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Inflation or Deflation?

by dvduval
58 replies
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I subscribe to a newsletter by John Mauldin that I always find to be an informative read. Lately, we have been hearing people complain the fed is "printing money", and that this is going to lead to wild inflation. But most people now seem to be worried more about deflation, though Merril Lynch still warned last year we would see inflation starting by the end of 2010.

Much of these "inflation hawks" rely on some work by economist Milton Friedman who many of the "supply side" economists of the Reagan era studied, and created "trickle down" economics.

On the flip side, what is often considered the opposite of "supply side" is "demand side" economics which says you can't have inflation without sufficient demand. Unemployment is thought to be a major factor in loss of demand, and most inflation has historically been during times of low unemployment. The exception being manipulation of commodities such as oil when we saw $140 oil recently, and oil shortages in the 70s which helped fuel the belief in "supply side" economics.

Here is a quote from the newsletter:

In 2008, when the fed purchased all manner of securities, to the tune of about $1.2 trillion, the fed was not "printing money". Bank deposits at the fed exploded to the upside, the monetary base rose from $800 billion to $2.1 trillion, yet no money was "printed". Deposits did not rise, loans were not made, income was not lifted, and output did not surge.
I personally believe only the monetary base has been increased. The fed has not printed more money. There is not a specter of increasing demand that would fuel inflation, and the "inflation hawks" are severely misguided.
#deflation #inflation
  • Profile picture of the author Daniel Brock
    Have you seen the Iraq/Afgan war debt?

    I'm pretty sure that that number doesn't even exist its so big.

    I'd bet the country isnt even worth close to that amount.
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  • Profile picture of the author dvduval
    Originally Posted by Ken_Caudill View Post

    The problem with your argument is that you take the phrase "printing money" literally. When the monetary base is nearly tripled with no increase in real wealth, it can do nothing but devalue the currency. When your dollar is worth less, prices will rise.
    Monetary base is NOT wealth. If anything, banks and other entities are unwilling to put money into circulation because there is no demand. There is also the "shadow inventory" that they fear will drain their balance sheets even more. They are keeping the money on the sidelines (but they don't have any more of it, more likely less accounting for shadow inventory). Credit is not being extended. Capacity is not being increased. Salaries are not rising. Jobs are not increasing. These are all NEGATIVE factors to circulation of money.

    The kicker, home prices have already deflated considerably. There is LESS money in the system. Increasing the monetary base is just a means of trying (albeit unsuccessfully) to get banks loaning to small businesses and home buyers again. But even with record low mortgage rates, new home sales are at lows not seen in generations, and the percentage of Americans working (and creating production capacity) is at a low not seen in generations.

    You could increase the monetary base another trillion dollars, but that would still not increase demand. Jobs will increase demand. Demand is what makes people complete for a limited supply of widgets. Its not there and we are not heading into inflation anytime soon.
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    • Profile picture of the author Eric Louviere
      Oh how I would love nothing more than to REALLY get into this thread... as others would too I'm guessing. This is a very facinating topic IMO but dangerous because of politics.

      I try to understand economics, and I too follow journals, trends, etc when it comes to the economy and such. It takes a lot of my brain power as I try to wrap my brain around all of this... but I still have my opinions already.

      US bails out banks.

      Banks end up stimulating nothing. They sure did not give out more loans... or fuel the small businesses... or issue more credit. At same time, credit goes down and people have less of it. People spend less. Small business owners struggle, cut jobs. Less jobs. Less money. Less credit.

      However, fed spending goes through the roof! Record level spending. Spending everywhere. Who's to pay for it all? Raise taxes? Then, small businesses cut even more jobs to make up for increased taxes... even less jobs now. even less money now. even less credit now. Raising taxes?

      To me, but I'm biased obviously, fuel the small businesses in the US and you fuel the economy. Maybe instead of bailing out the banks, bail out the small businesses who provide all the jobs. More jobs. more money. more credit.

      Am I making it too simple?

      You know what they say about simple solutions...



      Anyway, I'm a marketer not an economic genius, so have no idea. I say increase your skills at all costs so your earning capabilities are high and in demand... and you become more valuable than others who are also out of a job, money and credit.

      Eric
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      • Profile picture of the author Stephen @ ClickMonkey
        Originally Posted by Eric Louviere View Post

        Oh how I would love nothing more than to REALLY get into this thread... as others would too I'm guessing. This is a very facinating topic IMO but dangerous because of politics.
        You read my mind!

        I feel the same way, Eric!

        . . .

        Generally speaking....

        As someone who enjoys testing a bunch of stuff in obscure weirdo markets, I recently had a site created for me called...

        Hyperinflation Survival Secrets... Those Who Fail To Prepare, Plan To Fail!

        [SIDENOTE: The intent behind my sharing the site (which can easily be found on Google if 'hyperinflation survival secrets' is used as the search query) isn't to try and drum up sales for the little report that the site sells, but instead, to back up my claim of being someone who really does enjoy testing stuff!]

        What I did was send out an e-mail broadcast to a list of friends (my preferred way of referring to leads) who had signed up for a newsletter about stocks and the economy.

        My message latched on to a news headline related to the high price of gold, and then led the reader on a journey towards understanding what the high price of gold might be suggesting about the threat of inflation.

        This provided a great opportunity to mention the Hyperinflation Survival Secrets website, and sure enough, the site generated sales!

        Here's what I learned from this experiment:

        My friends might have thought it slightly weird of me to drop a link in their face for a site that talked about hyperinflation if I hadn't given them a reason for why I was mentioning it.

        By drawing on material that was in the news about gold, I created a more legitimate pretext for raising the subject of inflation. To play it safe (and smart), I completely avoided any kind of political overtones. I instead put the focus on the high price of gold, and asked my friends to think along with me about what that could possibly be suggesting about inflation.

        The website itself would probably cause most copywriters to fall over with laughter, but it did generate sales. My pre-selling approach probably helped, but who knows. I'll return to the site and tweak the headline and perhaps send my friends another e-mail.

        . . .

        Eric, it just occurred to me that there might even be an opportunity for a website that talks about the risks and dangers of deflation! Play both sides of the argument, and win either way! LOL
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        • Profile picture of the author dvduval
          Originally Posted by Stephen @ ClickMonkey View Post


          My message latched on to a news headline related to the high price of gold, and then led the reader on a journey towards understanding what the high price of gold might be suggesting about the threat of inflation.
          Gold is a commodity. So is oil. You can always have inflation of a commodity even in the face of deflation. For example, a shortage of food can drive up food prices, while home prices and jobs are in the tank in a deflating economy. And if you look at who actually has the gold reserves, its not the mom and pop investor. In the case of gold, you'll see big swings in the price, as say a large country goes on a buying spree. But gold has little bearing on job creation or credit creation which would be much more closely aligned with inflation.
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    • Profile picture of the author Kurt
      Originally Posted by Ken_Caudill View Post

      Additionally, I will say that recent macroeconomic developments have been easy to understand. People bought homes they couldn't afford with the blessing of government officials. This was encouraged by the likes of Fannie Mae and Freddie Mac, and a Federal Reserve in love with a cheap-credit policy.
      I just watched a news report day before yesterday that says the default rate is higher for homes over $1.2 million than for homes below $750,000 (?). BTW, the lower number is the limit for loans covered by the Feds.

      It's actually the wealthy that are defaulting at a higher rate due to them not paying their mortgages because they are now bad investments.
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    • Profile picture of the author dvduval
      Originally Posted by Ken_Caudill View Post

      The increase in the monetary base was to prop up property prices and keep banks solvent.
      Yes, basically what we did was say that we would not allow a megabank to fail. Meanwhile those same megabanks are borrowing from the US taxpayers at a near defaltionary rate (just above zero), and then refusing to extend credit. The combination of keeping zero interest rates, and no credit being extended, are both deflationary in effect.

      We are in what is known as a Liquidity Trap because we can't raise interest rates, because that will push down credit even more in the form of fewer business and home loans, taking more money out of the system (deflation).

      So it is the megabank that stands between the US taxpayer and deflation. For this reason I would support breaking up big banks, and raising taxes on the top 10% so we can pump more liquidity into the system to get loans to small businesses flowing again. You can cut costs in the government as much as you want, but it doesn't solve the liquidity trap. Breaking up the big banks, and then getting and using the liquidity appropriately would solve it.

      And when I say "small businesses" I mean businesses somewhere in the neighborhood of 1-100 employees (ex. you and me).
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    • Profile picture of the author TLTheLiberator
      Originally Posted by Ken_Caudill View Post

      The increase in the monetary base was to prop up property prices and keep banks solvent. It's much simpler than you let on. I received this newsletter this morning:

      Economics is Easy.

      "The truth is that economics is so hard for Kartik Athreya because he is trying to do the impossible."

      I stumbled across an interesting article a few days ago. Written by Kartik Athreya, of the Federal Reserve Bank of Richmond, the article is titled "Economics is Hard. Don't Let Bloggers Tell You Otherwise."
      The abstract of the paper declares,
      In this essay, I argue that neither non-economist bloggers, nor economists who portray economics -- especially macroeconomic policy -- as a simple enterprise with clear conclusions, are likely to contibute [sic] any insight to discussion of economics and, as a result, should be ignored by an open-minded lay public.
      To start, I might propose that the open-minded public ignore economists and organizations that are unable to run a spell-checker over the word "contribute."
      But that takes me away from the issue.
      If by "hard" Athreya means that economic concepts, and results, are sometimes counterintuitive, then I can agree. Examples include the following:
      • Giving the poor cash payments will result in fewer poor people -- False.
      • Or, setting limits on rent prices will make housing, overall, more affordable -- Also false.
      But that is not what Athreya means. He means that economics is so scientific and complex that the untrained economist (or a trained economist who simplifies the explanation or policy result) has nothing meaningful to contribute.
      He continues in discussing the public commentary, or lack thereof, that took place after the Tsunami in East Asia and the earthquake in Haiti:
      Everyone understands that seismology is probably hard enough that one probably has little useful to say without first getting a PhD in it. The key is that macroeconomics, which involves aggregating the actions of millions to generate outcomes, where the constituents pieces are human beings, is probably every bit as hard. This is a message that would-be commentators just have to learn to accept. For my part, seventeen years after my first PhD coursework, I still feel ill at ease with my grasp of many issues, and I am fairly confident that this is not just a question of limited intellect.
      The truth is that economics is so hard for Kartik Athreya because he is trying to do the impossible. He still feels ill at ease in his profession, after seventeen years, because he is trying to explain the economic aggregates of entire states and nations with the tools he learned in Calculus III, Econometrics II, and Linear Algebra I.
      This all reminds me of the scathing critique that Nassim Nicholas Taleb leveled in his book The Black Swan about the infiltration and paralyzing reality that rationality became to the world of mainstream economics:
      It involves complicated mathematics and thus raises a barrier to entry by non-mathematically trained scholars. I would not be the first to say that this optimization set back social science by reducing it from the intellectual and reflective discipline that it was becoming to an attempt at an "exact science." By "exact science," I mean a second-rate engineering problem for those who want to pretend that they are in the physics department -- so-called physics envy. In other words, an intellectual fraud. (p. 184)
      $3.00 $2.50


      For a short explanation on the limits of macroeconomics, I recommend reading "The Limits of Macroeconomics" by Roger Garrison.
      For a slightly longer one, I recommend a quick reread of Human Action by Mises himself.
      Additionally, I will say that recent macroeconomic developments have been easy to understand. People bought homes they couldn't afford with the blessing of government officials. This was encouraged by the likes of Fannie Mae and Freddie Mac, and a Federal Reserve in love with a cheap-credit policy. Now, it is all being made worse by increasing regulations, higher taxes, fiscal interventions, and unneeded bailouts.
      Meanwhile, I will continue to repeat that all people will be made better off in the long run by lowering taxes, easing regulations, stopping fiscal-policy interventions, and not giving the state the power to print fiat money.
      And Kartik Athreya can go on making "quality" contributions to macroeconomics by recalculating the fiscal multiplier, mathematically tweaking the Phillips Curve, and taking integrals under the IS-LM curves.
      Sterling T. Terrell is an economist and writer living outside of San Antonio, TX. Send him mail. See Sterling T. Terrell's article archives.


      Originally Posted by Ken_Caudill View Post

      Additionally, I will say that recent macroeconomic developments have been easy to understand.

      People bought homes they couldn't afford with the blessing of government officials.

      This was encouraged by the likes of Fannie Mae and Freddie Mac, and a Federal Reserve in love with a cheap-credit policy.
      Dude,

      You forgot the mention a few other major, major, major players in the mortgage drama that lead to the FC2008 also known as the Great Recession.

      - The Banks:

      - The Investment Houses:

      - The Hedge Funds:

      - The highly leveraged derivatives: ( the big dog on the block )

      Leaving these players out of the equation is like leaving Babe Ruth out of conversions about the greatest home run hitters of all time.


      TL
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  • Profile picture of the author dvduval
    Actually, helping small businesses is something Ben Bernanke spoke about yesterday, and many economists agree on. I think a common misconception is that when politicians refer to "small businesses" they really mean "big businesses", and the small businesses get little or nothing. That is certainly the situation right now. To make matters more confusing, during the housing boom, a large majority of so called "small businesses" were simply real estate investors that were flipping properties (but adding little or nothing to production capacity for our nation).

    It's time to get back to helping the REAL small businesses, such as people on this forum. And hopefully, people will truly think about how they can add value to society with great ideas that worthwhile to many.
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    • Profile picture of the author Eric Louviere
      Originally Posted by dvduval View Post

      Actually, helping small businesses is something Ben Bernanke spoke about yesterday, and many economists agree on. I think a common misconception is that when politicians refer to "small businesses" they really mean "big businesses", and the small businesses get little or nothing. That is certainly the situation right now. To make matters more confusing, during the housing boom, a large majority of so called "small businesses" were simply real estate investors that were flipping properties (but adding little or nothing to production capacity for our nation).

      It's time to get back to helping the REAL small businesses, such as people on this forum.
      Dass what I'm sayin'
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  • Profile picture of the author Groovystar
    I've read that deflation in the general market is a very, very bad sign for an economy. We seem to be heading there once again after what seemed like a possible reprieve earlier this year. At least that is what i have observed.
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  • Profile picture of the author efwebm
    I just know inflation is going to make my mortgage payment look a little smaller than it does now in ten years. Looking forward to that.
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    • Profile picture of the author dvduval
      Originally Posted by efwebm View Post

      I just know inflation is going to make my mortgage payment look a little smaller than it does now in ten years. Looking forward to that.
      I hope you are right, but when deflation sets in it can be very difficult to get out. What happens you have people arguing about austerity and others trying to use stimulus, and doing neither effectively. This is what happened for over a decade in Japan in the 90s.
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      • Profile picture of the author ExRat
        Hi,

        Some would suggest that 'they' are just creating and manipulating, then leveraging off and speculating on artificial bubbles and the associated peaks and troughs of a financial framework that was fundamentally and deliberately flawed, weighted and manipulable from the start.

        Some also suggest that 'they' haven't printed much money, but instead press a button on a computer keyboard.

        'They' are obviously only interested in shifting the balance of power in their favour so that 'they' can turn that wealth and power into favourable benefits relating to their lifestyle, those of their cohorts and possibly their siblings.

        Some would also suggest that much of what we are presented with and therefore what is likely to be discussed here is in truth a meaningless and entirely fabricated smokescreen/diversion created by 'them'. Based on this last suggestion, I find it helpful to start out by asking myself - 'what if all of these things* were of this ilk?'

        Examples of these things* - inflation, recession, market cycle etc

        You could take the slightly cynical view that a good analogy is an online casino where someone plays against virtual (non human) players representing the casino and regardless of how much they learn tactics, theories and convince themselves that it's a game of chance and that by learning those things it gives them an edge, it's actually not and it's controlled and weighted by the casino to their ultimate advantage and the things that they learn are actually distracting them to the extent that they are trying to win an unwinnable game.

        And to complete the analogy, even though they hide themselves as the source, it's the casino (in disguise) that is creating and distributing the manuals about the tactics and theory with the main intention of distracting and making the victim believe that by learning them he is equipping himself as best as he can.

        Perhaps he should be wading straight past the distractions and concentrating on the other player's real game because that's the only way for him to have a chance of an edge.
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  • Profile picture of the author Paul Hancox
    Deflation.

    It would only be inflation if the Fed "printed" AND put that money into the hands of THE PEOPLE.

    Who actually got the last lot of printing?

    I don't think it was "the people".

    Prices aren't going to rise if people don't have the MONEY to pay for the stuff.

    So I think it critically depends on where the "printed" money goes.
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    • Profile picture of the author bestoptimized
      Originally Posted by Paul Hancox View Post

      It would only be inflation if the Fed "printed" AND put that money into the hands of THE PEOPLE.

      Who actually got the last lot of printing?

      I don't think it was "the people".
      What do you think the companies the got the money did with it? They spend it and if they spend it then at least some of it would get down to the people albeit not directly.

      Obviously "the people" got some of the money. Cash for clunkers, car company bailouts, unemployment benefits, war in iraq/afghanistan, the thoudands of stupid projects that the Government is spending money on, even with the bank bailouts some of the money probably got into the money supply. The $787 billion stimulus bill largely made it into to the money supply. The stimulus to the banks largely didn't. Inflation happens when people lose confidence in the currency, not necessarily when the money supply grows fast (although that is what usually causes the loss of confidence in teh currency).

      The National Inflation Association believes that we are headed for inflation. The have an interesting video about it. I think they are right. In the near term (next few months) we may have some deflationary pricing but the government spending is going to catch up with us eventually (probably in the next year or two).

      Originally Posted by Paul Hancox View Post

      Prices aren't going to rise if people don't have the MONEY to pay for the stuff.
      Well, when there is high inflation stores will not be able to sell their products for the lower prices even if people can't afford them at the higher prices. They have to be able to make a profit. If they can't they will go under.
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      • Profile picture of the author dvduval
        Originally Posted by bestoptimized View Post

        Obviously "the people" got some of the money. Cash for clunkers, car company bailouts, unemployment benefits, war in iraq/afghanistan, the thoudands of stupid projects that the Government is spending money on, even with the bank bailouts some of the money probably got into the money supply. The $787 billion stimulus bill largely made it into to the money supply. The stimulus to the banks largely didn't. Inflation happens when people lose confidence in the currency, not necessarily when the money supply grows fast (although that is what usually causes the loss of confidence in teh currency).
        No, the most common measure, the M2 money supply, has slowed its growth to numbers not seen in a long time, and the stimulus probably helped to flatten the fall. As banks have stopped lending to small businesses, and the number of people working has decreased (etc), the money supply has continued to shrink, and is on the verge of being so low that we have deflation. And that's just it: when there is no "demand" for the "supply" of the money, because our economy is neither being stimulated by the government, businesses or consumers (the three things that make up GDP).
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  • Profile picture of the author dvduval
    Yes, good point, and 80% of Americans have about 7% of the financial wealth. This has been steadily getting worse since highest tax bracket went from 70% to 28% back in the eighties.
    Who Rules America: Wealth, Income, and Power
    So I suppose one might conclude that just 7% of the "printed money" is making it to 80% of Americans. As we start to cut unemployment benefits and state and local governments start to implement austerity measures, that 7% is heading down some more. Imagine what a difference it would be in people's lives if 80% of Americans held double what they have now or 14% of the wealth.
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  • Profile picture of the author Marhelper
    We are on the upside of a deflationary period and going to pay the piper (inflation) in the oncoming years. You have to pay up one way or another (many politicians are aware of this and maddeningly are ok with our kids and grand kids taking on the effects of mismanagement).
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    • Profile picture of the author dvduval
      Originally Posted by Marhelper View Post

      We are on the upside of a deflationary period and going to pay the piper (inflation) in the oncoming years. You have to pay up one way or another (many politicians are aware of this and maddeningly are ok with our kids and grand kids taking on the effects of mismanagement).
      Inflation of 2-5% is normal in a healthy economy. When an economy is really stimulated (ex. doing very well), inflation tends to increase, especially if unemployment is now. After the great depression, we had a couple of years of double digit inflation, but that was as we were finally coming out of the depression (and deflation).

      Now in terms of what caused this recession, and what caused the great depression, look no further than our tax stucture
      dshort.com: Federal Debt-to-GDP
      In the 1980s we went from the highest tax bracket at 70% to the highest at 28%. No way that is not going to cause a massive shock to the system (such an abrupt change). As a matter of fact, it did!
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      • Profile picture of the author ryjo
        Originally Posted by dvduval View Post

        Inflation of 2-5% is normal in a healthy economy. When an economy is really stimulated (ex. doing very well), inflation tends to increase, especially if unemployment is now. After the great depression, we had a couple of years of double digit inflation, but that was as we were finally coming out of the depression (and deflation).

        Now in terms of what caused this recession, and what caused the great depression, look no further than our tax stucture
        dshort.com: Federal Debt-to-GDP
        In the 1980s we went from the highest tax bracket at 70% to the highest at 28%. No way that is not going to cause a massive shock to the system (such an abrupt change). As a matter of fact, it did!
        Regan's economics in the 80s....his policies in my opinion got us out of stagflation....The economy is really interesting to me and wish I could figure it out.....In 10 years a lot of us will look back and understand it better and realize if we did a few things we could have profited from it...

        Deflation is happening now with so much debt on the average household people are spending less money and causes the economy to slow. I think the economy will actually do better once people pay off debt or go bankrupt to free up some expendable income....If we let more of the homes be foreclosed on and not postponing the pain....we will create more affordable housing and not artificial affordable housing with mortgage mods. This in turn would lower rent because more renters then rent would be lower and people could start spending more of their expendable income.....If we keep avoiding the pain the longer we will have deflation.

        But I own and live in a duplex....so keep the rent artificially high will help me in the short term I guess.
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  • Profile picture of the author MichaelHiles
    Ammo, the new currency. I have many, many rounds.
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  • Profile picture of the author AylaPress
    Stagflation
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  • Profile picture of the author Lawrh
    Seems bizarre to even consider inflation or deflation when fractional reserve banking exists. No one "prints" money. It is created out of thin air by banks. Deposit $1000, the banks books will show it as $8000. Then they loan this "money" and charge interest.

    Ban fractional reserve banking, make illegal privately owned central banks. Make government treasuries the sole control of the money supply. No more inflation or deflation.
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    • Profile picture of the author HeySal
      Originally Posted by Lawrh View Post

      Seems bizarre to even consider inflation or deflation when fractional reserve banking exists. No one "prints" money. It is created out of thin air by banks. Deposit $1000, the banks books will show it as $8000. Then they loan this "money" and charge interest.

      Ban fractional reserve banking, make illegal privately owned central banks. Make government treasuries the sole control of the money supply. No more inflation or deflation.
      You forgot one thing -- bring back metal backed currency and we will solve the whole nightmare that has been caused by the fiat money system.

      Oops. Um....there seems to be a BIG problem with that, though doesn't there. Wonder what it could be. It will be interesting to see how long it will be before they admit that Ft. Knox has been looted and we have NO METAL in there any more. Gee, wonder why none of the MSM has caught that one yet?

      Curiouser and Curiouser.
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      • Profile picture of the author dvduval
        Originally Posted by HeySal View Post

        You forgot one thing -- bring back metal backed currency and we will solve the whole nightmare that has been caused by the fiat money system.

        Oops. Um....there seems to be a BIG problem with that, though doesn't there. Wonder what it could be. It will be interesting to see how long it will be before they admit that Ft. Knox has been looted and we have NO METAL in there any more. Gee, wonder why none of the MSM has caught that one yet?

        Curiouser and Curiouser.
        Then we would have currency based on a limited resource. But its not actually a choice that could be easily made regardless of your desire to have such a law or practice, because banks all over the World use currency that is increasingly diversified. As we have seen with oil, commodities can be easily manipulated. This could introduce some crazy swings that would be nearly impossible to predict or control. Granted there are plenty of problems in the current system, going to a gold standard is not something likely to happen regardless of your desire to change the whole setup.
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  • Profile picture of the author johngate2100
    This is a fact when Money is over printed then it will lead to inflation.This is a common concept of Economics.
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    • Profile picture of the author dvduval
      Originally Posted by johngate2100 View Post

      This is a fact when Money is over printed then it will lead to inflation.This is a common concept of Economics.
      Right, and we do not have more money printed now. There is less money in circulation. Credit is being extended less and we are arguably seeing deflation right now, and little or chance of inflation when there is no demand in the system to drive up prices.
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  • Profile picture of the author garyv
    Right now we're borrowing money from China hand over fist. That's where the "printing money" comes from. And because we also buy a majority of our products from china, we're put into a predicament where our money is now worth not as much to them because we owe them so much. So in turn they'll start raising their prices to recoup the debt, and in turn we'll have to of course raise our prices.

    There's no way that you can predict anything but pure pain and inflation in the future. - Unless we go to war w/ China, and I don't see that happening.
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    • Profile picture of the author dvduval
      Originally Posted by garyv View Post

      Right now we're borrowing money from China hand over fist. That's where the "printing money" comes from. And because we also buy a majority of our products from china, we're put into a predicament where our money is now worth not as much to them because we owe them so much. So in turn they'll start raising their prices to recoup the debt, and in turn we'll have to of course raise our prices.

      There's no way that you can predict anything but pure pain and inflation in the future. - Unless we go to war w/ China, and I don't see that happening.
      China would actually be a much better case for hyper inflation (in China!). They are faced with growth they can't control, so of late they are starting to tighten lending standards (reducing how much can be borrowed). They also have a middle class that they are trying to get to develop so they won't have to depend on exports as much, because both Europe and the United States have less demand in the face of recession.

      It would be a lot easier for us to stop buying junk we don't need than for China layoff millions. If that trend started to happen we would get more jobs, more demand, and would welcome some inflation, because it would be based on demand for goods we made here in the United States.

      And of course if China slows their lending, that means a reduction in the "printed money" in circulation. The only way to get the opposite (inflationary) would be if China actually started lending us even more. I don't see an easy way for that to happen. So in the case of China, this is also a possible source of deflation for the United States.

      China also recently increased their currency (slightly) against ours making our dollar worth slightly more (deflationary).
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  • Profile picture of the author garyv
    Oh no, the China scenario is nothing but an inflationary one. Because if they go through a hyperinflationary period, then so do we. Because all of our products come from them. We don't have the capacity here anymore to ramp up production fast enough to combat a hyperinflaion scenario from China. So we'd be in it w/ them - probably even worse for us.
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    • Profile picture of the author dvduval
      Originally Posted by garyv View Post

      Oh no, the China scenario is nothing but an inflationary one. Because if they go through a hyperinflationary period, then so do we. Because all of our products come from them. We don't have the capacity here anymore to ramp up production fast enough to combat a hyperinflaion scenario from China. So we'd be in it w/ them - probably even worse for us.
      Right now we get about $25 Billion/month from China and send them about $7 Billion/month in our goods. While it is a significant amount of money, it is hardly something that will cause hyperinflation. Things like housing, food, and energy are enormously bigger than imports from China. Chinese goods are about 2% of GDP, so even a big price ajustment there would only affect us so much, and some of that inflation would be offset by more jobs and products coming from the United States.
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      • Profile picture of the author garyv
        Originally Posted by dvduval View Post

        Right now we get about $25 Billion/month from China and send them about $7 Billion/month in our goods. While it is a significant amount of money, it is hardly something that will cause hyperinflation. Things like housing, food, and energy are enormously bigger than imports from China. Chinese goods are about 2% of GDP, so even a big price ajustment there would only affect us so much, and some of that inflation would be offset by more jobs and products coming from the United States.
        Hyperinflation is a chain reaction that only needs one trigger. And our Chinese imports are definitely big enough to trigger it. Our Chinese imports infiltrate almost everything here.
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      • Profile picture of the author derekwong28
        Originally Posted by dvduval View Post

        Right now we get about $25 Billion/month from China and send them about $7 Billion/month in our goods. While it is a significant amount of money, it is hardly something that will cause hyperinflation. Things like housing, food, and energy are enormously bigger than imports from China. Chinese goods are about 2% of GDP, so even a big price ajustment there would only affect us so much, and some of that inflation would be offset by more jobs and products coming from the United States.
        I don't think that things are as simple as these figures suggest. Living in Hong Kong, the inflation picture from China is definitely very worrying. With government backing, there is intense pressue to raise wages dramatically at the moment. Foxconn, the main subcontractor for Apple, Dell, and HP had just almost doubled their wages. There is also an acute labour shortage and so the chips are on the worker's side. The size of the stimulus is actually much higher in China than in the US in absolute and also relative terms. Unlike the US, their banks have been forced to land and this had led to a real estate bubble and also other unncessary investment. In Hong Kong, Chinese buyers are snapping up multi-million dollar properties as if there were going to buy vegetables at the market. This has now got to the point that most Hong Kongers are sick and horrified at our high real estate prices and want a clampdown.

        For a start, a lot more countries than the US depend on trade with China e.g. Japan, Korea, and Australia. In fact, the US is not even China's biggest trade partner. If China exports inflation to these countries, their inflation will also be exported to the US.

        China is now the main determinant of most commodity prices including oil. It can easily push up these prices dramatically unless its economy slows down.

        There is intense pressure on China to appreciate its currency. If this occurs, a large number of other currencies in the emerging markets will be forced to appreciate at the same time. Perhaps this is the real aim of the Obama administration. Increasing US imports to China will not be enough, it wants to increase exports to all other countries and forcing the Yuan to appreciate is one way to do it.

        Instead of investing in US bonds, China could spend its money in the US such as buying real estate and other assets that could cause inflation in the US.


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        • Profile picture of the author dvduval
          Originally Posted by derekwong28 View Post

          There is intense pressure on China to appreciate its currency. If this occurs, a large number of other currencies in the emerging markets will be forced to appreciate at the same time. Perhaps this is the real aim of the Obama administration. Increasing US imports to China will not be enough, it wants to increase exports to all other countries and forcing the Yuan to appreciate is one way to do it.

          Instead of investing in US bonds, China could spend its money in the US such as buying real estate and other assets that could cause inflation in the US.


          Derek
          Both currency appreciation in China, and the Chinese spending more money in the United States would be positive toward job growth in the United States. These are both things that would bring balance to the current imbalance. Right now, we are totally opposite the scenario you outline, and moving toward the other direction would be an improvement. It is far too early to predict the improvement would go too far in the other direction. That's kind of like saying be careful about creating too many jobs, because jobs lead to inflation. First we need jobs, and to improve the imbalance, and that I welcome.
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  • Profile picture of the author rondo
    Speaking of US housing, check out this graph on upcoming mortgage rate resets:

    Add in high unemployment and you've got much more pain to come in the next couple of years.


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  • Profile picture of the author seasoned
    Let me shoot down your demand side economics by sheer logic. On manufactured goods, there are a LOT of costs that are sky high. How much do you think it costs to make a $15,000 car, for example? It could cost MILLIONS! Between design, tooling, minimum orders, etc.... So if it costs $15million for raw supplies, tooling, etc... for 15,000 cars it may cost $1000/each, and $15,000 could pay for marketing, distribution, labor, etc... But if they only made one, it would certainly cost far more.

    Do you think amazon could have made money selling just one book, even if bezos were the only employee? Do you think UPS can REALLY deliver a package for a few dollars? They DON'T! It wouldn't even pay for the delivery guys time! They collect all the orders at a place, and route them so a guy that may distribute HUNDREDS of packages distributes them on his way.

    SO, if demand goes down, there comes a time where a company will HAVE to raise prices or go out of business. SURE, they can try lowering prices to INCREASE demand but, with a thing like UPS, there comes a point where it is clear that won't help.

    Basically there are THREE reasons for inflation...

    1. NEED Costs go up because demand is too LOW or materials costs, risks, regulations have gone up.
    2. REGULATION of demand because of supply.

    3. GREED because demand is too HIGH or desires of others down the line are too great

    Probably all three are in play at all times, but in differing degrees. OPEC is a case of #3, but they do #2 to maintain control and try to make it look legitimate. It also ensures that they can do it for a longer period. And "the FED" uses #1, and CLAIMS it is #2(They talk about money supply). AGAIN, they want to maintain control and make it look legitimate.

    BTW the money supply has been inflated for a LONG time. Heck, homes used to cost FAR less. Food did also. During the depression, prices DID go up! They have spoken a LOT about how inflation RAVAGED germany, one reason for YKW! Supposedly people were paid TWICE a day in germany so they could buy goods in the afternoon before the prices went up!

    ALSO,
    http://www.marketoracle.co.uk/Article19199.html
    Surely if there was one place on Earth where deflation should now be rampant as per the debt deleveraging deflationary academic and BlogosFear models than it should be in Greece ?

    Nope !

    Instead of Deflation the Greek Inflation rate has soared to CPI 3.9% for March 2010, against a low of CPI of 0.5% just 10 months ago in June 2009.

    Jan 2010 2.4%
    Feb 2010 2.8%
    Mar 2010 3.9%
    ANOTHER thing, is that the dollar was DESTROYED 3/9/1933!!!!!!! That was RIGHT after the depression! It only STARTED in 1929!

    Inflation During The Great Depression
    President Franklin D. Roosevelt was inaugurated on March 4, 1933. He came into office with a mandate and agenda to stop the Depression, and that meant breaking the back of the deflationary spiral. His actions were swift, beginning with a mandatory four day bank holiday imposed the day after his inauguration. Five days after Roosevelt took office, on March 9th, the Emergency Banking Relief Act was passed by Congress. This was the first in a series of executive orders and bills that would take place over the following weeks and year, and would cumulatively take the United States government off the gold standard – and would also effectively confiscate all investment gold from US citizens at a 41% mandatory discount.

    From 1900 to 1933, the US government had been on a gold standard, and had issued gold certificates. In a matter of days in March of 1933, there would be a radical change, a veritable 180 degree turn, that would not only repeal the gold standard, but effectively make the use of gold as money illegal in the United States.

    ...

    So when we say history “proves” something about a currency, we need to be very, very careful that we are talking apples and apples, rather than apples and oranges. For instance, when we look at precious metals backed currencies, the deflation of 1929 to 1933 when the US was on the gold standard was nothing new. It was just the latest development in the ongoing cycle of inflation and deflation that characterizes this type of currency. Indeed, there were four major deflations during the century before Roosevelt ended the domestic gold standard, and the deflations of 1839-1843 and 1869-1896 were each much larger than the deflation of 1929-1933, with the dollar deflating roughly 40% in each of those earlier major deflations. This deflationary history does not, however, reflect the value of the “dollar” (as we currently know it) bouncing up and down, but rather the value of the tangible assets securing the dollar bouncing up and down around a long term average.

    Going off the gold standard was nothing new either. Many nations have gone through periods, particularly during wars, when more money is needed than there is gold or silver to back it up. So, they issued symbolic (fiat) currencies that were backed only by the authority of the government, or debased the metals content of the coins. These fiat currencies almost always turned out badly. Instead of cycling up and down in value over time, they tended to go straight down and never come back up. While global monetary history is complex and long, it is highly, highly unusual for a symbolic currency to experience major and sustained deflation at the levels that are the norm with precious metals backed currencies.
    Basically, we now have what is known as a fiat currency. Basically "the FED"(NOT the federal government) and the G8(apparently SOON to be the G20, which will be FAR worse) determine the value of our currency, and the base for interest rates.

    Steve
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    • Profile picture of the author dvduval
      Originally Posted by seasoned View Post


      Basically there are THREE reasons for inflation...

      1. NEED Costs go up because demand is too LOW or materials costs, risks, regulations have gone up.
      2. REGULATION of demand because of supply.

      3. GREED because demand is too HIGH or desires of others down the line are too great
      When you do things like send jobs overseas, you are "regulating" supply of jobs and reducing the amount of money people have to spend (deflation). When you spill oil in the gulf, you are "regulating" supply of fish. When you create credit default swaps that pump credit into the system that is a lie, you are artificially creating inflation (that will deflate down the road). Regulating supply when that supply is a danger society only makes sense.

      And when we have a system built on short term investor satisfaction, we stop investing in the long term which includes Research and Development. When companies stop doing research (and they have compared to the past), America start to fall behind. Our workforce becomes less skilled, and jobs overseas become more worthwhile to pursue.

      Interestingly, when taxes are higher for the wealthy, they tend to invest for longer term gain. When they can avoid taxes by putting more into R&D, they take that path. In the Great Depression, a similar strategy change occurred, just as we saw people this time continuing to invest in CDS even after it was apparent they were a lie (irrational exuberance).

      But yes, you can especially "shoot down" my demand economics when inequality has worsened still more. There is always more demand in 3rd World countries for things like food and shelter. But I think what you fail to see is the source of the inequality. Hint: it is not Fed.

      Maybe one day you will understand why inequality exists and have a desire to change it, as well as realize that laws, government and regulation play a vital role in combating inequality. However, at this moment in our history we are plagued by lobbyists who are pulling a lot of strings in our government at our expense.

      Unfortunately, your "invisible hand theory" has been replaced by the "manipulated hand" (of government) where multinational corporations are running the government now. The sooner you see that, the better.

      (things like deciding on a gold standard would be something that has enough support at this moment. I'm not necessarily against it, but also don't see it as the source of the problem. Gold can still be in the hands of the few, and they can manipulate it.)
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  • Profile picture of the author seasoned
    Gee, I never spoke of an "invisible hand". I even mentioned two VISIBLE ones, opec and "the fed". But there ARE "invisible" ones, like dolphins apparently are suffering a LOT because of the "spill". If their numbers greatly decrease, tuna may become more expensive(EVEN if they WEREN'T affected by the spill) because fishermen probably use dolphins to locate yellow fin tuna(aka tuna), and regulations may be put into place to further protect dolphins.

    Ironically, that might HELP tuna because then albacore(aka white tuna) might actually be CHEAPER than regular tuna!

    There IS a reason why cars cost MORE than gas! Incidently, there is MORE demand for gas than for cars!

    And OF COURSE the wealthy are more likely to invest if merely investing saves them money. ADMIT IT, the poor do the SAME thing. And banks NEVER keep money! Why do you think bank runs are so bad? Ever see it's a wonderful life? Jimmy Stewart's character explains it so BEAUTIFULLY, when he tries to mitigate the bank run HE has! The same goes with invested money.

    A person invests in an IPO, and the money goes to the company and those that arranged the deal. A person invests when it ISN'T an IPO, and pays back the last investor and those that arranged the deal.

    And HEY, I was AGAINST things like NAFTA, GATT, ETC... I still am! AND, AGAIN, the fiat currency created THOSE problems TOO!

    BTW if we were on the gold standard, ALL would basically have GOLD! Dollar notes used to be redeemable at any bank for SILVER! They had SILVER coins! A $50 GOLD piece was worth and cost, SURPRISE, $50! Do you realize that the last $50 gold piece issued by the US was worth, at a bank/business, $50 and cost about $500!?!?!? TEN TIMES as much! INCREDIBLE! But THAT was when they came out. THIS PLACE http://www.tulving.com/bullion/gold_...ican_eagle.htm allows you to buy the $50 coins for only about $30 over spot! What a DEAL! Too bad spot is like $1200!

    Steve
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  • Profile picture of the author dvduval
    @Seasoned
    The version of the gold standard you refer to would mean the dissolution of all credit as we know it. It's easy to paint a picture that things would be rosy again by simply doing away with credit, but unfortunately that is never going to happen, because there will always be liquidity in the system whether that be health insurance or placing a deposit for an apartment, or borrowing for a house. It's the abuses that people do with credit that cause the problems.

    Now on the path to moving to a gold standard would be reducing debt. Normally, we would reduce debt during the good times, and increase debt during recession. In this case we increased debt during the good times (think Reagan years, and the last Bush administration). We did manage to balance the budget during the Clinton years. All that has happened is we reduced taxes on the wealthy but did not account for that reduction in the budget. Since the middle class saw their salaries stagnate, while inflation continued, of course they don't like taxes, and shouldn't pay anymore. The top 1% absolutely should.

    Even your path to this idealist gold standard, you'll have to deal with the existing debt throughout the World which has existed since at least the Middle Ages. It's hard for me to have an opinion on something like this when I know it in not going to happen.

    What we can do is address inequality. We have less demand because the middle class have less money (and home value), and the rich got a bailout, and paid out the biggest bonuses yet. Of there will be deflation when the middle class has less money to buy things. We've already had some.

    I won't bother responding about how the oil spill was good for something, except that maybe it will help people wake up and realize that corporations are taking a piss on the middle class and tempting them to get their money back through taxation and regulation.

    Finally, on supply side economics, the production capacity in the United States has steadily declined since taxes were lowered. In other words, we saw a decrease in our ability to create supply. It didn't trickle down. It trickled out and up.
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    • Profile picture of the author TimPhelan
      This is so simple but so many don't seem to understand. The biggest reason our debt has balloned in because of two things which weren't paid for: the tax cuts and the two wars.

      Originally Posted by dvduval View Post

      Normally, we would reduce debt during the good times, and increase debt during recession. In this case we increased debt during the good times (think Reagan years, and the last Bush administration). We did manage to balance the budget during the Clinton years. All that has happened is we reduced taxes on the wealthy but did not account for that reduction in the budget.
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      • Profile picture of the author TLTheLiberator
        Originally Posted by TimPhelan View Post

        This is so simple but so many don't seem to understand this. The biggest reason our debt has balloned in because of two thing which weren't paid for: the tax cuts and the two wars.

        The first round of national debt ballooning in the modern era was from 1980 until 1992.

        We went from about 300 bill in total debt - before 1980, to something like 4 trillion in the next 12 years.

        - It was a joint venture of 2 republican presidents and a democratic congress.

        - Tax Cuts and a massive increase in defense spending did the trick.

        - We were told that we could grow our way out of the debt.

        Democratic president Clinton and the republican house and senate ( since 1994 ) added another half trill, while proceeding to balance the budget in the final two years of the Clinton admin which in 2000...



        ...handed the Bush2 admin a 200 billion a year surplus and a basic outline to totally eliminate the national debt by 2020.



        This latest round of debt was a solo effort on the part of the republicans with a unusual combo of a republican president and a republican house and senate.

        That combo lasted until the midterms of 2006 when the dems reclaimed the house and senate.

        The Bush admin handed the next admin ( Obama ) a new debt total of around 10 trill.

        Exactly how the debt was generated is explained above by Tim.

        - I'll include the Medicare drug prescription bill as a big "unfunded" expenditure of the admin.





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      • Profile picture of the author Kurt
        Originally Posted by TimPhelan View Post

        This is so simple but so many don't seem to understand this. The biggest reason our debt has balloned in because of two thing which weren't paid for: the tax cuts and the two wars.

        Even Pat Buchanan realizes this. According to him, we spend a trillion a year on everything military related and he's pushing for reductions. He says there are between 700-1000 US bases around the World and we don't need to keep them all open.

        Not only were taxes cut during war time, the wars were never paid for and are being financed by borrowing from China.

        The problem is, some start crying "they're weakening our defense! They're weakening our defense!" and people buy this crap.

        Here's a quick history lesson:

        What do The Great Wall of China, William The Conqueror and the USSR all have in common? They all spent so much (or cost so much) that they bankrupted their countries.

        The Great Wall cost so much to build the Chinese couldn't even field an army a generation later and the Khans took over China for a few generations. As expensive as the Great Wall was in terms of lives and money, it was a total failure from a military point of view.

        We hear all about William the Conqueror and the Battle of Hastings...After winning the battle, William went on a castle building mission for the next 20 years and was so broke, he couldn't field an army to defend his kingdom.

        We won the Cold War by simply out spending the Soviets and the USSR failed because they spent too much on military and not enough on their people.

        I've given three very real examples of where spending too much on the military WEAKENS a country's defense. And after the USSR fell, we never quit spending, even though we have no real enemy.
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        • Profile picture of the author TLTheLiberator
          Originally Posted by Kurt View Post

          Even Pat Buchanan realizes this. According to him, we spend a trillion a year on everything military related and he's pushing for reductions. He says there are between 700-1000 US bases around the World and we don't need to keep them all open.

          Not only were taxes cut during war time, the wars were never paid for and are being financed by borrowing from China.

          The problem is, some start crying "they're weakening our defense! They're weakening our defense!" and people buy this crap.

          Here's a quick history lesson:

          What do The Great Wall of China, William The Conqueror and the USSR all have in common? They all spent so much (or cost so much) that they bankrupted their countries.

          The Great Wall cost so much to build the Chinese couldn't even field an army a generation later and the Khans took over China for a few generations. As expensive as the Great Wall was in terms of lives and money, it was a total failure from a military point of view.

          We hear all about William the Conqueror and the Battle of Hastings...After winning the battle, William went on a castle building mission for the next 20 years and was so broke, he couldn't field an army to defend his kingdom.

          We won the Cold War by simply out spending the Soviets and the USSR failed because they spent too much on military and not enough on their people.

          I've given three very real examples of where spending too much on the military WEAKENS a country's defense. And after the USSR fell, we never quit spending, even though we have no real enemy.
          I hear you Kurt!

          At the start of 2000 our defense budget was about 325 Billion.

          By the end of 2008 the DB was at least 600 Billion.

          I understand 9-11 and all that but from 300 to 600????

          and...

          It would be nice to close those unnecessary bases, bring most of those troops home so that they can spend the money here.


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  • Profile picture of the author seasoned
    The gold standard would simply make things right. Some group of IDIOTS suggested that BP should issue more stock, to pay for the "oil spill". That is ILLEGAL! UNLESS they monetize some previously NON monetized area, like convert a bond into stock, or do a stock split, which would NOT really give them ANY extra money, or have an IPO to EXPAND, they are simply NOT allowed to issue new stock! THAT is why they NEVER do! I mean THINK about it! If they COULD, companies in trouble could simply issue MORE stock, and be OUT of trouble! BTW a stock split changes the number of shares, but the owners get the same value! SO, if you have 100 shares at $30 each, and it splits 3:1, you get an extra 200 shares, but all 300 shares are now about $10 each. You end up with the same value.

    WELL, "the fed" basically does a stock split but THEY keep the new shares! So it is THEFT, and we end up with LESS value.

    Steve
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  • Profile picture of the author dvduval
    Steve, we probably agree on more than we disagree, especially as more and more is revealed, and hope that will be the case with more people like you and I.

    In the case of the fed "splitting" or printing money in the crisis, let me make an example.

    Suppose someone is smoking in their bedroom, and it starts a fire. Should we save the smoker and everyone else in the building? Or should we let the building burn down because the smoker is wrong in what they did?

    That is pretty much what happened with the banking crisis. After that, we wanted to make tougher standards for banks, and the lobbyists came in with a powerful argument that regulation is never good. We are going to have another building catch on fire without a doubt.

    And I just have to continue to affirm that a gold standard is not going to happen, but there are other great options on the table once people decide to wake up. Right now, the lobbyists have us pretty solidly. But one day people will wake up.

    And yes, absolutely BP can even declare bankruptcy after spinning off or selling off some of their business. That is probably a likely scenario. Then we end up with ZERO value. But under the current unregulated system, we'll be lucky to get one or two scapegoats, and probably nobody will ever go to prison or lose all their wealth as so many fisherman are doing now.

    As citizens we all know that we are being taken for a ride, but we are also all split on the solutions (partisan). Until we figure out how to come together, the lobbyists and the people at the top continue to win at our expense.
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    • Profile picture of the author seasoned
      Originally Posted by dvduval View Post

      Steve, we probably agree on more than we disagree, especially as more and more is revealed, and hope that will be the case with more people like you and I.
      You might be RIGHT!

      Originally Posted by dvduval View Post

      In the case of the fed "splitting" or printing money in the crisis, let me make an example.
      I used the terminology because it fit the example and shows the dishonesty, etc... And they say WALLSTREET is THE culprit, etc...

      Originally Posted by dvduval View Post

      Suppose someone is smoking in their bedroom, and it starts a fire. Should we save the smoker and everyone else in the building? Or should we let the building burn down because the smoker is wrong in what they did?
      WRONG example! If THEY own the building and only THEY get hurt, maybe we should let it burn down. HEY, the home won't be sold to an unexpecting NORMAL person!

      Originally Posted by dvduval View Post

      That is pretty much what happened with the banking crisis. After that, we wanted to make tougher standards for banks, and the lobbyists came in with a powerful argument that regulation is never good. We are going to have another building catch on fire without a doubt.
      Banking was DIFFERENT, as the persons CAUSING the problem were NOT the ones affected! We NEVER needed tougher standards! They were in place as of 1933! We needed to ENFORCE the rules made THEN! NOT avvoid enforcement, succumb to what they were to prevent, and then act SO SMART by trying to experiment with something almost GUARANTEED to FAIL!

      Originally Posted by dvduval View Post

      And I just have to continue to affirm that a gold standard is not going to happen, but there are other great options on the table once people decide to wake up. Right now, the lobbyists have us pretty solidly. But one day people will wake up.
      I know a gold standard won't happen because it is THE right thing to do. It would get rid of MILLIONS of "workers", and a LOT of "power", so they won't do it.

      Originally Posted by dvduval View Post

      And yes, absolutely BP can even declare bankruptcy after spinning off or selling off some of their business. That is probably a likely scenario. Then we end up with ZERO value. But under the current unregulated system, we'll be lucky to get one or two scapegoats, and probably nobody will ever go to prison or lose all their wealth as so many fisherman are doing now.
      Well, I am thinking one step below that! WHO CARES about the fishermen! THEY are having problems because the ENVIRONMENT is being destroyed! I worry for the ENVIRONMENT! The fishermen? Heck, pay them some money, it's worthless anyway. WHO CARES!? The ENVIRONMENT can't be put back even with all the money on the planet. The best we can hope for is a modest recovery. EVENTUALLY, after that recovery, the fishermen can go back to work.

      Originally Posted by dvduval View Post

      As citizens we all know that we are being taken for a ride, but we are also all split on the solutions (partisan). Until we figure out how to come together, the lobbyists and the people at the top continue to win at our expense.
      Well, as long as people just listen to talking points, it is impossible to really move forward at any kind of speed.

      Steve
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  • Profile picture of the author seasoned
    Well, I never heard of a lot of tax cuts, and when was the last time we had a 40+ year war!?!?!? HOW did we, or should I say how ARE we surviving!?!?!?

    Steve
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  • Profile picture of the author seasoned
    TL,

    The problem is, as I said about 11 years ago(BTW one of them I spoke about over 30 years ago, and I WAS JUST A KID!), just before I bought a home because I "KNEW" the government couldn't be so stupid....

    The interest rates were SO low, and the rules RIDICULOUS, that foreclosures were almost ASSURED! I mean 0-.25 to start? ARE YOU KIDDING ME!?!?!? And the 125% mortgage? Interest only? Adjustable? >30 year? Didn't they learn ANYTHING from the 70s!?!?!? How about GRAMMAR SCHOOL!?!?

    I didn't hear about the interest only until quicken started selling them. I felt like SUCH a sucker! After that, had I not already had a home, I would have simply waited for the crash.

    As for banks? Well, they DID break, and later fight to overturn glass steagle. If not for that, NO PROBLEM! HOW did the banks break it? Well, undue risk buy selling nodoc 125% 45yr interest only loans, for example!

    Investment houses were only guilty because of what they sold, based on the aforementioned loans.

    How did hedge funds affect it?

    Derivatives were only bad because of the aforementioned loans, outside of some stupid contract law that they sometimes put in to shift risk(So people really had to watch their backs!).

    BTW TRADITIONALLY, 100% loans were for those with fantastic credit, I believe 96% were relatively standard, but they go down to about 80%. 125% means that you just sign, get the house, AND 25% of the value of the home, IN CASH, with NO money down!

    Steve
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  • Profile picture of the author dvduval
    A big part of the problem was the way the "tranches" (groups of mortgages) were packages. What would happen is the investment bankers would but together a tranch of a tranch, and then never provide enough data for the rating agency to be able analyze. One tranch would reference another, and the other was not available. If on the first try, a group of mortgages didn't get the desired rating, it was repackaged with other tranches until it had the highest rating.

    Now if you look at the history of bonds, investing in A rated bonds has been safe for decades. For most investors this was something that you didn't even question. You took your risk with stocks, and you counted on bonds to be extremely safe, especially with the high ratings.

    Once these bankers found a way to repackage in a way that nobody could verify the value they became like vultures. Their appetite for mortgages increased rapidly, and in turn there was pressure to get more mortgages like never before and never again.

    I don't doubt for one second that it was these bankers that were at fault. They manipulated a part of the financial system that was once very secure, and paid themselves enormous bonuses with the profits they received from an artificially created bubble.

    If we would have had more government regulation, as well as limited the size of banks (many grew as a result of their ability to capitalize on the bubble), this would not have happened. Now in order take back our government we really need to send some lobbyists packing.
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  • Profile picture of the author seasoned
    dvduval,

    You're right about that, but the idea of tranches was ORIGINALLY to MITIGATE risk. Of course, if 100% of your loans are bad, the whole will be 100% bad no matter what. I don't know WHAT you mean regarding one referring to another.

    BTW SEC laws, at least then, were INCREDIBLY lax in this area. There were effectively NO regulations, since the investors were "INSTITUTIONAL" investors. The bank could LITERALLY hire people off the street to sell them.

    Steve
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    • Profile picture of the author dvduval
      Originally Posted by seasoned View Post

      dvduval,

      You're right about that, but the idea of tranches was ORIGINALLY to MITIGATE risk. Of course, if 100% of your loans are bad, the whole will be 100% bad no matter what. I don't know WHAT you mean regarding one referring to another.

      BTW SEC laws, at least then, were INCREDIBLY lax in this area. There were effectively NO regulations, since the investors were "INSTITUTIONAL" investors. The bank could LITERALLY hire people off the street to sell them.

      Steve
      What I meant by one referring to another was basically that it was literally impossible for a person at the rating agency to see the individual mortgages in each tranch. They were rating something without the true data, and no way to get it!

      And examining the relationship of institutional investors and the rating agencies is a whole different topic, but something that they are doing more now, and hopefully with the new Consumer Protection Agency they will be able to become even more active in seeing what is going on.

      It is important to remember that there were warnings about these types of transactions long ago, but people (Republicans and Democrats) fell for the argument that we should let the markets run their course, and regulation was the enemy of businesses. Looking back, letting the markets run their course was far worse.
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      • Profile picture of the author seasoned
        Originally Posted by dvduval View Post

        What I meant by one referring to another was basically that it was literally impossible for a person at the rating agency to see the individual mortgages in each tranch. They were rating something without the true data, and no way to get it!

        And examining the relationship of institutional investors and the rating agencies is a whole different topic, but something that they are doing more now, and hopefully with the new Consumer Protection Agency they will be able to become even more active in seeing what is going on.

        It is important to remember that there were warnings about these types of transactions long ago, but people (Republicans and Democrats) fell for the argument that we should let the markets run their course, and regulation was the enemy of businesses. Looking back, letting the markets run their course was far worse.
        Well, there isn't a way to really see the assets behind a bond either.

        I'm NOT excusing, merely explaining, etc...

        Steve
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      • Profile picture of the author TLTheLiberator
        Originally Posted by dvduval View Post

        What I meant by one referring to another was basically that it was literally impossible for a person at the rating agency to see the individual mortgages in each tranch. They were rating something without the true data, and no way to get it!

        And examining the relationship of institutional investors and the rating agencies is a whole different topic, but something that they are doing more now, and hopefully with the new Consumer Protection Agency they will be able to become even more active in seeing what is going on.

        It is important to remember that there were warnings about these types of transactions long ago, but people (Republicans and Democrats) fell for the argument that we should let the markets run their course, and regulation was the enemy of businesses. Looking back, letting the markets run their course was far worse.

        Thanks for the reminder.


        Let me add the rating agencies to the list of major culprits.

        TL
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        • Profile picture of the author dvduval
          Originally Posted by TLTheLiberator View Post

          Thanks for the reminder.


          Let me add the rating agencies to the list of major culprits.

          TL
          The rating agencies were really nothing but pawns for the investment bankers who could simply choose a different agency if they didn't get the results they wanted. There was also the hope that rating agency employees would get hired by the firms, so they had incentive to provide ratings that would help them get hired.
          (they made about 10 times less than the people requesting the ratings)

          Whether you want to blame the rating agencies, the government, the Fed, or the creation of the CDS, it is the investment bankers and others in the top 1% that are seeing their earnings reach record levels (way higher than the Great Depression or the Robber Baron years). And it is those people that need to see their taxes increased dramatically. They aren't providing value. They are manipulating the system as the middle class steadily loses.

          I am not saying that any specific individual in the top 1% is some crazy demon, but it is more the problem with the system itself is messed up right now. It is normal for people at the top to have more financial responsibility (higher taxes), but that is not the case right now. We are in a very abnormal place.
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  • Profile picture of the author seasoned
    All the rating agencies were doing was "GRADE INFLATION"! That IS the rage you know! It is bad in EVERY case BUT, if YOU want to fix it HERE, you should fix it ELSEWHERE also!

    Steve
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    • Profile picture of the author dvduval
      Originally Posted by seasoned View Post

      All the rating agencies were doing was "GRADE INFLATION"! That IS the rage you know! It is bad in EVERY case BUT, if YOU want to fix it HERE, you should fix it ELSEWHERE also!

      Steve
      More importantly, it allowed banks to take risks that would have not been allowable under the law. There would not have been such unmitigated inflation had there been more consumer protection in place as was present for decades. But starting in the 80s there has been a shift. The S&L scandal was a very similar scenario that served as a warning that we ignored as once again lobbyists at the direction of investment bankers convinced Congress that regulation was not in our best interest.
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      • Profile picture of the author seasoned
        Originally Posted by dvduval View Post

        More importantly, it allowed banks to take risks that would have not been allowable under the law. There would not have been such unmitigated inflation had there been more consumer protection in place as was present for decades. But starting in the 80s there has been a shift. The S&L scandal was a very similar scenario that served as a warning that we ignored as once again lobbyists at the direction of investment bankers convinced Congress that regulation was not in our best interest.
        Yeah, and I can't detail ALL I meant since some may debate political etc... BUT, if we got ridd of ALL grad deflation, it would help a LOT of things. NOT ONLY would people be able to trust ratings on investments, the securities would generally be better, and people would arrange and research better so such ratings wouldn't be as necessary.

        Steve
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