I am reading Schiff's book, and I am confused by his contention that a bear market can somehow slow down the process of dollar depreciation.
I'm guessing because demand falls during a bear market, so you get price deflation which counters the effect of central bank inflation.
Base model cars of the world unite! You have nothing to lose but quarter-mile races.
Under the current system dollar inflation is tied to borrowing. Banks can't create money unless there is demand for new loans. If everyone has too much debt and doesn't want to borrow anymore, the bank can't just print itself dollars and spend them. That would be too obvious a rip off.
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Erickk: I am reading Schiff's book, and I am confused by his contention that a bear market can somehow slow down the process of dollar depreciation.
Supply and Demand
The value of any medium of exchange/store of value, as with all goods and services, and regardless of whether that medium of exchange is fiat or otherwise, is set by the final outcome of the interplay of the two factors, [1]supply, and [2], the demand for that supply, at any point in time.
See Von Mises' "The Theory of Money and Credit".Changes In Relative Value of US $'sSo [as with anything else] when supply of US $'s outstrips demand, the US $ unit loses value [i.e. its purchasing power falls], relative to its previous value. Conversely, when, for whatever reason, demand for US $'s outstrips the supply, the $ unit gains in value/ purchasing power, relative to previous value. Supply of Money New US$ supply , as you probably know, originates with the Federal Reserve system. Demand for the Supply of MoneyThe gross demand for that supply is usually thought of as being the general publics perceived need to hold on to more "hard" cash for liquidity purposes instead of spending it, to turn other goods/investments/bank account balances back into cash [to then hold] and also for many individuals and financial institutions [eg banks, investmet services etc.] to hold some cash/savings in the form of cash equivalents that are regarded to be both safe and liquid [i.e. US treasury debt] .
The tendency to hold, or, not to hold onto cash and liquid, interest -bearing near-cash equivalents as outlined above, depends on how safe, or rich, the majority of the public may feel at any point in time. Mass Psychology During Economic Uncertainty
In times of general economic uncertainty [ i.e. recession, bear markets, war, bank failures, and at other times that cause a widespread feeling of economic uncertainty, the overall psychological state of the larger mass of individuals and institutions [i.e. uncertainty and fear] may result in the individuals that comprise this large group holding onto more cash $'s than it otherwise would, instead of spending those $'s on new goods/services , and also for it to convert other goods and investments to cash to hold, and also to maybe store/hold more cash via "liquid", "safe" US treasuries [i.e cash substitutes that earn interest and can be quickly converted to cash], simply because the future seems more uncertain than it did before, so that cash and close, interest bearing liquid equivalents seem to be the best option at the time for many. Thus, the impulse to hold cash money and near equivalents considered fully liquid has increased, and therefor the demand to hold cash US$'s has increased, relative to the previous demand.$US Demand Exceeds Supply?
Under those circumstances, should the new , heavier demand for actual liquid cash and close equivalents [for whatever reason], consistently outstrip the supply of $'s over a period of time, then the $'s depreciation [i.e its natural inbuilt inflationary tendency] will slow, or even be temporarily reversed, as the $US unit value/purchasing power has now been increased, relative to its previous value, because of a change in the relationship of the two factors controlling its ultimate price in the market, supply, and demand.
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Thanks guys@@
But does it have anything to do with Fractional Reserve System? For example, if I earn money in stock market, my banking account will automatically record this increase, thus enabling the bankers to create more money on top of this increased amount. Am I correct??
sry thats is wrong
onebornfreedotblogspotdotcom: Erickk: I am reading Schiff's book, and I am confused by his contention that a bear market can somehow slow down the process of dollar depreciation. Supply and Demand The value of any medium of exchange/store of value, as with all goods and services, and regardless of whether that medium of exchange is fiat or otherwise, is set by the final outcome of the interplay of the two factors, [1]supply, and [2], the demand for that supply, at any point in time. See Von Mises' "The Theory of Money and Credit".Changes In Relative Value of US sSo [as with anything else] when supply of US s outstrips demand, the US $ unit loses value [i.e. its purchasing power falls], relative to its previous value. Conversely, when, for whatever reason, demand for US s outstrips the supply, the $ unit gains in value/ purchasing power, relative to previous value. Supply of Money New US$ supply , as you probably know, originates with the Federal Reserve system. Demand for the Supply of MoneyThe gross demand for that supply is usually thought of as being the general publics perceived need to hold on to more "hard" cash for liquidity purposes instead of spending it, to turn other goods/investments/bank account balances back into cash [to then hold] and also for many individuals and financial institutions [eg banks, investmet services etc.] to hold some cash/savings in the form of cash equivalents that are regarded to be both safe and liquid [i.e. US treasury debt] . The tendency to hold, or, not to hold onto cash and liquid, interest -bearing near-cash equivalents as outlined above, depends on how safe, or rich, the majority of the public may feel at any point in time. Mass Psychology During Economic Uncertainty In times of general economic uncertainty [ i.e. recession, bear markets, war, bank failures, and at other times that cause a widespread feeling of economic uncertainty, the overall psychological state of the larger mass of individuals and institutions [i.e. uncertainty and fear] may result in the individuals that comprise this large group holding onto more cash s than it otherwise would, instead of spending those s on new goods/services , and also for it to convert other goods and investments to cash to hold, and also to maybe store/hold more cash via "liquid", "safe" US treasuries [i.e cash substitutes that earn interest and can be quickly converted to cash], simply because the future seems more uncertain than it did before, so that cash and close, interest bearing liquid equivalents seem to be the best option at the time for many. Thus, the impulse to hold cash money and near equivalents considered fully liquid has increased, and therefor the demand to hold cash US s has increased, relative to the previous demand.$US Demand Exceeds Supply? Under those circumstances, should the new , heavier demand for actual liquid cash and close equivalents [for whatever reason], consistently outstrip the supply of s over a period of time, then the s depreciation [i.e its natural inbuilt inflationary tendency] will slow, or even be temporarily reversed, as the $US unit value/purchasing power has now been increased, relative to its previous value, because of a change in the relationship of the two factors controlling its ultimate price in the market, supply, and demand.
See Von Mises' "The Theory of Money and Credit".Changes In Relative Value of US
sSo [as with anything else] when supply of US
s outstrips demand, the US $ unit loses value [i.e. its purchasing power falls], relative to its previous value. Conversely, when, for whatever reason, demand for US
s outstrips the supply, the $ unit gains in value/ purchasing power, relative to previous value. Supply of Money New US$ supply , as you probably know, originates with the Federal Reserve system. Demand for the Supply of MoneyThe gross demand for that supply is usually thought of as being the general publics perceived need to hold on to more "hard" cash for liquidity purposes instead of spending it, to turn other goods/investments/bank account balances back into cash [to then hold] and also for many individuals and financial institutions [eg banks, investmet services etc.] to hold some cash/savings in the form of cash equivalents that are regarded to be both safe and liquid [i.e. US treasury debt] .
In times of general economic uncertainty [ i.e. recession, bear markets, war, bank failures, and at other times that cause a widespread feeling of economic uncertainty, the overall psychological state of the larger mass of individuals and institutions [i.e. uncertainty and fear] may result in the individuals that comprise this large group holding onto more cash
s than it otherwise would, instead of spending those
s on new goods/services , and also for it to convert other goods and investments to cash to hold, and also to maybe store/hold more cash via "liquid", "safe" US treasuries [i.e cash substitutes that earn interest and can be quickly converted to cash], simply because the future seems more uncertain than it did before, so that cash and close, interest bearing liquid equivalents seem to be the best option at the time for many. Thus, the impulse to hold cash money and near equivalents considered fully liquid has increased, and therefor the demand to hold cash US
s has increased, relative to the previous demand.$US Demand Exceeds Supply?
Under those circumstances, should the new , heavier demand for actual liquid cash and close equivalents [for whatever reason], consistently outstrip the supply of
s over a period of time, then the
s depreciation [i.e its natural inbuilt inflationary tendency] will slow, or even be temporarily reversed, as the $US unit value/purchasing power has now been increased, relative to its previous value, because of a change in the relationship of the two factors controlling its ultimate price in the market, supply, and demand.
Thank you this is a great answer!!
I still have a question. If the US stock market goes bearish, then the global investors will want to take money out of the stock market, and exchange their US dollars to other money, (so that they can put the money into other stock market which is deemed maybe more profitable) thus making the dollar depreciating, rather than increasing the value. So how can Schiff's argument and your intrepretation explain this phenomena??
Erickk: Thank you this is a great answer!! I still have a question. If the US stock market goes bearish, then the global investors will want to take money out of the stock market, and exchange their US dollars to other money, (so that they can put the money into other stock market which is deemed maybe more profitable) thus making the dollar depreciating, rather than increasing the value. So how can Schiff's argument and your intrepretation explain this phenomena??
Schiff makes pretty clear that until very recently global investors (and especially central banks) still saw the dollar as the safe harbor asset of the world. But this view is changing very rapidly. When there is a selloff in the market, investors usually flee to what they see as the safest asset, so when global investors sell off stocks, many of them wanted dollars in exchange. As the view of what the safe harbor asset changes, so will the behavior of investors during bear market selloffs.
When it becomes clear that the dollar cannot hold its value, and that the current value of the dollar is only a question of who blinks first, the dollar will lose its status as a safe harbor asset and foreigners will want out. At that point, the Federal Reserve can either let interest rates rise or monetize the repatriating debt.
If it monetizes the debt coming from foreigners, it will cause more people to stop saving and start spending their money before it loses much of its value. It's a vicious circle so long as the monetization continues, and really so long as the government keeps spending vastly beyond our means.