Is the US too big to fail?

NEW -> Contingent Buyer Assistance Program
[quote author="graphrix" date=1227622042]<a href="http://online.wsj.com/article/SB122748912533552007.html">I thought of awgee when I read this well written WSJ op/ed piece today, on this very subject.</a></blockquote>
<em>"But for now, the issuance of nonagency mortgage-backed securities (MBS) in America has plunged by 98% year-on-year to a monthly average of $0.82 billion in the past four months, down from a peak of $136 billion in June 2006. There has been no new issuance in commercial MBS since July. This collapse in securitization is intensely deflationary."</em>

Yesterday I read that the CDS and Interest Rate Swap markets have increased by a few trillion this year, as financial institutions and hedge funds are hedging their risk.

Honestly, I do not know if there is more monetary inflation or deflation. Every day I read articles giving evidence of either or both. So far, I tend to think there presently exists more deflation than inflation, unless one counts OTC derivatives, which classically one does not.

But, the one thing I know for sure is that historically, the Federal Reserve and every other central bank in history, (no, this is not new, and no, we are not any smarter or more sophisticated), has always responded to deflation by printing money. And that printing has always destroyed confidence or faith in the currency. Will the Fed this time be able to counter balance deflation with just the right amount of money supply increase? I dunno. But, history and probability tells me to take the other side of the bet.
 
[quote author="Oscar" date=1227623341][quote author="awgee" date=1227619355][quote author="Oscar" date=1227604430][quote author="awgee" date=1227594045]How many folks realize that the Federal Reserve is a private bank which is owned by the member banks from whom the Fed is taking collateral and to whom the Fed is loaning money? And every time the Fed creates money to loan to the banks which own the Fed, it devalues the citizen's money, or in other words, the Fed is taxing the taxpayers to bail out the banks? And the Fed is doing all this with no accountability to Congress or anyone else?</blockquote>
Quite a few, I imagine. But rather than just shout "Fire", maybe you could tell me where I can find a fire alarm, or an extinguisher, or an exit. Because I'm not finding a whole lot of solutions to what is happening, just a whole lot of pet theories about what happens next and who is to blame.</blockquote>


Why do you assume there is a solution?</blockquote>
There is always a solution. It may be painful, harsh, and impossible to contemplate but it is still a solution.</blockquote>


If that is what you call a solution, then yes, there is one.
 
[quote author="upperlowerclass" date=1227624556]Anyone have a good book suggestion on money, credit, debt, inflation/deflation and the such? I took a year of quantum mechanics in college and I swear this stuff sometimes rivals the complexity.</blockquote>


Although the main subject is the Federal Reserve, <em>The Creature from Jekyll Island</em> by G. Edward Griffin, does a wonderful job explaining the subjects you mention, especially what money is and isn't.
 
[quote author="Oscar" date=1227623204][quote author="IrvineRenter" date=1227605020][quote author="awgee" date=1227594045]How many folks realize that the Federal Reserve is a private bank which is owned by the member banks from whom the Fed is taking collateral and to whom the Fed is loaning money? And every time the Fed creates money to loan to the banks which own the Fed, it devalues the citizen's money, or in other words, the Fed is taxing the taxpayers to bail out the banks? And the Fed is doing all this with no accountability to Congress or anyone else?</blockquote>


I would like to discuss this idea further because I am still of the mindset of Winex's first post that the FED is not printing money fast enough to keep up with the rate of money destruction in the banking industry. If the FED prints money, and if money is being simultaneously destroyed by loans going bad, isn't that the essence of deflation, and doesn't that actually make our currency more valuable? Isn't less money chasing the same amount of goods and services?



With as alarming as the activities of the FED are, I still don't see how all this printing money is inflationary in an environment where money is disappearing even faster through loan losses.



Now, I can see a point in the future where the FED is still printing money and there is no destruction of money to counterbalance it. Then we would have rising interest rates and inflation. In my opinion, we are at real risk of seeing a double-dip recession. The first is going on now, and the second will be caused by the rising interest rates necessitated to fight the inflation that is bound to come later.</blockquote>
My understanding is that there is relatively little money destruction going on, but rather relatively massive credit destruction in the form of deleveraging. Yes, the banks have written down billions in losses, but they have also sucked up every last bit of capital available to meet reserve requirements in case they have to take trillions in liabilities back on their books (and then realize losses on them). So far the approach has been to shovel cash out the door in the form of Fed repo's to anyone with a pulse, direct liquidity injections from the Treasury, as well as opening swap lines for central banks who are running short of dollars. This doesn't imply an immediate cash crunch so much as it does a credit crunch. According to <a href="http://stockweb.blogspot.com/2008/10/total-subprime-writedowns-and-finacial.html">StockWeb</a> the total losses written down are only $592 Billion, and yet that number is dwarfed by the $3.18 Trillion the Fed has already issued in the forms of repos, swaps, guarantees, and loans. That's not money, it's credit and once it's spent it becomes debt. I think we aren't seeing inflation because the credit isn't being spent but hoarded as "proof" of viability.</blockquote>


In this country, under a fractional reserve banking system with a fiat currency, debt is money.
 
I don't agree with much of what Joe Biden says, but he was right when he said the US would be tested soon. Here is what the enemy is saying about us:



<a href="http://www.drudgereport.com/flashrur.htm">http://www.drudgereport.com/flashrur.htm</a>



<em>RUSSIAN ANALYST PREDICTS DECLINE AND BREAKUP OF USA

Tue Nov 25 2008 09:04:22 ET



A leading Russian political analyst has said the economic turmoil in the United States has confirmed his long-held view that the country is heading for collapse, and will divide into separate parts.



Professor Igor Panarin said in an interview with the respected daily IZVESTIA published on Monday: "The dollar is not secured by anything. The country's foreign debt has grown like an avalanche, even though in the early 1980s there was no debt. By 1998, when I first made my prediction, it had exceeded $2 trillion. Now it is more than 11 trillion. This is a pyramid that can only collapse."



The paper said Panarin's dire predictions for the U.S. economy, initially made at an international conference in Australia 10 years ago at a time when the economy appeared strong, have been given more credence by this year's events.



When asked when the U.S. economy would collapse, Panarin said: "It is already collapsing. Due to the financial crisis, three of the largest and oldest five banks on Wall Street have already ceased to exist, and two are barely surviving. Their losses are the biggest in history. Now what we will see is a change in the regulatory system on a global financial scale: America will no longer be the world's financial regulator."



When asked who would replace the U.S. in regulating world markets, he said: "Two countries could assume this role: China, with its vast reserves, and Russia, which could play the role of a regulator in Eurasia."



Asked why he expected the U.S. to break up into separate parts, he said: "A whole range of reasons. Firstly, the financial problems in the U.S. will get worse. Millions of citizens there have lost their savings. Prices and unemployment are on the rise. General Motors and Ford are on the verge of collapse, and this means that whole cities will be left without work. Governors are already insistently demanding money from the federal center. Dissatisfaction is growing, and at the moment it is only being held back by the elections and the hope that Obama can work miracles. But by spring, it will be clear that there are no miracles."



He also cited the "vulnerable political setup", "lack of unified national laws", and "divisions among the elite, which have become clear in these crisis conditions."



He predicted that the U.S. will break up into six parts - the Pacific coast, with its growing Chinese population; the South, with its Hispanics; Texas, where independence movements are on the rise; the Atlantic coast, with its distinct and separate mentality; five of the poorer central states with their large Native American populations; and the northern states, where the influence from Canada is strong.



He even suggested that "we could claim Alaska - it was only granted on lease, after all." Panarin, 60, is a professor at the Diplomatic Academy of the Russian Ministry of Foreign Affairs, and has authored several books on information warfare. </em>





Also, anyone who has read anything that Medvedev is saying lately realizes that the cold war is back on.



Things are about to get ugly.
 
[quote author="Oscar" date=1227623341][quote author="awgee" date=1227619355][quote author="Oscar" date=1227604430][quote author="awgee" date=1227594045]How many folks realize that the Federal Reserve is a private bank which is owned by the member banks from whom the Fed is taking collateral and to whom the Fed is loaning money? And every time the Fed creates money to loan to the banks which own the Fed, it devalues the citizen's money, or in other words, the Fed is taxing the taxpayers to bail out the banks? And the Fed is doing all this with no accountability to Congress or anyone else?</blockquote>
Quite a few, I imagine. But rather than just shout "Fire", maybe you could tell me where I can find a fire alarm, or an extinguisher, or an exit. Because I'm not finding a whole lot of solutions to what is happening, just a whole lot of pet theories about what happens next and who is to blame.</blockquote>


Why do you assume there is a solution?</blockquote>
There is always a solution. It may be painful, harsh, and impossible to contemplate but it is still a solution.</blockquote>


November 24, 2008



The Bailout Surge

by Ron Paul



This week the bailout of the Big Three automakers was under heavy consideration in Congress's lame duck session. I have always opposed government bailouts of private organizations. Back in 1979 Congress had hearings about bailing out Chrysler and I was on record pointing out that these types of policies are foolish and very damaging to the long term economic health of our country. They still are.



There was also renewed pressure this week to bailout homeowners and send another round of stimulus checks to "Main Street" to balance out all the handouts to big business. It seems that eventually the entire economy is going to be blanketed over with Federal Reserve notes. Most in Washington are completely oblivious as to why this model of money creation and spending is so dangerous.



We must remember that governments do not produce anything. Their only resources come from producers in the economy through such means as inflation and taxation. The government has an obligation to be good stewards of these resources. In bailing out failing companies, they are confiscating money from productive members of the economy and giving it to failing ones. By sustaining companies with obsolete or unsustainable business models, the government prevents their resources from being liquidated and made available to other companies that can put them to better, more productive use. An essential element of a healthy free market, is that both success and failure must be permitted to happen when they are earned. But instead with a bailout, the rewards are reversed - the proceeds from successful entities are given to failing ones. How this is supposed to be good for our economy is beyond me.



With each bailout we hear rhetoric that this is the mother of all bailouts. This will fix the problem once and for all, and that this is absolutely necessary to avert disaster. This sense of panic squeezes astonishing amounts of dollars out of reluctant but hopeful legislators, who hate the position they are being put in, but are relieved that it will be the last time. It is never the last time, and again and again we are faced with the same scenarios and the same fears. We are already in the bailout business for such a staggering amount that admitting it was wrong in the first place would be too embarrassing. So the commitment to this course of action is only irrationally escalated, in the hopes that somehow, someway eventually it will work and those in power won't have to admit they were wrong.



It won't work. It can't work. We need to cut our losses and get back on course. There is too much at stake for too many people to continue down this road. The bailouts thus far to AIG, Bear Stearns, Fannie and Freddie, and TARP funds amount to around $1.5 trillion. Considering our GDP is $14 trillion, and our Federal budget is already $3 trillion, this additional amount will significantly eat into our future lifestyles. That amounts to an extra $5,000 that every person in the country needs to somehow produce just to keep up. It is obvious to most Americans that we need to reject corporate cronyism, and allow the natural regulations and incentives of the free market to pick the winners and losers in our economy, not the whims of bureaucrats and politicians.



Dr. Ron Paul

Project Freedom
 
[quote author="IrvineRenter" date=1227605020][quote author="awgee" date=1227594045]How many folks realize that the Federal Reserve is a private bank which is owned by the member banks from whom the Fed is taking collateral and to whom the Fed is loaning money? And every time the Fed creates money to loan to the banks which own the Fed, it devalues the citizen's money, or in other words, the Fed is taxing the taxpayers to bail out the banks? And the Fed is doing all this with no accountability to Congress or anyone else?</blockquote>


I would like to discuss this idea further because I am still of the mindset of Winex's first post that the FED is not printing money fast enough to keep up with the rate of money destruction in the banking industry. If the FED prints money, and if money is being simultaneously destroyed by loans going bad, isn't that the essence of deflation, and doesn't that actually make our currency more valuable? Isn't less money chasing the same amount of goods and services?



With as alarming as the activities of the FED are, I still don't see how all this printing money is inflationary in an environment where money is disappearing even faster through loan losses.



Now, I can see a point in the future where the FED is still printing money and there is no destruction of money to counterbalance it. Then we would have rising interest rates and inflation. In my opinion, we are at real risk of seeing a double-dip recession. The first is going on now, and the second will be caused by the rising interest rates necessitated to fight the inflation that is bound to come later.</blockquote>


Just for the sake of clarity, up until yesterday I didn't think the FED could (or would) print money fast enough to offset deflation. But when I see they are prepared to print $7.8 trillion right now, I have to change that opinion. Given what we are preparing to do, I would hope that inflation is in our future, because the debt load we are about to incur will be crushing if the dollar isn't devalued.
 
[quote author="Oscar" date=1227635804]Stolen from a comment on Calculated Risk:

<img src="http://www.realmeme.com/roller/images/TheCrash/fedExponentialCurve.png" alt="" />

<blockquote>Notice that if you extrapolate the pre-existing exponential function from 2001, you come pretty close to the current Treasury bailout size. I suspect that derivatives trading obscured the missing money growth by substituting a linear function for the exponential function over a certain monetary / complexity range. When it finally failed, the retrace is close to what the previous exponential growth would have been.



Look at the 1995-2001 period. The same thing happens. For five years, the exponential growth is surppressed but during the 2001 recession, there's a sudden pop as the trend line re-asserts itself.



What does it mean if this is true?

That the bailout amounts will keep rising exponentially until... </blockquote>
<a href="http://www.realmeme.com/roller/page/realmeme/20081125">Source</a>

In other words, we aren't seeing inflation because the derivatives acted as money (and subsequently advanced inflation) and now the Fed & Government are scrambling to replace the fake cash with 'real' cash. I'm not saying I endorse this idea, just that I found it intriguing.</blockquote>
Very intriguing in deed. It sure explains why the central banks can print enough currency. I knew that the run up in commodities was BS because they went up too quick, too fast just like the stock and housing markets. Now comes the pain of coming back to the mean...aka deflation. Those derivatives just juiced up prices and I have a feeling the derivatives market will shrink considerably from even today's levels.
 
[quote author="Oscar" date=1227623204][quote author="IrvineRenter" date=1227605020][quote author="awgee" date=1227594045]How many folks realize that the Federal Reserve is a private bank which is owned by the member banks from whom the Fed is taking collateral and to whom the Fed is loaning money? And every time the Fed creates money to loan to the banks which own the Fed, it devalues the citizen's money, or in other words, the Fed is taxing the taxpayers to bail out the banks? And the Fed is doing all this with no accountability to Congress or anyone else?</blockquote>


I would like to discuss this idea further because I am still of the mindset of Winex's first post that the FED is not printing money fast enough to keep up with the rate of money destruction in the banking industry. If the FED prints money, and if money is being simultaneously destroyed by loans going bad, isn't that the essence of deflation, and doesn't that actually make our currency more valuable? Isn't less money chasing the same amount of goods and services?



With as alarming as the activities of the FED are, I still don't see how all this printing money is inflationary in an environment where money is disappearing even faster through loan losses.



Now, I can see a point in the future where the FED is still printing money and there is no destruction of money to counterbalance it. Then we would have rising interest rates and inflation. In my opinion, we are at real risk of seeing a double-dip recession. The first is going on now, and the second will be caused by the rising interest rates necessitated to fight the inflation that is bound to come later.</blockquote>
My understanding is that there is relatively little money destruction going on, but rather relatively massive credit destruction in the form of deleveraging. Yes, the banks have written down billions in losses, but they have also sucked up every last bit of capital available to meet reserve requirements in case they have to take trillions in liabilities back on their books (and then realize losses on them). So far the approach has been to shovel cash out the door in the form of Fed repo's to anyone with a pulse, direct liquidity injections from the Treasury, as well as opening swap lines for central banks who are running short of dollars. This doesn't imply an immediate cash crunch so much as it does a credit crunch. According to <a href="http://stockweb.blogspot.com/2008/10/total-subprime-writedowns-and-finacial.html">StockWeb</a> the total losses written down are only $592 Billion, and yet that number is dwarfed by the $3.18 Trillion the Fed has already issued in the forms of repos, swaps, guarantees, and loans. That's not money, it's credit and once it's spent it becomes debt. I think we aren't seeing inflation because the credit isn't being spent but hoarded as "proof" of viability.</blockquote>


Just because the banks haven't <em>recognized </em>their write offs doesn't mean the losses are not real. I believe there is a great deal of money destruction happening in addition to massive deleveraging. Given the decline in values of almost all asset classes, in particular the highly leveraged real estate market, there must be some major money destruction happening.



For instance, assume a bank extends a $500,000 loan on a piece of property using 100% financing (common here in California). The borrower defaults, and the bank sells the REO and recoups $300,000. The <em>credit destruction</em> at the end of this transaction is the $300,000 of money they created when they wrote the loan. The <em>real money</em> destruction is the other $200,000 they must write off against their capital reserves. Multiply this by all the bad loans out there, and you have a huge amount of both credit destruction and real money destruction.



I believe the currency markets are recognizing that there are fewer <em>real </em>US dollars in circulation due to the real money destruction we are witnessing with all the loan losses. Fewer dollars chasing the same amount of goods and services makes the currency more valuable: deflation.



I see Winex's point about the huge liabilities the government is planning to take on. If they can actually print that many dollars, they will print faster than we can destroy it, and we will have inflation.



As was mentioned in the article Graphrix linked to, this will be the test of Keynesian economic theories concerning Depression economics. If the Keynesian's are right (which the author of the article thinks they are not), then Bernanke and the FED are doing the right things, and the recession will be blunted. If the Keynesian's are wrong, this crisis will get worse, and it will persist for some time.
 
[quote author="IrvineRenter" date=1227667428][quote author="Oscar" date=1227623204]

My understanding is that there is relatively little money destruction going on, but rather relatively massive credit destruction in the form of deleveraging. Yes, the banks have written down billions in losses, but they have also sucked up every last bit of capital available to meet reserve requirements in case they have to take trillions in liabilities back on their books (and then realize losses on them). So far the approach has been to shovel cash out the door in the form of Fed repo's to anyone with a pulse, direct liquidity injections from the Treasury, as well as opening swap lines for central banks who are running short of dollars. This doesn't imply an immediate cash crunch so much as it does a credit crunch. According to <a href="http://stockweb.blogspot.com/2008/10/total-subprime-writedowns-and-finacial.html">StockWeb</a> the total losses written down are only $592 Billion, and yet that number is dwarfed by the $3.18 Trillion the Fed has already issued in the forms of repos, swaps, guarantees, and loans. That's not money, it's credit and once it's spent it becomes debt. I think we aren't seeing inflation because the credit isn't being spent but hoarded as "proof" of viability.</blockquote>


Just because the banks haven't <em>recognized </em>their write offs doesn't mean the losses are not real. I believe there is a great deal of money destruction happening in addition to massive deleveraging. Given the decline in values of almost all asset classes, in particular the highly leveraged real estate market, there must be some major money destruction happening.



For instance, assume a bank extends a $500,000 loan on a piece of property using 100% financing (common here in California). The borrower defaults, and the bank sells the REO and recoups $300,000. The <em>credit destruction</em> at the end of this transaction is the $300,000 of money they created when they wrote the loan. The <em>real money</em> destruction is the other $200,000 they must write off against their capital reserves. Multiply this by all the bad loans out there, and you have a huge amount of both credit destruction and real money destruction.



I believe the currency markets are recognizing that there are fewer <em>real </em>US dollars in circulation due to the real money destruction we are witnessing with all the loan losses. Fewer dollars chasing the same amount of goods and services makes the currency more valuable: deflation. </blockquote>


I'm not arguing with you, just speculating as to why we haven't seen the traditional reaction to the amount of cash being flooded into the world's economy. As you pointed out, the banks are facing real losses, but so far they have been able to delay recognizing the largest portion of them (CDO, CDS, CLO, etc.) with the apparent consent of the Fed, Treasury, and regulators... which could stave off actual money destruction for a while. This would lead to dollar hoarding by anyone facing future losses, combined with the massive amout of redemptions causing the deleveraging, both of which would reduce the amount of currency in circulation: same result but for different reasons.
 
[quote author="Oscar" date=1227673850]I'm not arguing with you, just speculating as to why we haven't seen the traditional reaction to the amount of cash being flooded into the world's economy. As you pointed out, the banks are facing real losses, but so far they have been able to delay recognizing the largest portion of them (CDO, CDS, CLO, etc.) with the apparent consent of the Fed, Treasury, and regulators... which could stave off actual money destruction for a while. This would lead to dollar hoarding by anyone facing future losses, combined with the massive amout of redemptions causing the deleveraging, both of which would reduce the amount of currency in circulation: same result but for different reasons.</blockquote>


I suspect we have not seen inflation and currency devaluation because we are destroying real dollars. Of course, I also wonder if they can turn off the printing presses once we have created what has been lost. If the FED keeps buying Treasuries (printing money) after the destruction stops, we will have massive inflation. Also, when the lenders start creating credit again from an extremely deleveraged point, will that trigger inflation.



I guess my real question is will the creation of new credit -- even in the absense of printing new, real money -- cause inflation? Does the expansion of money supply through credit alone create inflation? I don't know the answer to this one.



During the bubble, we had massive debt structures masquerading as real money capital. In the absence of these Ponzi Schemes, does credit creation cause inflation?
 
[quote author="IrvineRenter" date=1227687389][quote author="Oscar" date=1227673850]I'm not arguing with you, just speculating as to why we haven't seen the traditional reaction to the amount of cash being flooded into the world's economy. As you pointed out, the banks are facing real losses, but so far they have been able to delay recognizing the largest portion of them (CDO, CDS, CLO, etc.) with the apparent consent of the Fed, Treasury, and regulators... which could stave off actual money destruction for a while. This would lead to dollar hoarding by anyone facing future losses, combined with the massive amout of redemptions causing the deleveraging, both of which would reduce the amount of currency in circulation: same result but for different reasons.</blockquote>


I suspect we have not seen inflation and currency devaluation because we are destroying real dollars. Of course, I also wonder if they can turn off the printing presses once we have created what has been lost. If the FED keeps buying Treasuries (printing money) after the destruction stops, we will have massive inflation. Also, when the lenders start creating credit again from an extremely deleveraged point, will that trigger inflation.



I guess my real question is will the creation of new credit -- even in the absense of printing new, real money -- cause inflation? Does the expansion of money supply through credit alone create inflation? I don't know the answer to this one.



During the bubble, we had massive debt structures masquerading as real money capital. In the absence of these Ponzi Schemes, does credit creation cause inflation?</blockquote>


With the size and complexity of our economy, it takes 3 months after the end of a quarter to get a final reading on GDP. Economic activity in an economy is a tangible thing. What are the odds of the Fed stopping the printing presses when something intangible like destruction of money ceases?
 
[quote author="WINEX" date=1227696804]With the size and complexity of our economy, it takes 3 months after the end of a quarter to get a final reading on GDP. Economic activity in an economy is a tangible thing. What are the odds of the Fed stopping the printing presses when something intangible like destruction of money ceases?</blockquote>


It would seem likely that they will overprint. Even if money destruction ceases, the economy will still be in the crapper, and they will want to reignite commerce.
 
[quote author="IrvineRenter" date=1227699342][quote author="WINEX" date=1227696804]With the size and complexity of our economy, it takes 3 months after the end of a quarter to get a final reading on GDP. Economic activity in an economy is a tangible thing. What are the odds of the Fed stopping the printing presses when something intangible like destruction of money ceases?</blockquote>


It would seem likely that they will overprint. </blockquote>


You have far more faith in our government than I do.
 
[quote author="IrvineRenter" date=1227687389][quote author="Oscar" date=1227673850]I'm not arguing with you, just speculating as to why we haven't seen the traditional reaction to the amount of cash being flooded into the world's economy. As you pointed out, the banks are facing real losses, but so far they have been able to delay recognizing the largest portion of them (CDO, CDS, CLO, etc.) with the apparent consent of the Fed, Treasury, and regulators... which could stave off actual money destruction for a while. This would lead to dollar hoarding by anyone facing future losses, combined with the massive amout of redemptions causing the deleveraging, both of which would reduce the amount of currency in circulation: same result but for different reasons.</blockquote>


I suspect we have not seen inflation and currency devaluation because we are destroying real dollars. Of course, I also wonder if they can turn off the printing presses once we have created what has been lost. If the FED keeps buying Treasuries (printing money) after the destruction stops, we will have massive inflation. Also, when the lenders start creating credit again from an extremely deleveraged point, will that trigger inflation.



I guess my real question is will the creation of new credit -- even in the absense of printing new, real money -- cause inflation? Does the expansion of money supply through credit alone create inflation? I don't know the answer to this one.



During the bubble, we had massive debt structures masquerading as real money capital. In the absence of these Ponzi Schemes, does credit creation cause inflation?</blockquote>


Debt creation is inflation. Does debt creation cause price increases? Absolutely, but there is no sure way to direct the created money to a particular sector of the economy nor is there any sure way to predict exactly where it will land. Looking at the various graphs, it is obvious that the money supply has been increasing, (inflation), for a long, long time, yet price increases as measured by the CPI or backward looking estimates of the CPI before it was calculated on an ongoing basis, varied and did not necessarily correspond with increases in the money supply or monetary base.
 
[quote author="awgee" date=1227701864][quote author="IrvineRenter" date=1227687389][quote author="Oscar" date=1227673850]I'm not arguing with you, just speculating as to why we haven't seen the traditional reaction to the amount of cash being flooded into the world's economy. As you pointed out, the banks are facing real losses, but so far they have been able to delay recognizing the largest portion of them (CDO, CDS, CLO, etc.) with the apparent consent of the Fed, Treasury, and regulators... which could stave off actual money destruction for a while. This would lead to dollar hoarding by anyone facing future losses, combined with the massive amout of redemptions causing the deleveraging, both of which would reduce the amount of currency in circulation: same result but for different reasons.</blockquote>


I suspect we have not seen inflation and currency devaluation because we are destroying real dollars. Of course, I also wonder if they can turn off the printing presses once we have created what has been lost. If the FED keeps buying Treasuries (printing money) after the destruction stops, we will have massive inflation. Also, when the lenders start creating credit again from an extremely deleveraged point, will that trigger inflation.



I guess my real question is will the creation of new credit -- even in the absense of printing new, real money -- cause inflation? Does the expansion of money supply through credit alone create inflation? I don't know the answer to this one.



During the bubble, we had massive debt structures masquerading as real money capital. In the absence of these Ponzi Schemes, does credit creation cause inflation?</blockquote>


Debt creation is inflation. Does debt creation cause price increases? Absolutely, but there is no sure way to direct the created money to a particular sector of the economy nor is there any sure way to predict exactly where it will land. Looking at the various graphs, it is obvious that the money supply has been increasing, (inflation), for a long, long time, yet price increases as measured by the CPI or backward looking estimates of the CPI before it was calculated on an ongoing basis, varied and did not necessarily correspond with increases in the money supply or monetary base.</blockquote>


If all debt creation is inflation, then all debt destruction must be deflation. If so, then we are experiencing massive deflation with all the deleveraging going on.



In theory, debt creation should be a temporary phenomenon. A loan is made, money is created, and when a loan is paid back, money is destroyed. Fluctuations in created debt should not be either inflationary or deflationary.



Also, an increase in money supply is necessary to reflect the added value of goods and services in a productive economy. Otherwise if the total sum of money were fixed, when someone created something of value, this would devalue everything else.



What am I missing here?
 
[quote author="IrvineRenter" date=1227704212][quote author="awgee" date=1227701864][quote author="IrvineRenter" date=1227687389][quote author="Oscar" date=1227673850]I'm not arguing with you, just speculating as to why we haven't seen the traditional reaction to the amount of cash being flooded into the world's economy. As you pointed out, the banks are facing real losses, but so far they have been able to delay recognizing the largest portion of them (CDO, CDS, CLO, etc.) with the apparent consent of the Fed, Treasury, and regulators... which could stave off actual money destruction for a while. This would lead to dollar hoarding by anyone facing future losses, combined with the massive amout of redemptions causing the deleveraging, both of which would reduce the amount of currency in circulation: same result but for different reasons.</blockquote>


I suspect we have not seen inflation and currency devaluation because we are destroying real dollars. Of course, I also wonder if they can turn off the printing presses once we have created what has been lost. If the FED keeps buying Treasuries (printing money) after the destruction stops, we will have massive inflation. Also, when the lenders start creating credit again from an extremely deleveraged point, will that trigger inflation.



I guess my real question is will the creation of new credit -- even in the absense of printing new, real money -- cause inflation? Does the expansion of money supply through credit alone create inflation? I don't know the answer to this one.



During the bubble, we had massive debt structures masquerading as real money capital. In the absence of these Ponzi Schemes, does credit creation cause inflation?</blockquote>


Debt creation is inflation. Does debt creation cause price increases? Absolutely, but there is no sure way to direct the created money to a particular sector of the economy nor is there any sure way to predict exactly where it will land. Looking at the various graphs, it is obvious that the money supply has been increasing, (inflation), for a long, long time, yet price increases as measured by the CPI or backward looking estimates of the CPI before it was calculated on an ongoing basis, varied and did not necessarily correspond with increases in the money supply or monetary base.</blockquote>


If all debt creation is inflation, then all debt destruction must be deflation. If so, then we are experiencing massive deflation with all the deleveraging going on.



In theory, debt creation should be a temporary phenomenon. A loan is made, money is created, and when a loan is paid back, money is destroyed. Fluctuations in created debt should not be either inflationary or deflationary.



Also, an increase in money supply is necessary to reflect the added value of goods and services in a productive economy. Otherwise if the total sum of money were fixed, when someone created something of value, this would devalue everything else.



What am I missing here?</blockquote>


Well, for one, I don't think that debt created by government loans backed by toxic assets will be paid back. But I guess that debt can always be forgiven. After all, it's only tax dollars we are talking about...
 
[quote author="IrvineRenter" date=1227704212][quote author="awgee" date=1227701864][quote author="IrvineRenter" date=1227687389][quote author="Oscar" date=1227673850]I'm not arguing with you, just speculating as to why we haven't seen the traditional reaction to the amount of cash being flooded into the world's economy. As you pointed out, the banks are facing real losses, but so far they have been able to delay recognizing the largest portion of them (CDO, CDS, CLO, etc.) with the apparent consent of the Fed, Treasury, and regulators... which could stave off actual money destruction for a while. This would lead to dollar hoarding by anyone facing future losses, combined with the massive amout of redemptions causing the deleveraging, both of which would reduce the amount of currency in circulation: same result but for different reasons.</blockquote>


I suspect we have not seen inflation and currency devaluation because we are destroying real dollars. Of course, I also wonder if they can turn off the printing presses once we have created what has been lost. If the FED keeps buying Treasuries (printing money) after the destruction stops, we will have massive inflation. Also, when the lenders start creating credit again from an extremely deleveraged point, will that trigger inflation.



I guess my real question is will the creation of new credit -- even in the absense of printing new, real money -- cause inflation? Does the expansion of money supply through credit alone create inflation? I don't know the answer to this one.



During the bubble, we had massive debt structures masquerading as real money capital. In the absence of these Ponzi Schemes, does credit creation cause inflation?</blockquote>


Debt creation is inflation. Does debt creation cause price increases? Absolutely, but there is no sure way to direct the created money to a particular sector of the economy nor is there any sure way to predict exactly where it will land. Looking at the various graphs, it is obvious that the money supply has been increasing, (inflation), for a long, long time, yet price increases as measured by the CPI or backward looking estimates of the CPI before it was calculated on an ongoing basis, varied and did not necessarily correspond with increases in the money supply or monetary base.</blockquote>


If all debt creation is inflation, then all debt destruction must be deflation. If so, then we are experiencing massive deflation with all the deleveraging going on.



In theory, debt creation should be a temporary phenomenon. A loan is made, money is created, and when a loan is paid back, money is destroyed. Fluctuations in created debt should not be either inflationary or deflationary.



Also, an increase in money supply is necessary to reflect the added value of goods and services in a productive economy. Otherwise if the total sum of money were fixed, when someone created something of value, this would devalue everything else.



What am I missing here?</blockquote>


Debt destruction is deflation. Deflation is a decrease in the money supply, not a decrease in prices.

How much debt destruction are we experiencing? How much debt is being created at the same time? There were trillions of dollars of OTC derivatives created in the last year, and much of that with created money, debt, and leveraged debt.

Some of the deleveraging is asset depreciation which is not deflation. Many people confuse the two. How much of the deleveraging is debt destruction and how much is asset depreciation? I do not know. I have read many different figures and estimates and as far as I can tell, there is no definitive answer to that question yet. Everyone seems to have an agenda or a preconceived idea on the subject and makes the data fit their argument. IMO, so far it looks like at present there is more deflation than inflation.

But, I would not get hung up on that. The present circumstance may be short lived, around one year. Maybe two at the most.

I do not know why, but people give lip service to Bernanke's words concerning his solution for deflation, but very few seem to take him seriously enough to prepare for his Keynesian solution. And from my view, it looks like he is doing exactly what he said he would in this situation. And from what little I have read, no agency in history has been able to correctly counter balance a deflationary spiral with inflation. I think I put a list of the countries that have tried it on another thread. Will Bernanke be the first? Is he smarter than all the central banks before him? Maybe, but I am betting he will fail.

It amazes me just how Ameri-centric people are in this country. They think that America is different and America has the solution to everything. Can do. But, Americans are severely lacking in economic history knowledge, even American economic history. This is not the first time our country has faced deflation and subsequent inflation. Guess where the term, "not worth a Continental" came from. And do you know what our forefathers "solution" was?

I love America. I love Americans. But the government and the Federal Reserve is not America, and at this point, I do not think they are even American. One of the things I love most about our country was it's freedom which included the freedom to fail.



Personally, I think it a fallacy that an increasing money supply is necessary for economic growth. Consider an example society consisting of ten people, $1000, and five chairs. The society becomes more productive and makes ten chairs. The price of chairs goes down. So what? More chairs, same work, decreasing price. That's productivity with a fixed money supply.

Did the money supply increase while this country and other societies were on a gold standard? Were this country and other societies any less productive as a result? If you research, I think you would be surprised to find just the opposite, because banks can not control interest rates, governments can not conduct wars without citizen approval and real monetary support, and no one or group can control and abuse the money supply on a real gold standard.
 
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