# Three meanings of "printing money causes inflation"



## andrewf (Mar 1, 2010)

We had a less than fruitful discussion about inflation and growth of the money supply/money printing. I think this blog post is really great and maybe helps bridge the ideological divide. Any thoughts?

Three meanings of "printing money causes inflation" 



> Do I fear that the very large amounts of money that they have been printing will cause inflation to explode when those special circumstances revert to normal?
> 
> No. I don't fear that there's a pent-up inflationary pressure from all that money printing that is just waiting to explode when things return to normal. Because I believe that central bankers aren't stupid. If, or rather when, it starts to happen, they will put the money printing into reverse, to prevent it happening. Central banks will buy back the extra money they previously printed, to prevent inflation rising too much. But if, for some unknown reason, they couldn't or didn't buy back that extra money, then yes, I do believe that there would eventually be a very big increase in future inflation from the very large amounts of money that have been printed.


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## Karlhungus (Oct 4, 2013)

andrewf said:


> We had a less than fruitful discussion about inflation and growth of the money supply/money printing. I think this blog post is really great and maybe helps bridge the ideological divide. Any thoughts?
> 
> Three meanings of "printing money causes inflation"


Inflation has more to do with capacity utilization. In other words, how much capacity the average "factory" has. If factories are full, prices go up. The magic number according to Kahn academy is 80%. If capacity utilization is above 80%, then we should worry about inflation. But it hasn't been for a long time.


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## HaroldCrump (Jun 10, 2009)

This is an overly simplistic article.
The blogger does say this is meant for "non-economists", and that's fine, but it leaves out key facts and pieces of information.
However, the blogger does go on to provide his/her interpretation/opinion about the state of money printing.

For instance, the blogger does not mention _velocity of money_ even once in the article, which is very critical factor in inflation.
Velocity of money has been very low since the credit crisis, and I believe it is at historical lows (just like interest rates).
Speaking of which, the _interest rate _is the _cost of money_ - the author does not explain that the demand and supply of money - just like any other good - is regulated by the cost of the good.

The author also, very conveniently, glosses over the following statement:
_Central banks will buy back the extra money they previously printed, to prevent inflation rising too much._
Ha LOL - pray explain how?
By selling the treasury bonds bought using Q/E back to the market at discount to par?
So the Fed will "eat the loss"?
To the tune of what? $10 Trillion?

If velocity of money increases, the Fed will not be able to reduce the stock of money easily.
It will be out of their control.

They can raise the overnight rates, and also allow long-term rates to rise on their own (by stopping Q/E).
However, the result of that will be a massive inflow of capital - which will exacerbate inflation and cause a rise in prices.

A similar idea was purported by neo-liberal economist Paul Krugman about 2 years ago during the debt-ceiling debate that the Treasury can simply mint a $1T coin and deposit it into the Federal Reserve to bypass the debt-ceiling and enable the govt. to continue spending.


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## leslie (May 25, 2009)

So printing money causes more inflation than would have existed without the printing. What a pointless point.

Included in the all-else-equal is ..
a) inflation would otherwise have fallen (or become deflation) because of a declining multiplier effect.
b) inflation would otherwise have fallen because bank leverage has been reduced by new regulations.
c) inflation would otherwise have fallen because more $$ is going into asset bubbles instead of the consumption goods measured by 'inflation'.
d) inflation would otherwise have fallen because business is wanting to borrow less because of a low-growth economy.
e) inflation would otherwise have fallen because the baby boomer generation is hitting their maximum-wealth-age where their investments create an oversupply of capacity.
f) etc

So "printing money causes more inflation than would have existed without the printing", but that does not necessarily mean there is any inflation at all.


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## Eder (Feb 16, 2011)

The central bank could sell the treasuries back at perhaps a trillion dollar loss...not too bad a cost for tax payers to eat seeing as we avoided (hopefully) a dirty thirties scenario.


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## andrewf (Mar 1, 2010)

Even if they do sell the bonds at a loss when they unwind QE, keep in mind that the Fed has made (and continues to make) a very significant profit on the bonds it has held on its balance sheet. It finances at 0% (by printing cash). Fed can use combinations of raising interest rates (which increases the spread between their assets and liabilities as they are rolled over) and asset sales to cool the economy. They can control the impact to the fed balance sheet by doing more of the former and less of the latter.

Fed can't be insolvent given that its liabilities never mature (money).


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## Rysto (Nov 22, 2010)

leslie said:


> So "printing money causes more inflation than would have existed without the printing", but that does not necessarily mean there is any inflation at all.


Yes, that was entirely the point of the article. He's arguing against the kooks who claim that hyperinflation is coming to the West any day now due to loose monetary policy.


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## HaroldCrump (Jun 10, 2009)

Rysto said:


> He's arguing against the kooks who claim that hyperinflation is coming to the West any day now due to loose monetary policy.


Don't be so quick to dismiss the case for hyperinflation.
We already have significant inflation in essential goods and services in North America (incl. here in Canada), such as in food and energy.
This inflation has been building up slowly but surely since the mid 2000s, and has accelerated significantly since 2009.

Inflation, deflation, hyperinflation, etc. are not taps that can be turned on/off at the will of central banks.
These forces take several years - sometimes as long as a decade - to resolve themselves out and show up in all aspects of the economy and society.

Note the last two periods of hyperinflation - the post WW-I hyperinflation in Europe and the late 1970s/early 1980s inflation in North America.
Those did not just happen - there were many factors leading up to them that had been working through the economic system for many years.

The factors were both fiscal and monetary policy - misguided, loose, politically motivated bad fiscal and monetary policy.
The massive money printing and defense spending during the Vietnam war, combined with the social welfare policies of the "Great Society", etc. all culminated in Nixon having no choice but to nix the Gold standard.
It took another 7 - 8 years for the velocity to do its magic, all of which led to the hyperinflation of the late 1970s & 1980s.

The 1920s was similar in Germany.
The liquidation of Germany following the Treaty of Versailles, the money printing from 1921 till about 1924, the selling of gold by Germany during those years, all led to the hyperinflation.

You are looking at barely 4 years of data under Q/E and concluding very confidently that there is no inflation, and there won't be any in the future as a result of these policies.
I am not so confident at all.
We already have a lot of the pre-conditions that lead to future hyperinflation.

There is bad fiscal policy, loose monetary policy, global conflict & wars, competitive devaluation of currencies among the major central banks, social unrest - not just in the developing countries but in modern, Western countries too, structural unemployment, etc.

I think it is important to look beyond the official rhetoric spewed by the central banks and the political administration.


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## HaroldCrump (Jun 10, 2009)

Eder said:


> The central bank could sell the treasuries back at perhaps a trillion dollar loss...not too bad a cost for tax payers to eat seeing as we avoided (hopefully) a dirty thirties scenario.





andrewf said:


> Even if they do sell the bonds at a loss when they unwind QE, keep in mind that the Fed has made (and continues to make) a very significant profit on the bonds it has held on its balance sheet.


It is not like that at all.
The Fed is massively leveraged.
They have grown their balance sheet from about $800B in 2007 to over $4.4T right now.
They are leveraged 80:1.

If it were a regular investment bank or hedge fund, it would already have collapsed by now.
Well, it _is _ a hedge fund/investment bank, but it is special, of course.

Banks have collapsed under far less leverage.
In its last quarter, Lehmann Brothers was leveraged about 75:1, and it simply could not borrow even 1c. more from the overnight market, unlike the Fed.

The Fed's "profits" are all notional, paper profits.
Those will disappear like thin air the moment they start re-selling any of their assets back into the open market.



> Fed can use combinations of raising interest rates (which increases the spread between their assets and liabilities as they are rolled over) and asset sales to cool the economy. They can control the impact to the fed balance sheet by doing more of the former and less of the latter.


That will make matters worse.
If the Fed starts raising rates, they will begin to incur losses in their portfolio on a mark-to-market basis.
Keep in mind that they are massively leveraged.
Even small losses will wipe out their capital reserves.

They _cannot _unravel this stimulus unless the underlying economy is strong enough to absorb all of these asset sales.
That would require very low levels of unemployment - not just paper unemployment, but unraveling the true potential employment that is encased in the historically low labor participation rate.
It will require wages to rise appreciably.
None of that is happening.
The Phillips Curve aint working.
And it is a direct result of the Fed's monetary policy.


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## Rysto (Nov 22, 2010)

The US in the late 70s is completely incomparable with the Weimar republic. The inflation rate in the US topped out at 11% annually. In the Weimar republic, it went up to a rate of tens of thousands percent _per month_.


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## HaroldCrump (Jun 10, 2009)

Rysto said:


> The US in the late 70s is completely incomparable with the Weimar republic. The inflation rate in the US topped out at 11% annually. In the Weimar republic, it went up to a rate of tens of thousands percent _per month_.


Wanna live under 11% inflation?
And 11% was not the top - the top was something like 14.5% between 1978 - 1980.
It took interest rates of around 16% to control that.

In any case, you completely misunderstood my post.
I did not say that the causes of the last two periods of hyperinflation were the same - just that it can take several years for all the factors to play out.
Every period of time and every region can have unique circumstances.

The apologists for the official Fed rhetoric very conveniently look at the last 3 - 4 years and completely dismiss all possibilities of future economic problems caused by those very same policies.


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## andrewf (Mar 1, 2010)

1) You lose credibility when you refer to the 1970s as a period of hyperinflation , as well as conflating Weimar Germany with the 1970s US. It does not meet any commonly recognized definition of hyperinflation (double digits inflation per month, at a minimum)

2) Fed leverage is irrelevant. It can't become insolvent, because its liabilities never mature. And there is no shortage of demand for its liabilities (money). 

3) The Fed pays real money dividends to the Treasury, as the BoC does in Canada. It was $89 billion for fiscal 2012. $80 billion was income on their portfolio of assets resulting from QE.

http://www.federalreserve.gov/newsevents/press/other/20130110a.htm

_"If the Fed starts raising rates, they will begin to incur losses in their portfolio on a mark-to-market basis.
Keep in mind that they are massively leveraged.
Even small losses will wipe out their capital reserves."_

As I said, the Fed by definition can't become insolvent. And as they roll over their portfolio as it matures at higher rates, they can make any amount of income they wish. Their liabilities cost them either 0% (cash) or the overnight rate for deposits.

_"They cannot unravel this stimulus unless the underlying economy is strong enough to absorb all of these asset sales.
That would require very low levels of unemployment - not just paper unemployment, but unraveling the true potential employment that is encased in the historically low labor participation rate.
It will require wages to rise appreciably.
None of that is happening.
The Phillips Curve aint working.
And it is a direct result of the Fed's monetary policy. "
_

That's a question of whether inflation accelerates while the economy is below capacity. Is it more important to meet its inflation mandate, or its economic mandate? For BoC, its mandate is at least clear: it is to maintain low, stable inflation.

The degree to which the Fed unwind QE is the degree to which they are committed to low inflation at the cost of GDP growth/employment. But that was always the choice.


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## sags (May 15, 2010)

The Fed and Treasury can play games.........sending "digital numbers" back and forth, with apparent immunity from negative consequences.....on the surface. 

But below the surface, the American consumer is paying higher prices for almost everything........because of the lost purchasing power of the US dollar.

It cost more US dollars to pay for something imported (most of the things they buy).......and because consumers aren't receiving more US dollars in their pay (wage stagnation).........they are falling behind every month.

Hence the rise in personal debt (often to stay current with their rising expenses), a growing dependency on government programs, and millions of people heading towards retirement with little savings.

The growing "wealth gap" is a clear example of the benefit from rising stock markets and asset values for those that own them,........but a declining standard of living for those who don't.

Main Street and Wall Street......lead in different directions.


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## HaroldCrump (Jun 10, 2009)

andrewf said:


> It does not meet any commonly recognized definition of hyperinflation (double digits inflation per month, at a minimum)


The difference between 15% annual (hyper)inflation and 1920s German style is the collapse of the currency.
In the former case, the currency did not collapse.
But 15% inflation is pretty bad, esp. the way it is measured now.
It will cause significant wealth destruction, esp. of the saver/investor class, and retirees, pensioners, fixed income earners, etc.

The key thing that I was saying above is that these things take time to play out.
The apologists for Q/E are pointing to less than 5 years of experience and concluding that there won't be any significant inflation caused by this, let alone hyperinflation.

I don't want to debate what is hyper and what is not, and where is the cut-off point.
15% annual inflation - if it does come to pass - is pretty serious.

The other assumption the Q/E crowd makes is that if there is some degree of inflation (say 5%, whatever, pick a number) - the Fed will be able to control it and bring it down to say 3%.
That does not happen.
These forces are not a tap that can be turned on/off at will.

At what point will the Fed begin taking de-inflating measures? At 3%, 5%, 7%?
Will they be able to prevent 3% from becoming 7%, and from 7% becoming 11%?
I see no reason to believe they can control this genie, esp. given their leveraged balance sheet.



> 2) Fed leverage is irrelevant. It can't become insolvent, because its liabilities never mature. And there is no shortage of demand for its liabilities (money).


It is relevant because it precludes them from taking steps in the future to regulate the economy.
They are already leveraged 80:1.
Their balance sheet is about $4.4T.
They will not be selling those long-duration assets back into the market.

If another crisis hits anytime in the next 5 - 10 years, what will they do?
Take their balance sheet up to $8T? $15T?

The Fed has very limited ability to protect the economy in the future.



> 3) The Fed pays real money dividends to the Treasury, as the BoC does in Canada. It was $89 billion for fiscal 2012. $80 billion was income on their portfolio of assets resulting from QE.


So you guys are basically saying that Q/E is the de facto economic policy moving forward?
The Treasury can keep issuing unlimited amount of debt, as long as the Fed is there to keep buying it?
The US does not need savers any more (domestic or foreign), there is no need for foreign buyers of American debt because the Fed can keep buying it, and keep paying dividends back to the Treasury.
This shell game can go on perpetually....



> As I said, the Fed by definition can't become insolvent. And as they roll over their portfolio as it matures at higher rates, they can make any amount of income they wish. Their liabilities cost them either 0% (cash) or the overnight rate for deposits.


What does that accomplish?
The Fed becomes nothing more than a protected investment bank (i.e. the only dealer in US treasuries).
It is simply a shell game and does not benefit the economy.



> The degree to which the Fed unwind QE is the degree to which they are committed to low inflation at the cost of GDP growth/employment. But that was always the choice.


The US Fed has been falling over itself trying to define their next target.
They are failing at each target they set themselves, until they change it again.
First they said nominal GDP targeting.
Then they said unemployment targeting.
They keep moving the goal posts with each round of Q/E.

Leaving aside the initial response to the 2008 crisis (the TARP and Q/E-I), the rest of Fed policy has been a failure.
Q/E is less and less effective...in fact, QE-III has changed nothing in the economy.
If there is a QE-IV, the markets will simply yawn.


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## andrewf (Mar 1, 2010)

If QE is ineffective, why would unwinding it be such an economic disaster? It's not logically coherent.

I don't understand why you think the fed is limited in how far it can grow its balance sheet. Leverage is irrelevant as it can always just print money and call it equity. What mechanism do you think constrains the feds leverage?

The fed thinks it has come close to loosening monetary policy enough as it slows the rate of growth of its balance sheet. Unwinding QE is the obvious next step but I think the will or should take the approach of allowing rates to rise somewhat while unwinding QE gradually. You're allowed to think QE is a failure, but you can't know the counterfactual. Our understanding of macroeconomics suggests that inflation would have been lower, likely deflationary, and the recession would have been even deeper. The eurozone is instructive of what too tight monetary policy looks like. Not sure the US would have been better off with Spanish or Greek levels of recession and unemployment.


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## lonewolf (Jun 12, 2012)

andrewf said:


> I don't understand why you think the fed is limited in how far it can grow its balance sheet. Leverage is irrelevant as it can always just print money and call it equity. What mechanism do you think constrains the feds leverage?
> 
> 
> .


 Social mood, The fed is not independent of social mood.


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## HaroldCrump (Jun 10, 2009)

andrewf said:


> If QE is ineffective, why would unwinding it be such an economic disaster?


It is doing more harm than good.
It is pillaging the wealth of savers, and rewarding the same risky behavior than caused the credit crisis in the first place.
It has distorted all kinds of price signals and economic indicators.

Long term bond yields are a very key indicator, perhaps one of the top 3 key economic indicators of all time.
We have interest rate data going back nearly 400 years.
And that is the #1 target of Fed manipulation via QE.
They have distorted bond yields, and as a result, unemployment and all other aspects of the economy and society.

ZIRP and QE is financial repression, plain and simple.
And then they wonder why businesses are not investing, new businesses are not starting up, people are not spending more, etc.

They _should_ be unwinding it, but the issue is we cannot know for sure what the ramifications will be, esp. if it is unwound in a disorderly fashion.
It can create all sorts of unexpected side effects, not just in the US economy, but worldwide.
Currencies can (and will) be destabilized, trade balances will be impacted, it could cause hyperinflation in underdeveloped countries, etc.

It is not easy to control these effects.



> I don't understand why you think the fed is limited in how far it can grow its balance sheet. Leverage is irrelevant as it can always just print money and call it equity. What mechanism do you think constrains the feds leverage?


Confidence in the Fed and the Dollar limits their actions.
All of Fed's action is based on one thing only - the international community's confidence in the king dollar.
Which, in turn, is based on the USD's unique status as the global reserve currency.

The Fed has taken that confidence out for a spin since 2008.
It is now pushing the limits of that confidence.
So far, it has held steady.

No one knows what the limits of that confidence are.
Keep in mind that ZIRP/QE is not just the dilution of wealth for a few million American retirees, pensioners, etc.
It is repressing the confidence of America's foreign creditors, too.

If you bought and held stock in a company, and suddenly the company decides to keep issuing more and more shares every quarter, your position has been diluted significantly.
As long as you believe in the earnings potential of the company and its future products (in this analogy, it is GDP growth and tax receipts), you will probably keep your shares.
But if you begin to believe that the company is simply diluting its capital base, issuing more shares to keep paying dividends on previous issues, you will lose confidence.

That is how the investors in American debt are feeling.

There are limits to how long a shell game like this can go on i.e. Treasury issuing bonds and the Fed buying it up.
They are toying with the very concept of money and wealth.
The academics at the Fed have come to believe they can fully control economic forces - both domestically and internationally.
They can print money to fund the spendthrift ways of the US administration (past and present), fund all the global wars and policing, and control the behavior of other countries that depend on the dollar.

The limits of Fed action is that very confidence.
I can't place a number to it, of course.
Is it $8T, $15T, $25T - no one can say.
But there is a limit to the concept of free money.

btw, Japan has already been there, done that.
They have printed massive amounts of money as stimulus.
This latest attempt by Abe is just one more in a long series.
It did cause a temporary boost to the GDP, but after that, the economy has again slipped back into low growth/recession.


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## lonewolf (Jun 12, 2012)

Some say high interest rates killed inflation of the 80s (less loans taken out when expensive)

Others say high interest rates of the 80s made inflation for the future. ( The compounding of the interest @ a higher rate )

The time to buy annuities is near the peak of summer in the K wave cycle. This is my plan for some of my money if the system is still intact 30 or so years from now.


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## lonewolf (Jun 12, 2012)

To much faith is placed in the fed. They are no match for all the baby boomers that are past their peak spending years. No way can they stimulate the economy when the time is not right.

When central banks try to support a currency they are no match for market forces, The bankers might stop a move in a currency for a while but mass mood wins out over time.

Central bankers have a lousy record for buying & selling gold. They buy near highs & sell near lows.

From 2007 - 2009 the fed was not able to stop the bear market

The Fed is over rated with the power it has. When the mood is right the masses could abolish the fed something that could easily happen if a bear market is large enough.


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## andrewf (Mar 1, 2010)

A weakening dollar would help the fed in their goal of stimulating inflation given that it is too low, by their measure. It would also help with net exports...

The problem right now is not lack of confidence in USD as a reserve currency, it is excess demand for reserve currency. The way to deal with that is to beat savers with the stick of low interest rates. I don't understand how historically low interest rates are supposed to reduce business investment--the cost of capital has plummeted. I think you are mixing up cause and effect. The alternative to QE was to nuke the financial system in 2008, wipe out debt/savings in order to deleverage and rebuild from the ashes. I don't think savers would have preferred that.

You bring up Japan... Japan's problem is that they have been too timid in their QE as a response to hitting the zero lower bound. They should have hit their savers much harder, or at least given them more reason to send their savings abroad by reducing the supply of domestic debt not held by the CB.


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## HaroldCrump (Jun 10, 2009)

andrewf said:


> A weakening dollar would help the fed in their goal of stimulating inflation given that it is too low, by their measure. It would also help with net exports...


You cannot trash your currency to boost exports because it leads to competitive devaluations.
It has been tried and tested before, many times.
Any benefits are marginal and temporary.
In cases where a developed country has a large trading deficit with an underdeveloped country (typical in case of an industrialized country with a trade deficit against a resource rich underdeveloped country), it leads to inflation in the latter country, usually in food & energy prices.

Competitive devaluation is a beggar-thy-neighbor strategy and does not work.



> I don't understand how historically low interest rates are supposed to reduce business investment--the cost of capital has plummeted.


The interest rate is not the only factor in determining business investment.
There are usually far more important factors, such as business confidence, govt. policy, regulation, expected demand for goods and services, etc.

Unless businesses expect demand for their products to rise, they will not invest.
If they see political chaos and lack of stable policy, they will not invest.

The US is suffering from all these problems right now.
Then they impose punitive regulations on top of everything.
Oh drat, business is not investing & hiring workers...oh gee I wonder why.



> The way to deal with that is to beat savers with the stick of low interest rates.
> You bring up Japan... Japan's problem is that they have been too timid in their QE as a response to hitting the zero lower bound. They should have hit their savers much harder


So you are firmly in the _*screw the savers*_ camp.
No wonder you love ZIRP & QE.
_*Beat the savers with a stick*_...yeah, that's the way to create GDP growth, consumer spending, and job growth :rolleyes2:

All it is doing is transferring wealth from the saver class to the speculator class.
Rewarding banks, hedge funds, investment banks, etc.

In the US today, new business creation rates are the lowest since the late 1970s recession.
Labor participation rate is the lowest in 40 years or so.
An entrepreneur or small business owner cannot get a loan from a regular banking institution in the US today for anything less than 12%.
Rates are sometimes as high as 18% for a startup business loan.
They are being driven into the bosoms of the shadow banking industry.

Yet, investment banks and hedge funds can borrow money from the Fed at 0% to finance their LBOs, RTOs, speculations, SIVs, LSAPs, etc.
_*That *_is what ZIPR and QE does.

And then the social welfarists and leftists wonder oh gee, why is there so much income inequality and wealth imbalance?


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## andrewf (Mar 1, 2010)

If everyone is trying to save money you run into the paradox of thrift. You need to disincentivize excessive saving, and you do that with financial repression. You seem to think the current global economy is a disaster. This is what disaster avoided looks like. Excessively tight monetary policy would have been a rerun of the 1930s or at the very least twenty years of stagnation like Japan. 

You never really seem to acknowledge that the tight monetary policy you are advocating means skinhead mobs in the street and twenty percent unemployment like in Greece. What do you think your alternate universe of tight monetary policy would look like?


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## Rusty O'Toole (Feb 1, 2012)

Every form of tinkering with economic policy leads to distortions in the economy, and unwanted side effects. The goal should be to have a fully functioning economy, with full employment, producing the things we need and use.

Unfortunately, it is too easy to reach for the slick trick, the quick fix and the gimmick. Eventually you get to the point where policy makers are ignoring the real economy and trying to keep the fake economy from collapsing. 

Japan has had this kind of zombie economy now for 20 years, and the rest of us are not far behind.

Japan, Greece, Cyprus, Europe in general, the US, Argentina, all these are the result of a certain line of action that started 50 years ago or more. It does not make sense to ignore bad economic policy for 50 years, then suddenly look for a scapegoat in the last year, when the chickens come home to roost.

Sort of like watching a man drink himself to death then blaming his problems on that last bottle.


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## sags (May 15, 2010)

We are just biding time........waiting for the "black swan" event that will bring down the financial house of cards.

The dust from the damage of the last derivatives crash was still rising..........when investment banks started creating new complex financial structures. Nobody understands them.......but they fill the investment banks with profits and that is all that matters to them.

Trillions of dollars spent.......trillions of dollars lost by the middle class.......and the same things are being done all over again.

Subprime is back after a short vacation.........mortgage backed derivatives never left town........and the government still absorbs the risk.


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## HaroldCrump (Jun 10, 2009)

andrewf said:


> If everyone is trying to save money you run into the paradox of thrift.


You seriously consider the paradox of thrift a risk in this day & age?
We are nowhere even close to hitting the paradox of thrift.

BTW, the paradox of thrift is a self-resolving condition.
Secondly, the paradox of thrift is one of those textbook concepts like _perfect competition_ - it exists only in textbooks, never in reality.
We have never, in the history of market economics, ever run into the paradox of thrift.

Anyhow, in this day & age of highly leveraged consumers, governments, and economies, there is no risk of running into the paradox of thrift.



> You need to disincentivize excessive saving, and you do that with financial repression.


Where is the saving?
On what basis are you saying that there is excessive saving?
There would have been excessive saving if consumer debt levels were zero, government deficits and debts were near zero, etc.

If you are citing low interest rates as evidence of excessive saving, that is not true.
Take out the central bank action, take out the FOMC-style manipulation, and then let us see what the true cost of money (i.e. interest rate) is.

It is now a known fact that all the 5 major global money center banks, along with the Bank of England, colluded to arbitrarily lower the LIBOR in the post financial crisis days.
Q/E and LSAPs are suppressing the normal functioning of the long-term bond yields.

Long term bond yields are perhaps the _single most effective_ indicator of systemic risk, and a key capital allocation tool.
Q/E is causing massive misallocation of capital.



> You never really seem to acknowledge that the tight monetary policy you are advocating means skinhead mobs in the street and twenty percent unemployment like in Greece. What do you think your alternate universe of tight monetary policy would look like?


The Eurozone does not have "tight" monetary policy.
The Eurozone have 0 deposit rates, and negative overnight rates.
They have not printed Euros to the same extent as the US Fed has printed USDs, but they _have_ increased the stock of money supply to bail out the Eurozone banks.
The ECB has engaged in massive swap deals with major Spanish, French, Italian, and Portuguese banks to swap their defunct ABCPs and CDOs in exchange for squeaky clean Euros.

The Greek riots, etc. is what _loose_ monetary policy looks like.

Secondly, on what basis is Q/E, ZIRP etc. _loose_, and normal, market driven interest rates _tight_ monetary policy?
It is only from the perspective of speculators and investment banks that these policies are _loose_.
From the perspective of individuals, households, and small businesses suffering under financial repression, these policies are _tight_.

The central banks have way overstepped their original purposes as lenders of last resort (admittedly with legislative support, of course).
It is one thing to provide overnight loans, set deposit ratios etc.
But it is quite another thing to suppress the functioning of the global monetary system in collusion with each other.

Long term bond yields, as well as relative exchange rates between various key global currencies, are very important risk indicators.
Those indicators have been suppressed and manipulated, leading to unreliable risk indicators and signals.


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## lonewolf (Jun 12, 2012)

Can the fed really effect interest rates ? The baby boomers are past peak spending they are more concerned now with saving for retirement. When they were borrowing money to buy homes in the 80s the demand for loans pushed interest rates higher. Now they want to collect interest for retirement which pushes interest rates lower. The next cycle of rising interest rates might not be from increase in confidence but a decrease in confidence of the borrower to pay back the IOU. The market will demand a higher reward if the confidence in the borrowers ability to pay back is lower. In the recent past higher confidence often pushed interest rates higher as people took out loans when they felt confident in their ability to pay them back. Now high confidence is pushing interest rates lower as the baby boomers expect to get paid back the IOUs.


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## cheech10 (Dec 31, 2010)

Don't confuse the fed rate with bond rates. The fed rate is what is charged between banks on their balances at the fed, and the fed has wide latitude in setting this. Bond rates are determined by the market, and only have a tenuous link to the fed rate. This is why the argument that the fed (or other central bank) will keep rates low to prop up real estate values is flawed: mortgage rates are tied to bond rates, not the fed overnight rate.


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## HaroldCrump (Jun 10, 2009)

cheech10 said:


> Don't confuse the fed rate with bond rates. The fed rate is what is charged between banks on their balances at the fed, and the fed has wide latitude in setting this. Bond rates are determined by the market, and only have a tenuous link to the fed rate. This is why the argument that the fed (or other central bank) will keep rates low to prop up real estate values is flawed: mortgage rates are tied to bond rates, not the fed overnight rate.


The Fed is directly affecting bond rates via quantitative easing, Twist, forward guidance, etc.
These are all ways to directly and indirectly influencing/jawboning the bond market.
The arguments that central banks everywhere are not propping up their respective real estate markets is to live in denial.


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