 

Lone Pine Capital, managed by Stephen Mandel Jr. His $7 Billion fund has returned over 25% annually since its inception in 1997. Increased his gold holdings by 50% this year.

 

Warren Buffett, “You can Bet on Inflation”, “I guarantee you the dollar will buy less 10-20 years from now. But we are doing things that will hurt the purchasing power of the dollar”, “We are doing things that we have not seen in the past. And policy makers do not know the outcome and I don't know the outcome. You do know it will have consequences and you can bet on inflation.”, The U.S. must address the massive amounts of “monetary medicine” that have been pumped into the financial system and now pose threats to the world’s largest economy and its currency, billionaire Warren Buffett said.

The “gusher of federal money” has rescued the financial system and the U.S. economy is now on a slow path to recovery. “Enormous dosages of monetary medicine continue to be administered and, before long, we will need to deal with their side effects,” Buffett, 78, said. “For now, most of those effects are invisible and could indeed remain latent for a long time. Still, their threat may be as ominous as that posed by the financial crisis itself.”

“Unchecked greenback emissions will certainly cause the purchasing power of currency to melt,” Buffett said. “The dollar’s destiny lies with Congress.”

 

 

PIMCO , Pacific Investment Management Co., the world’s biggest manager of bond funds, who have outperformed 95% of it’s peers, said the dollar will weaken as the U.S. pumps “massive” amounts of money into the economy. “Investors should consider whether it makes sense to take advantage of any periods of U.S. dollar strength to diversify their currency exposure”, “The massive amounts of U.S. dollar liquidity produced in response to the crisis” have helped reduce demand for the currency. “While we have not yet reached the point where a new global reserve currency will arise, we are clearly seeing a loss of status for the U.S. dollar as a store of value even in the absence of a single viable alternative,” Bill Gross, who runs the $169 billion Pimco Total Return Fund, is also warning the U.S. currency will fall.

Holders of dollars should diversify before central banks and sovereign wealth funds do the same because of concern government budget deficits will deepen, Gross said in June.

 

“We may see complementary reserve currencies,” Nouriel Roubini said at a conference in Athens on June 11th, 2009 . While it’s “not going to happen overnight,” the development “will diminish the role of the dollar over time.”

The dollar’s status is under threat as the leaders of Brazil, Russia, India and China discuss ways to substitute the dollar with other assets, amid a fear of a US budget deficit and a soaring inflation due to the massive amount of fresh dollars that the FED has been printing lately. China alone owns more than $744 billion of U.S. Treasury bonds among its $2 trillion of foreign-exchange reserves. , Russia Saudi Arabia Japan and Germany other big US dollars and treasury bonds holders ...

[Magox]

This chart shows the relative rises in the Ms over time.

 

http://en.wikipedia.org/wiki/File:Componen...ney_supply2.svg

 

A reckoning time may come as the M2-3 makes its way to M1 but with things remaining sluggish, I hold out hope that Bernake (and his successors) will have time to pull back the money supply over a "lost" decade or so. Good result? No. Solvable mess? Probably.

 

I am not sure if repealing mark to market would have relieved the banks of their solvency problem earlier this year but I would have liked to have seen that done at the same time the FED pumped (less) money into the system. That credit crisis in 4Q2008 into early this year was really scary... not sure what other solutions were out there at the time.

 

I (with others) own a 24M/year business that has had little to no debt (only real debt is our office space) and a historically excellent cash flow...early this year we had cash issues as clients couldn't pay and banks almost laughed at us when we came seeking a short term loan. It was really rough out there. Now we have a few banks competing to give us a LOC (which we are getting to avoid that situation in the future).

J.A, I'm glad to hear that, in regards to your business and the access to loans that you will have. That's definitely good news.

 

I am not as hopeful as you are in regards to Bernanke (and his successors), for the reasons I had mentioned earlier, and the person that is the front runner that I have been hearing that could succeed him is Janet Yellen, and she is probably less fiscaly conservative in philosophy than Bernanke is. I do not see how they will be able to reverse course on the (MBS) purchases and that is where a lot of the money that is on their balance sheet has gone to.

 

Regardless, it doesn't only depend on the Federal Reserve it also lies in the hands of Congress and what they can do bridge the gap on our deficit, and as you probably know, I have very little confidence that they can do that, specially in a sluggish economy.

[John Adams]

J.A, I'm glad to hear that, in regards to your business and the access to loans that you will have. That's definitely good news.

 

I am not as hopeful as you are in regards to Bernanke (and his successors), for the reasons I had mentioned earlier, and the person that is the front runner that I have been hearing that could succeed him is Janet Yellen, and she is probably less fiscaly conservative in philosophy than Bernanke is. I do not see how they will be able to reverse course on the (MBS) purchases and that is where a lot of the money that is on their balance sheet has gone to.

 

Regardless, it doesn't only depend on the Federal Reserve it also lies in the hands of Congress and what they can do bridge the gap on our deficit, and as you probably know, I have very little confidence that they can do that, specially in a sluggish economy.

 

Yeah. We agree. I am not sure if the US has the stomach for this. My point is that it's fixable and that because I don't think the economy is winding up to fly anytime soon, there is time to do the fixing.

 

Things like this and the health care letters (see other thread) will push the US populism one way or another. The bad news is that there's no standard bearer party for fiscal conservatism.

[TPS]

This may be a little long

 

In regards to your first paragraph, obviously the Fed doesn't give the money to the public, but where you are failing to understand is that it is only a matter of time that the money that is being printed from the fed filters its way into the real economy. Right now the banks are holding the majority of that money, and they are not lending it, and rightfully so.

 

Banks are hoarding money right now, and they will not begin to lend more freely until property/commercial real estate values halt their decline and start showing some appreciation in value. Banks will also not lend freely until the employment situation clearly improves, why lend if there is a chance that the person you are going to lend to, may lose his job?

Banks are borrowing money from the Fed at 0-.25%, basically for free. This gives banks a lot of flexibility right now to put those funds to work for them in other areas that will net higher returns, such as treasuries, in which I don't know if you caught the last auction, the banks were major purchasers of the treasuries that were offered. This allows them to replenish and build up their capital reserve ratios.

 

Right now, credit is shrinking, which is deflationary, and I have made that argument on this message board countless times. But again, where you are failing to understand is that as a result of all these deflationary measures, the Federal reserve and Treasury are taking unprecedented steps to get us out of this mess, which have very inflationary implications.

 

Where you will get this wrong is that once the economy clearly turns the corner, that money that the banks are hoarding will start to filter it's way out to the economy. Credit extension will increase, more people will have access to loans for homes, commercial real estate, autos, appliances, furniture, business loans and etc. This is inflationary.

 

My argument to J.A is that the Federal Reserve and Congress will not have the political will to combat this likely development, simply for the fact that the growth that we will most likely see won't be that of a robust one or even average by historic standards but a muted one. Raising interest rates drastically, or raising taxes to everyone across the board is not a popular decision for an economy that is recovering.

It's good to see that you understand that inflation will only come about when banks start making loans to those who purchase goods, services, property, etc. I do not doubt that there will be some inflation when times are better--Hell, we've averaged about 3-4% inflation for about the past 30 years. If that is what you mean by inflation, then I can't disagree. However, inflationary pressures will not arise until the economy rebounds enough to create resource constraints--mainly labor (wages costs) and raw materials, because prices are set by firms, not the money supply.

 

(I think) One area where we disagree is how the FED will react when times are better. If inflation starts to go above the FED's target, they will raise interest rates to dampen loan demand--this is how the FED has always tried to regulate the economy, via interest rates. The debate: will the FED raise its inflation target above 2-3% and allow the economy to grow with slightly higher inflation? Probably a little (5% target?), but not to what people fear.

 

Another area where we disagree: yes, the FED has monetized some of the debt, but I argue it CAN DO SO when resources are slack. We disagree on this because we disagree on our definition of inflation. I believe inflation is caused by real factors; that is, competition and demand for real resources. When unemployment is high, factory utilization is low, and private sector demand is low, the FED can finance government spending without an impact on inflation. Of course, as the economy recovers and moves toward full employment it would be inflationary (but then it won't need to do it).

 

As for the dollar's declining international status, I wrote about this five years ago. The current situation is simply more fuel for its long term decline as internation reserve currency.

 

Btw, a very bold prediction by Buffett: "the dollar will be worth less 10-20 years from now..." Wow!

[Magox]

It's good to see that you understand that inflation will only come about when banks start making loans to those who purchase goods, services, property, etc. I do not doubt that there will be some inflation when times are better--Hell, we've averaged about 3-4% inflation for about the past 30 years. If that is what you mean by inflation, then I can't disagree. However, inflationary pressures will not arise until the economy rebounds enough to create resource constraints--mainly labor (wages costs) and raw materials, because prices are set by firms, not the money supply.

 

(I think) One area where we disagree is how the FED will react when times are better. If inflation starts to go above the FED's target, they will raise interest rates to dampen loan demand--this is how the FED has always tried to regulate the economy, via interest rates. The debate: will the FED raise its inflation target above 2-3% and allow the economy to grow with slightly higher inflation? Probably a little (5% target?), but not to what people fear.

 

Another area where we disagree: yes, the FED has monetized some of the debt, but I argue it CAN DO SO when resources are slack. We disagree on this because we disagree on our definition of inflation. I believe inflation is caused by real factors; that is, competition and demand for real resources. When unemployment is high, factory utilization is low, and private sector demand is low, the FED can finance government spending without an impact on inflation. Of course, as the economy recovers and moves toward full employment it would be inflationary (but then it won't need to do it).

 

As for the dollar's declining international status, I wrote about this five years ago. The current situation is simply more fuel for its long term decline as internation reserve currency.

 

Btw, a very bold prediction by Buffett: "the dollar will be worth less 10-20 years from now..." Wow!

Even by the Labor Departments gauges of Inflation on both CPI and PPI , I would say sometime in the next 3-5 years we will see north of 7% inflation. The Fed will definitely raise their inflation targets, because they will understand that a weaker dollar will stimulate our exports which in turn will be helpful in reducing the deficit.

 

Also, the fate of the dollar and inflation isn't soley in the hands of the Fed, you have to consider Congress as well. Not only do you have to consider congress, but you have to consider Emerging market growth.

 

As to inflation, we will just have to once again disagree with the definition of it.