Economics Questions

Re: Peter Schiff is wrong, kind of

Spideynw — Thu, 14 Jan 2010 02:04:52 GMT

bloomj31:
What if the "vault money" gets pulled out of the system by the Fed before it can be loaned out again?

Don't worry, the Fed will happily lend the U.S. government any money it wants. The Feds continued existence is dependent on it.

Re: Peter Schiff is wrong, kind of

JeffB — Thu, 14 Jan 2010 02:02:32 GMT

bloomj31:

What if the "vault money" gets pulled out of the system by the Fed before it can be loaned out again?

I'm not really saying that will happen, but that's Bernanke's supposed "exit strategy" as far as I understand it.

Actually, it sounds to me as if Mr. Bernanke may be planning on keeping a ton of money tied up in those reserves. I heard him talking about how their new ability to pay interest on reserves gave them a powerful tool for controlling the money supply. -- The don't count money banks have as reserves at the Fed in the money supply as it is out of circulation. That does cost them some additional money in interest, but I guess that's no hill to climb for someone who can "print" money at will.

Hard Rain posted a link to a YouTube segment where Bernanke talked about it a little bit.

It seems like it would be an awful lot less painful than the traditional method of selling some of their stock of treasuries on the open market. That always tends to raise interest rates, which would be catastrophic in our current economy. Mortgage companies are already hanging on by their fingernails as are many homeowners and businesses. Commercial real estate is also on very thin ice.

Re: Peter Schiff is wrong, kind of

bloomj31 — Wed, 13 Jan 2010 18:43:24 GMT

Saiphes:

Prices will rise when market actors bid them up. Dollars sitting in banks as emergency liquidity won't be used to bid up prices until they are loaned out. A thing called regime uncertainty, even with Fed rates near 0%, is likely causing would be business ideas to sit on shelves waiting for a time when entrepreneurs no longer fear weird and random interventions or market volatility. And, housing prices are probably still too untrustworthy for borrowers to get back into flipping - and many consumers are in pay debt down mode anyways. That's my guess.

What if the "vault money" gets pulled out of the system by the Fed before it can be loaned out again?

I'm not really saying that will happen, but that's Bernanke's supposed "exit strategy" as far as I understand it.

Re: Peter Schiff is wrong, kind of

Spideynw — Wed, 13 Jan 2010 17:38:15 GMT

bloomj31:

Spideynw:

If the only variable that changed was the number of dollars doubled, then eventually, yes all wages and prices would double. That is the only result inflation can really have.

If this is true, why haven't we seen aggregate (or whatever word you want to use) prices increase at the same rate that the money supply has? What's not happening here?

There has not been a significant increase in the supply of currency yet. I conjecture that gold prices are being bid up right now not because of inflation, but because of the fear of inflation. The writing is on the wall. Eventually, people will stop lending to the government. When that happens, you will see massive inflation.

Re: Peter Schiff is wrong, kind of

krazy kaju — Wed, 13 Jan 2010 08:24:13 GMT

bloomj31:
Does anyone know exactly what happens if a government declares bankruptcy? I mean do they go to a bankruptcy court and distribute the remaining assets among the different claimants or does the insolvent government just get all their debts annulled?

When a government defaults it doesn't pay back all of its debt in the allotted time. Usually, it'll either outright cancel all of the debt, cancel a portion of the debt and pay the rest of the debt on time, or delay some (or all) debt payments until it can continue them.

Re: Peter Schiff is wrong, kind of

Saiphes — Wed, 13 Jan 2010 08:20:36 GMT

bloomj31:

Spideynw:

If the only variable that changed was the number of dollars doubled, then eventually, yes all wages and prices would double. That is the only result inflation can really have.

If this is true, why haven't we seen aggregate (or whatever word you want to use) prices increase at the same rate that the money supply has? What's not happening here?

Prices will rise when market actors bid them up. Dollars sitting in banks as emergency liquidity won't be used to bid up prices until they are loaned out. A thing called regime uncertainty, even with Fed rates near 0%, is likely causing would be business ideas to sit on shelves waiting for a time when entrepreneurs no longer fear weird and random interventions or market volatility. And, housing prices are probably still too untrustworthy for borrowers to get back into flipping - and many consumers are in pay debt down mode anyways. That's my guess.

Re: Peter Schiff is wrong, kind of

liberty student — Wed, 13 Jan 2010 07:20:54 GMT

bloomj31:
Also, as I understand it, inflation (rising prices)

I meant to quibble about this earlier in the day. Inflation is not rising prices any more than the flu is a fever. Rising prices are a symptom of inflation, but inflation refers specifically (as an Austrian would use it) an increase in the supply of money and credit, and deflation is not falling prices, but a decrease in the supply of money and credit.

Prices must rise and fall in the market, to label price increases in particular goods inflation, means that ceteris paribus some other price must have fallen to offset the change in demand.

The only way all prices can rise at once (in the aggregate) is if the supply of money and credit is increasing. Only then can prices rise without an offset in lower prices elsewhere.

This is an important point to understand because it is so fundamental to understanding Austrian theory as it pertains to money. If you need me to explain it better, just ask and I will try.

Re: Peter Schiff is wrong, kind of

bloomj31 — Wed, 13 Jan 2010 06:56:42 GMT

Spideynw:

If the only variable that changed was the number of dollars doubled, then eventually, yes all wages and prices would double. That is the only result inflation can really have.

If this is true, why haven't we seen aggregate (or whatever word you want to use) prices increase at the same rate that the money supply has? What's not happening here?

Re: Peter Schiff is wrong, kind of

Spideynw — Wed, 13 Jan 2010 06:53:10 GMT

bloomj31:
Also, as I understand it, inflation (rising prices) would only occur with the goods and services that were in high demand.

Why? Again, the only variable that changed was that the currency supply was doubled. I mean are you saying if tomorrow you received a million dollars, the only things you would go buy would be lots of new products that are on the market (if you are thinking of things with the highest demand)? You would not buy a new home, or a new car, or go to a fancy restaurant, or go on a nice vacation? Or when you say high in demand, are you talking about "needs"? If so, does that mean you would just buy a cheap car, a cheap house, lots of cheap food, etc., etc., just so you can have your basic demands met?

bloomj31:
So not all wages would double and not all prices would double.

If the only variable that changed was the number of dollars doubled, then eventually, yes all wages and prices would double. That is the only result inflation can really have.

Re: Peter Schiff is wrong, kind of

Spideynw — Tue, 12 Jan 2010 23:21:05 GMT

Ansury:
Isn't the problem with this that, technically, if you only make a partial re-payment--aren't you still defaulting?

Yes, someone else already made this point (a good one). However, someone else made an interesting point that the agreement was to be paid back a certain number of dollars, not a certain number of dollars worth a certain amount. As such, it really would not be a default, if the government prints money to pay of its debts.

Re: Peter Schiff is wrong, kind of

bloomj31 — Tue, 12 Jan 2010 22:36:37 GMT

Spideynw:

Can't everything be considered a "necessity"?

Here is the thing. If today we have 1 trillion dollars in the world, and tomorrow the government printed another 1 trillion, doubling it to 2 trillion dollars, would you not expect all wages and prices to double, eventually, since now twice as many dollars are chasing the same amount of goods and services?

I mean I guess everyone could be considered a necessity, but for the purpose of clarity, I think we could try to define necessities in terms of the goods and services that people require for base level of survival. That's probably a lousy definition, but we could probably come up with a better one.

Also, as I understand it, inflation (rising prices) would only occur with the goods and services that were in high demand. So the question is not just "is the money supply growing?" but also "where is it being spent?"

So not all wages would double and not all prices would double. Just the wages and prices where the money was changing hands the fastest. Or, to use a nice economic term, wherever the velocity of money was the highest. Isn't that consistent with economic theory?

Re: Peter Schiff is wrong, kind of

Ansury — Tue, 12 Jan 2010 22:33:54 GMT

Spideynw:

Peter Schiff made a statement that if the government pays its debts by printing money, that in essence the government is defaulting on its debts. This is only partially true. Yes, the creditor is getting paid in a devalued currency, but the creditor can still buy things, just not as much. The thing is, that the currency is devalued for everyone, not just the creditor. Which means it is also a tax on everyone holding that currency. So, printing money to pay off debts is unique, in that it is both a tax and a default.

Isn't the problem with this that, technically, if you only make a partial re-payment--aren't you still defaulting? Perhaps I misunderstand the term's specific meaning, but I'd imagine that if you have a loan payment due and you only pay 50% of it, you've still defaulted on the loan.

Of course, if the gov prints the money to "repay" the loans, they'll probably get away with it (as opposed to anyone else making a partial payment).

Re: Peter Schiff is wrong, kind of

Spideynw — Tue, 12 Jan 2010 22:08:40 GMT

bloomj31:
Sure, we might see inflation in necessities.

Can't everything be considered a "necessity"?

Here is the thing. If today we have 1 trillion dollars in the world, and tomorrow the government printed another 1 trillion, doubling it to 2 trillion dollars, would you not expect all wages and prices to double, eventually, since now twice as many dollars are chasing the same amount of goods and services?

Re: Peter Schiff is wrong, kind of

bloomj31 — Tue, 12 Jan 2010 21:09:57 GMT

jmorris84:

None of this means that there is or would be deflation, though. People who "hoard" their money still have the ability to spend it, right?

Sure. But if they're spending it, they're not hoarding it. Sure, we might see inflation in necessities. But we might also see deflation in asset prices. I don't know, I'm no economics expert, but it just seems like there would be a serious psychological reaction to a sovereign default, no matter what form it takes. That psychological reaction seems most likely to be fear, in my mind. That's all I'm saying here.

Re: Peter Schiff is wrong, kind of

jmorris84 — Tue, 12 Jan 2010 21:06:58 GMT

bloomj31:

People panic and stop spending. In fact, they might take to hoarding their money. That would remove liquidity from the market faster than it could be replaced. Look at the hoarding the banks are doing with their new funds, is it so difficult to imagine a similar scenario in the event of a sovereign default but at an individual level?

None of this means that there is or would be deflation, though. People who "hoard" their money still have the ability to spend it, right?