Economics Questions

Re: QE III or Lack Thereof

Caley McKibbin — Mon, 25 Apr 2011 09:07:50 GMT

In 2008, dollars became less money-like; dollars lost some of their efficacy as a medium of exchange.

That seems like some strange way of saying that a smaller proportion of dollars are spent over a period of time. In any case, that is an esoteric definition of monetary "squeezing" if the Fed calls it "easing".

Re: QE III or Lack Thereof

JeffB — Sat, 23 Apr 2011 00:31:45 GMT

Modus Tollens:

... Nominal spending remains depressed. We need more money.

I think Roger W. Garrison, Professor of Economics at Auburn University, has a great Power Point presentation on YouTube on "Capital Based Macroeconomics" that shows why we're in the economic dire straights we're in now: www.youtube.com/watch?v=zhoFOyy7rbo

My attempt at a Cliff Notes explanation would be that the Fed had been trying to goose the economy beyond its "production possibilities frontier" by pumping up the money supply and thereby artificially depressing interest rates. That temporarily caused people and companies to borrow more money than was prudent under the mistaken impression, deliberately induced by the Fed, that there were more savings available to loan than was actually the case. Therefore, the debt based expansion was unsustainable and the inevitable crash ensued.

That mistaken and unsustainable boom caused a significant amount of malinvestment in projects and consumption that should never have been attempted. The bust period is the hangover from those excesses and is a necessary time for the people, the companies and the economy in general to liquidate those malinvestments. It is a decidedly unpleasant time of contraction and consolidation as people pay down debts and some debts are written off as uncollectable.

But the Fed and many economists think that necessary period of cleansing for the economy and the participants in it is a bad thing that could be avoided with a bit of the "hair of the dog", much as an alcoholic thinks a drink will help ease his hangover, or a drug addict thinks another hit of heroin is the ticket to get rid of his withdrawal symptoms.

So I think the bottom line is that I strongly disagree that the solution to our own problems could be resolved if the Fed agrees that "We need more money".

Re: QE III or Lack Thereof

JeffB — Sat, 23 Apr 2011 00:12:58 GMT

Caley McKibbin:

Some "squeeze" that is..

Thanks for that link!

I had been looking for something that could generate the TMS. I thought I had seen some data on a website somewhere, but it hadn't been updated in a few years or so.

Re: QE III or Lack Thereof

JeffB — Fri, 22 Apr 2011 23:51:41 GMT

Rcder:

Theoretically the Federal Reserve could choose to stop expanding credit and let interest rates rise. They're a relatively independent government institution, so Bernanke and his ilk would be insulated from the mood swings of popular democracy.

I think your are right that the Fed could theoretically stop expanding credit and let interest rates rise, but I don't think the Fed is nearly as independent as you seem to believe. Sarel Oberholster wrote an article on the subject of "The Independence of the Fed" in which he concluded:

"Does that mean that the private banks own the Fed?

The short answer is yes but it is a hollow ownership with very restricted rights, basically to provide a smokescreen for the claim that the fed is independent. ...

...

The outright undisputable conclusion is that the Fed, when tested against GAAP as is used by it in it’s assessment of those it regulates, is a Special Purpose Entity of Federal Government or according to the latest definition is a Variable Interest Entity of Federal Government. The rules of consolidation therefore apply and the Fed must be seen as controlled by Federal Government, indivisiably part of Federal Government. The pretence of independence is no more that that, a pretence.

Re: QE III or Lack Thereof

Frederique Bastiao — Fri, 22 Apr 2011 23:30:52 GMT

Rcder:
If we were to allow the money rate of interest to adjust to the market rate of interest, do we know for sure that it would be so terribly high? Hypothetically consumer time preferences could be low and thus interest rates wouldn't have to climb very far, or am I misunderstanding the situation?

With the dollar rapidly losing its value and huge deficits ahead, yes, I think that the market rate of interest would be much higher. It's not like there's a solution to these huge deficits any time soon, why would anyone - but the FED - buy US treasuries unless its interest rates are very high?

Re: QE III or Lack Thereof

Rcder — Fri, 22 Apr 2011 22:45:16 GMT

Frederique Bastiao:

I think they'd have to raise interest rates so much that to continue to print is the less disastrous path to take on their minds.

If we were to allow the money rate of interest to adjust to the market rate of interest, do we know for sure that it would be so terribly high? Hypothetically consumer time preferences could be low and thus interest rates wouldn't have to climb very far, or am I misunderstanding the situation?

Frederique Bastiao:

To be honest I'm extremely pessimistic about the dollar situation and I think that its "destruction" is pretty much inevitable now.

Is there a single person in America who's optimistic about the USD?

Re: QE III or Lack Thereof

Modus Tollens — Fri, 22 Apr 2011 22:41:48 GMT

Caley,

In 2008, dollars became less money-like; dollars lost some of their efficacy as a medium of exchange. That is why the money supply can increase so much while prices are rising slower than before. If we had competition in the supply of money, then some alternative money would sate the demand. Unfortunately, we must rely on the Federal Reserve and its dollars. The effective money supply has fallen, and so we need more dollars to offset the difference. The Federal Reserve, by allowing this to go relatively unchecked in 2008, embarked on a kind of "quantitative squeezing" that has never fully been undone.

Re: QE III or Lack Thereof

Frederique Bastiao — Fri, 22 Apr 2011 22:35:45 GMT

Rcder:

Would you mind elaborating on that point? Theoretically the Federal Reserve could choose to stop expanding credit and let interest rates rise. They're a relatively independent government institution, so Bernanke and his ilk would be insulated from the mood swings of popular democracy.

I think they'd have to raise interest rates so much that to continue to print is the less disastrous path to take on their minds.

To be honest I'm extremely pessimistic about the dollar situation and I think that its "destruction" is pretty much inevitable now.

Re: QE III or Lack Thereof

Caley McKibbin — Fri, 22 Apr 2011 22:29:06 GMT

So, monetary squeezing means not easing as much as some would like. Glad we clarified that.

Re: QE III or Lack Thereof

Modus Tollens — Fri, 22 Apr 2011 22:27:08 GMT

The chart looks scary, but is meaningless by itself. Nominal spending remains depressed. We need more money.

Re: QE III or Lack Thereof

Rcder — Fri, 22 Apr 2011 22:23:40 GMT

Frederique Bastiao:

I don't think they have much of an option at this point.

Would you mind elaborating on that point? Theoretically the Federal Reserve could choose to stop expanding credit and let interest rates rise. They're a relatively independent government institution, so Bernanke and his ilk would be insulated from the mood swings of popular democracy.

Re: QE III or Lack Thereof

Caley McKibbin — Fri, 22 Apr 2011 22:20:34 GMT

Some "squeeze" that is..

Re: QE III or Lack Thereof

Frederique Bastiao — Fri, 22 Apr 2011 22:15:33 GMT

I don't think they have much of an option at this point.

Re: QE III or Lack Thereof

Modus Tollens — Fri, 22 Apr 2011 22:07:21 GMT

The Fed hasn't started with easy money. They have been doing quantitative squeezing since 2008.

Re: QE III or Lack Thereof

Caley McKibbin — Fri, 22 Apr 2011 21:56:40 GMT

Keeping the scam going depends on plausible deniability. So, the inflation will go on until they feel that they can paint a rosy picture of the situation.