Economics Questions

Re: What Is Required to Stop Deflation and Re-Start Inflation?

Stolz25 — Fri, 13 Feb 2009 12:58:45 GMT

reidbump:
The federal debt was monetized upon issuance, so I don't know what you mean by this. They can't re-monetize it.

Right now we owe 10 trillion dollars or so. The Fed could buy up all those loans by issuing new money.

Re: What Is Required to Stop Deflation and Re-Start Inflation?

bearing01 — Fri, 13 Feb 2009 03:00:58 GMT

Here's another way the gov't can monetize debt without people having to borrow it. Just print it and give it to people to pay their mortgages.

US May Start Subsidizing Some Mortgage Payments

http://www.cnbc.com/id/29164998

Nothing amazes me anymore. Pretty soon my toilet paper will be worth more.

Re: What Is Required to Stop Deflation and Re-Start Inflation?

meambobbo — Fri, 13 Feb 2009 00:37:11 GMT

Ah, yes, good points.

I guess several things could happen that would pan out to be extremely inflationary:

1) The government can guarantee or buy the banks' toxic assets, which would make the banks loan again. People will borrow once the interest rates are low enough. I'm not sure this can actually happen. The banks toxic assets are probably far larger than the government can afford without destroying the dollar overnight. Just getting the worst ones off the balance sheet, however, will get things moving.

2) The government can nationalize banking and credit. Expect them to start pulling levers without any understanding of the consequences. Not necessarily hyperinflationary, but maybe...definitely bad.

3) The banks can finally go bankrupt, and the bad debt can get wiped out. Depositors will have their FDIC insurance paid by the printing presses. When new banks emerge clean from this garbage, loaning and borrowing will forge onward, only with a larger supply of possible "reserves". If reserve requirements aren't adjusted upwards, there is extreme inflationary pressure. The FED would be limited in its ability to sell its assets to reduce money in circulation, as about half its balance sheet would be defaulted on by the failing banks. It would have to sell off its treasuries and gold, which it may be reluctant to do.

4) The FED can start purchasing assets directly to "reflate". While this is strictly narrow money, the FED seems to have no fear of having narrow money approach broad money in total amounts. This reduces the real interest due on loans, and borrowing will increase. The more borrowing increases, the more price inflation there is, and so on, until real interest rates finally rise. This is a good recipe for an asset bubble. Maybe we'll get 3 in a single decade...

I am thinking a combination of 1, 3, and 4 will happen, but things will move slowly for the next 1-3 years.

Re: What Is Required to Stop Deflation and Re-Start Inflation?

reidbump — Fri, 13 Feb 2009 00:01:28 GMT

meambobbo:
reid, the bank's reserves do not have to be loaned out to enter circulation.

Circulation is the wrong term. Obviously the moment the Fed created the new money and credited the banks' accounts to increase their reserves that put the money in circulation. I should have said that the reserves have to be lent out in order to further the inflationary cycle.

meambobbo:
if the banks experience losses on prior loans, they can use the reserves to pay off their liabilities. In fact, that's probably exactly why they're holding them.

I understand that, but that does not continue the inflationary effect. That takes money out of the system. The only way the money can be multiplied 10 times and increase the money supply further is by lending it.

meambobbo:
While consumers may not desire taking on debt, the government seems desperate to fill the gap.

You're right, but absent the consumer component, I don't see how the money supply can multiply as rapidly as it did from 01-07. In fact, consumer liquidation is deflationary, so more than the government has to be borrowing.

meambobbo:
Also, read Bernanke's paper about inflating the money supply at the "zero-bound":

Thank you for the reference. I'll read it.

Re: What Is Required to Stop Deflation and Re-Start Inflation?

meambobbo — Thu, 12 Feb 2009 23:51:40 GMT

reid, the bank's reserves do not have to be loaned out to enter circulation. if the banks experience losses on prior loans, they can use the reserves to pay off their liabilities. In fact, that's probably exactly why they're holding them. They are waiting to see the government's plan to buy up their bad debt. If it keeps them solvent, you bet your ass those reserves will be loaned out at even lower interest rates. If they have to take hits on their assets, then they can use their excess reserves to cover liabilities.

The Fed recently announced it may plan to buy long-term treasury debt. While consumers may not desire taking on debt, the government seems desperate to fill the gap. Look at the Fed's balance sheet. They are taking on government agency debt in addition to the treasury bonds.

Also, read Bernanke's paper about inflating the money supply at the "zero-bound":

http://www.federalreserve.gov/pubs/feds/2004/200448/200448pap.pdf

and here's some commentary on these (might be easier to read)

http://www.lewrockwell.com/north/north679.html

http://www.lewrockwell.com/north/north667.html

Re: What Is Required to Stop Deflation and Re-Start Inflation?

reidbump — Thu, 12 Feb 2009 23:44:59 GMT

nirgrahamUK:

please offer an explanation why people must increase their debt load in order 'to get the currency running through the system' ?

Are you new to Austrian economics? I recommend you read on this website the many resources on how money is created.

Re: What Is Required to Stop Deflation and Re-Start Inflation?

reidbump — Thu, 12 Feb 2009 23:38:30 GMT

Stolz25:
The Fed could also monetarize the country's outstanding debt as well.

The federal debt was monetized upon issuance, so I don't know what you mean by this. They can't re-monetize it.

Stolz25:
Also, things like the stimulus bill could be paid for directly with new money, taking the debt issuing completely out of the equation.

The fed issues debt to pay for the stimulus and that debt is monetized by the Fed upon redemption. I suppose the Fed theoretically could just print the money without the federal government issuing corresponding debt, but that isn't what happens. Debt has to be issued.

Re: What Is Required to Stop Deflation and Re-Start Inflation?

nirgrahamUK — Thu, 12 Feb 2009 23:37:12 GMT

please offer an explanation why people must increase their debt load in order 'to get the currency running through the system' ?

Re: What Is Required to Stop Deflation and Re-Start Inflation?

reidbump — Thu, 12 Feb 2009 23:30:21 GMT

nirgrahamUK:

if you know so much about it, why are you asking?

I ask because many Austrians say that we are experiencing deflation because of the forced liquidation that has resulted from the bursting of the inflationary bubble of the Greenspan era. I agree. Austrians also say that we will experience massive inflation due to the Fed's policies in dealing with this "credit crisis." What I have not heard them explain is how the inflation will take place, because people must increase their debt load in order to get the currency running through the system and put the money multiplier effect into play.

So, again, does anyone know?

The seeds of hyperinflation have definitely been planted, but I'm just wondering how they will sprout.

Re: What Is Required to Stop Deflation and Re-Start Inflation?

nirgrahamUK — Thu, 12 Feb 2009 22:57:23 GMT

if you know so much about it, why are you asking?

Re: What Is Required to Stop Deflation and Re-Start Inflation?

reidbump — Thu, 12 Feb 2009 22:36:23 GMT

The process the Fed uses requires borrowing, whether it be government borrowing or private borrowing.

Re: What Is Required to Stop Deflation and Re-Start Inflation?

nirgrahamUK — Thu, 12 Feb 2009 22:29:01 GMT

reid, it doesnt require borrowing. If i sell you some useless junk and you give me millions of fiat money for me to spend on real goods out there; then your the fed and i've been quantatively eased. and no borrowing

Re: What Is Required to Stop Deflation and Re-Start Inflation?

reidbump — Thu, 12 Feb 2009 22:13:30 GMT

Stolz25:
I think he was asking what the actual method would be for increasing the money supply without loans.

Is there a method for doing so in the U.S.? I believe our entire system is based on monetizing debt. There is no money unless it is borrowed. Thus the original question. Are we tapped out? Are we at the end of our ropes in taking on more debt? If so, then deflation, not inflation would result. Right?

Re: What Is Required to Stop Deflation and Re-Start Inflation?

reidbump — Thu, 12 Feb 2009 22:11:53 GMT

nirgrahamUK:

http://en.wikipedia.org/wiki/Quantitative_easing

Quantitative Easing or the Fed's open market operations, all require borrowing to get the money circulating.

Re: What Is Required to Stop Deflation and Re-Start Inflation?

nirgrahamUK — Thu, 12 Feb 2009 20:13:10 GMT

http://en.wikipedia.org/wiki/Quantitative_easing