Wednesday, June 24, 2009

Money Printing Nirvana

Rain and mist all day today. Same story for some time now. Rumor has it the Sun will be out tomorrow and it will be north of 80 degrees. I hope my skin does not burst into flames when the light actually hits it again. Hopefully my melanocyte recruitment cascade pathway is still working after almost 10 days of darkness! Wow, that was kind of geeky.

Blog Notes
With the return of the Sun, I am going to hope for a real start to the summer. What this means is the dreaded "summer posting" type schedule. Right before and then after July 4th it is my fishing season. This usually run into late September, though the NFL takes over then to a large extent. I also will be playing some more tennis more frequently. Add to this my brand new back deck and new front lawn and I think I am going to have a fun and busy summer.

What this all adds up to is less frequent posts. I would say every day will be out for sure, but not once or twice a week either. Friday night is always my favorite blog of the week. Maybe weekend wrap ups as well will be added. Yours truly does have a life outside or writing and the summer time is the right time. I know all the loyal readers understand, and I am sure their blog reading time goes down in the summer months as well. Never fear, I will be here.

Today had all the drama of watching paint dry. A basic rerun of the same statement from last meeting, though the FED did leave out the actual term "deflation" as not to scare anyone. As usual, the real fun is in the stories that are run after the statement and today was no exception.

Consider this AP story (via Yahoo Finance) which open with an absurd jump of logic, but of course just leaves it on the table as is:
Fed says recession easing, inflation is tame
WASHINGTON (AP) -- The Federal Reserve signaled Wednesday that the weak economy likely will keep prices in check despite growing concerns that the trillions it's pumping into the financial system will ignite inflation.
Fed Chairman Ben Bernanke and his colleagues held a key bank lending rate at a record low of between zero and 0.25 percent. And they pledged again to keep it there for "an extended period" to help brace the economy.
The Fed is sending the message that the economy is making progress toward a path of recovery, that the credit markets appear to be healing and inflation is not going to be a problem," said economist Lynn Reaser, vice president of the National Association for Business Economics. "The bogeyman of deflation also was removed from the Fed's primary risk list," she added.
The Fed in March launched a $1.2 trillion effort to drive down interest rates to try to revive lending and get Americans to spend more freely again. It said it would spend up to $300 billion to buy long-term government bonds over six months and boost its purchases of mortgage securities. So far, the Fed has bought about $177.5 billion in Treasury bonds.
The Fed is on track to buy up to $1.25 trillion worth of securities issued by Fannie Mae and Freddie Mac by the end of this year. Nearly $456 billion worth of those securities have been purchased.

There is a lot of stuff here, so lets start with the smaller items;

-The FED has made it clear that a rate hike is off the table. I will now accept apologies form all those saying the FED would be raising rates in August. You were all dreamers and you are all now proven wrong. The rates will be zero for an "extended" period of time. So unless you cannot read that means ZIRP just got treated with ExtenZe and so knock off the "rate hike" and "exit strategy" talk.

-The FED is truly all powerful as both inflation and deflation are pronounced dead as of today by the FED. They only said inflation was "well contained" (uh oh!) and they did not bother to even mention deflation (uh oh!). The FED has engineered a perfect outcome and one they are in total control of, if you read just this article that is.

Money Printing Nirvana
My last point is the major one. Reread that first line:
"...the weak economy likely will keep prices in check despite growing concerns that the trillions it's pumping into the financial system will ignite inflation."

The FED feels that because wages are static or going lower and the price of an XBox is static or going lower they can create money unabated with no consequence.

Now, Economic Disconnect, you might say "all that money is not going into new credit, hence there is no velocity of money, thus no inflation as it can only cover debt destruction". And of course you are correct and the next step is deflation.

To this I would ask;
-If wages could be kept low (by economic factors or edict)
-If consumer prices could be kept low (by lack of demand or edict)
-If banks will not lend out money, but instead use it to write off debt (this may well be what is going on)

Then would it not be nirvana to simply print enough money to cover all debt, call it "cancelled out" by all the new paper, and start all over again?

Indeed, this seems so devilishly simple I would wonder why every nation in the history of the world has not had this as their economic centerpiece.

And I think this leads me to my "inflation" predisposition. You may define inflation as an increase in the money supply, but I could define it as de facto devaluation. If the US prints say 10 trillion dollars to absorb mortgage losses, credit card losses, commercial real estate losses and other losses not yet known then yes, that money never enters the money supply as new capital. But it was used to pay for the debt that was taken on and could not be paid back in real money. As a creditor you just got paid back with printed money that came from nowhere. At this point the currency has no moorings in reality (not that it does now, but if kept as a slow process the world accepts this as a cost of doing business) and thus any creditor will want either MORE of the dollars, or they will not want them at all and demand payment by other means.

This is the danger of the "printing press", not hyperinflation because of a sea of money, but inflation due to limited desire for a particular money or a lack of belief in a particular money form.

Now I understand that because this has not happened as of yet to the US, nor in it's history many think this will never happen. I also have respect for the "other currencies are worse off, so the dollar will always be strong" argument for what it attempts to imply.

It reminds me of the old line:
"When you owe the bank $100 that is YOUR problem; When you owe the bank 100 Million it is the BANKS problem".
(Aside: this joke needs to be corrected for today's dollars!)

The US owes so much money that indeed it is in the best interests of most of our creditors to play pretend and allow the US to do what it is doing with the money creation. I have discussed the possibility of a debt "Chandrasekhar limit" many times. I think we finally get an answer to that question.

Have a good night.


Vincent said...


getyourselfconnected said...

What did I win??

Stagflationary Mark said...


The optimists are no doubt pulling hair right now. Deflation isn't a problem. Inflation isn't a problem. Entire global economy is in shambles though.

As for the ZIRP, I'm more concerned about long-term NRIRP (negative real interest rate policy). "Top" economists (like Mankiw) want it to force the savers to spend. We don't have NRIRP now though. The long-term savers (such as myself) are actually doing better than I would have expected based on all that's happened so far.

Lisa said...

Never fear, there are green shoots everywhere:
(US) Radar Logic: April 2009 25-MSA RPX Composite house price index +1.2% m/m, first increase since June 2007; YoY: -20%
- Home prices increased on a month-over-month basis in 18 of the 25 metropolitan statistical areas (MSAs) covered by the report.
- Transaction counts also increased on a month-over-month basis in 18 MSAs in April, keeping with the traditional seasonal pattern.
- All five California MSAs posted their largest month-over-month increases for the month of April since 2005.

- Comments: "A very interesting observation is that the percentage of transactions that are ''motivated'' sales seems to be stabilizing," said Feder. "If this continues we could see some improvement in housing inventories."

*Note: MSA means metropolitan statistical areas.

Apparently, prices rising 1.2% from -20% (in some places like CA this means that home prices rose a teeny tiny bit above -50%) is something to be excited about. USD/JPY rises along with S&P futures. Happy days are here again.
Moving into a house this week (I hate apt living even in this quaint little town) and haven't commented much, but I am reading your posts :)

Anonymous said...

When you owe the bank a billion dollars, it's the government's problem and when you owe the bank a trillion dollars, it's the world's problem

GawainsGhost said...

Dr. Housing Bubble writes an interesting post on the inflation-deflation debate.

The good doctor is always an edifying read. His ongoing series, Lessons from the Great Depression, is well worth the time.

Basically, in the current environment, he sees demand destruction leading to price deflation.

GawainsGhost said...

Gary North calls out Mish.

This is an interesting read.

watchtower said...

Hmmmm, this is where I think we are going:

"Once the US consumer is tapped out, and cannot effectively make a return on investment of our trade partners, the rationale for the continuation of the USD goes away."

"The Two insoluble problems that will lead to a depression and ultimately the final USD collapse:

1. Deleveraging cannot be stopped, there is too much.

2.The USD is only supported by a healthy world economy and is subsidized."

Chris Laird
'Tough Sledding Ahead'

Things are slowing down around here.
At first I couldn't see it and even started to think that the collapse was either BS or just restricted to CA, AZ, FL and the like but not anymore.
Car dealerships are folding like cheap lawn chairs around here now and most notably I have noticed that the help wanted signs have disappeared on the fast food marquees.
Green shoots my a##, it's getting worse around here on a daily basis.
Even the Doctor my wife works for is seeing less and less people.
He's a good doc with good beside manners, I don't think it is because of him personally, plus the talk is that all of the docs around here are seeing less people.
I got a letter in the mail a couple of days ago about my credit card.
It said that they would now set limits on it as they see fit basically.
If I'm getting a letter like that with no debt, money in the bank and a perfect credit history (I use my card for traveling mainly and ALWAYS pay it off before incurring finance charges), you can bet that others are too.
They are tightning credit for the common man.

Buckle up.

watchtower said...

Well I noticed that I capitalized the word "doctor".

From my experience they are not God although I do appreciate them and what they go through.
I would not want their job.

Anonymous said...

WASHINGTON, June 25 (Reuters) - The White House said on Thursday that President Barack Obama had confidence in the job Federal Reserve Chairman Ben Bernanke has done so far, despite congressional criticism over his role in the Bank of America merger with Merrill Lynch last year.

I wouldn't have expected anything less coming out of Mr. Change.


Vincent said...

This is the danger of the "printing press", not hyperinflation because of a sea of money, but inflation due to limited desire for a particular money or a lack of belief in a particular money form.
The US owes so much money that indeed it is in the best interests of most of our creditors to play pretend and allow the US to do what it is doing with the money creation.

Many argued in W's second term, the adults would return and manage the value of the dollar down, similar to Regan's second term Plaza Accord.

Our trading partners did not want this outcome, wanted to continue to use us as there end consumer and therefore bought our long bond as vender financing. We played along because of the rampart greed and it made the administration look good. Connundrum my sweet behind.

Since ending the gold standard we have always had inflation and we always will, despite tempary respites. To keep an economy going the end user must psychologically be motivated to purchase TODAY than wait until (and pay more) tomorrow.

The game as I see it, and as I interpret your post is a managed controlled debasing of the dollar, despite the BS protest to the contrary by China et al. Version 3 of an unoficial Brent Woods. They are all on board because it is in their best interest. They will continue to buy, but in lesser degrees (managed controll), our debt knowing full well there reserves will take a hit, but cannot afford to do otherwise. We, on the other hand, need the inflation from a lower dollar to grease the economy, boost exports,and cheapen out debt

getyourselfconnected said...

I think you state my case very well, thanks!

Good to see you stop in Lisa!

Bernanke has Obama's full confisence and that is good enough for me. NOT!!

Gawains, I will reference that gary north piece tonight.

Anonymous said...

Japan Slides to Deflation as Prices Fall Record 1.1%