"Full Faith & Credit" when the inmates take over the asylum

[Lowe]

The reason why I think wider understanding would reduce confidence is because it's been my experience that most people have a pretty good amount of faith in government competence, whether that's from positive personal experiences, patriotism, idealism, youthful naiveté, or something else. Learning how jerry-rigged the system is doesn't seem like it would strengthen that confidence.

I have learned a lot about the monetary system in the last couple years, which is when I began using the PP.  Around that time I had begun reading these forums, as wells as following the financial news.  I read a few MR articles along the way. 

Throughout I grew more confident in the Federal Reserve system, its stability, and the good intentions of central bankers.  I think this is what moda describes.  However I also became much more cynical about it, how obfuscatory it is, and how much of it seems unnecessary.

Familiarity, confidence, and cynicism are related, and this pattern represents what most people would experience, I think.

[Mdraf]

I leave the inflation discussion to Kshartle since I would be cutting and pasting what he already said.

Well, he didn't say anything all that convincing — and he didn't back up anything he said with any evidence — so maybe we'll just leave it alone then.

My beef is the other side of the "swap". I don't believe those bonds are equivalent to the cash which was printed to buy them, and that they will eventually lose value as interest rates rise and the US debt/gdp ratio gets into further iffy territory.

So, let me see if I follow what you're saying... Bank of America has a $100 billion dollars of T-bonds on its balance sheet. Let's say that in December, the value of their T-bonds goes down to $90 billion. The Fed purchases $10 billion of their bonds that month and gives them $10 billion in cash for those bonds that lost value. What problem am I missing? BOA's balance sheet is no different after each swap.

What problem am I supposed to be noticing here? I guess I still just don't see what your point is.

The fed now has paid $10 billion for bonds that are worth $9 billion. One billion has disappeared but one billion in cash has been injected.

[Pointedstick]

The fed now has paid $10 billion for bonds that are worth $9 billion. One billion has disappeared but one billion in cash has been injected.

Doesn't the Fed pay the market value and not the face value? If so, they'd paid $10 billion cash for $10 billion worth of bonds and BoA has no net gain in Gumby's hypothetical example.

[Gumby]

The fed now has paid $10 billion for bonds that are worth $9 billion. One billion has disappeared but one billion in cash has been injected.

Doesn't the Fed pay the market value and not the face value? If so, they'd paid $10 billion cash for $10 billion worth of bonds and BoA has no net gain in Gumby's hypothetical example.

Mdraf, Pointedstick is right. If BOA paid $10 billion for some bonds at auction, and those bonds are now worth $9 billion, then the Fed buys those bonds for the market price of $9 billion.

There's nothing funny going on in the transaction. The Fed doesn't buy the bonds for face value. The Fed buys the bonds (from Primary Dealers) on the secondary market for market value.

I'm kind of excited that we got past that. Now that means that we pretty much agree on everything!

[moda0306]

I leave the inflation discussion to Kshartle since I would be cutting and pasting what he already said.

Well, he didn't say anything all that convincing — and he didn't back up anything he said with any evidence — so maybe we'll just leave it alone then.

My beef is the other side of the "swap". I don't believe those bonds are equivalent to the cash which was printed to buy them, and that they will eventually lose value as interest rates rise and the US debt/gdp ratio gets into further iffy territory.

So, let me see if I follow what you're saying... Bank of America has a $100 billion dollars of T-bonds on its balance sheet. Let's say that in December, the value of their T-bonds goes down to $90 billion. The Fed purchases $10 billion of their bonds that month and gives them $10 billion in cash for those bonds that lost value. What problem am I missing? BOA's balance sheet is no different after each swap.

What problem am I supposed to be noticing here? I guess I still just don't see what your point is.

The fed now has paid $10 billion for bonds that are worth $9 billion. One billion has disappeared but one billion in cash has been injected.

They pay market value for the bonds, not face value.

[Kshartle]

I leave the inflation discussion to Kshartle since I would be cutting and pasting what he already said.

Well, he didn't say anything all that convincing — and he didn't back up anything he said with any evidence — so maybe we'll just leave it alone then.

Ohhh boy, I've explained a dozen times in a half-dozen ways how QE expands the money supply. Some of the ways I've tried to make extremely simple.

I've explained how government spending misallocates resources and destroys capital as have others. I've explained how every dollar's worth of purchasing power they spend is one dollar's worth of purchasing power the rightful owner can't spend and how this is bad for the economy. I've used as simple of explanations as I can. I've gone over the difference between economic activity and economic growth. The government can't provide for growth because it spends in ways people don't want, otherwise we would already be doing it. They pay more for stuff than the market will. That means the inputs cost more than the outputs....a loss for us.

I've explained how the deflationary recession is caused by artificially low rates and government blown bubbles, not unstable private credit (nonsense, people are much more careful loaning out their money than the government).

I've explained how during the deflation no purchasing power is lost, it's just redistributed to those who have dollars and saved ahead of time. They are the rightful owners of purchasing power. People who were relying on credit no longer have someone willing to loan them purchasing power because they are too risky. Maybe they were in one of the inflation bubble industries the government created and they need to find other work. We temporarily have less to buy because production reduces as the economy tries to re-adjust to something sustainable. Prices need to fall and will fall without interference.

I've explained in simple terms how the government interfering with this process only stimulates economic activity, not growth and only postpones the recession and makes it bigger by exacerbating the misallocations. If they institute price controls, either floors or ceilings the result is surpluses in some areas and shortages in others as people try to stay legal. The law turns the recession into a depression.

I've gone over these things so many times. It's boring. I've tried to point them out with simple logic and basic economic truths we can agree on. At this point if you don't get those points it's not an intellectual thing it's an emotional problem. It's an irrational attachment to a belief system that is, at a minimum, very incomplete.

Leaving out all of the above, even if someone or some branch of economic thought is technically correct on mechanics, is leaving out reality. It's tiring to keep having economic discussions that ignore reality. Can we move on from this or can people who fundamentally disagree not interrupt when others are talking about these subjects? We just keep going back to the basics and it gets slightly personal. I'll do my best to ignore every post about the above subjects that I think are completely wrong if I know you are an MR devotee or whatever. 

[Gumby]

Ohhh boy, I've explained a dozen times in a half-dozen ways how QE expands the money supply.

Sorry, but it's not a very convincing argument, KShartle. You are referring to the "Quantity Theory of Money". It's a theory that originated in the 16th century and was disproven in the 1930s and the only people who still believe it are Monetarists and Milton Friedmanites that have been wrong about everything since 1980. Monetarists, and Friedman, were laughed out of mainstream economics when their theories couldn't explain anything post-1980. There is no evidence that expanding the base money supply results in inflation if other highly liquid financial assets of equal value are being removed — particularly when base money is such a tiny part of our economy's purchasing power.  A "finance major" should know all this — and I'm shocked that you don't.

I've explained how government spending misallocates resources and destroys capital as have others.

Now you are complaining about FISCAL operations. QE for T-Bonds is a MONETARY operation. A "finance major" should know the difference. If you want to get into the dangers of FISCAL spending, that's a political conversation. A government could just as easily just reduce taxes to have a similar effect as increased spending. But, again, that's a political conversation on FISCAL spending that certainly has merit.

I've explained how every dollar's worth of purchasing power they spend is one dollar's worth of purchasing power the rightful owner can't spend

It's just not very convincing, KShartle. And you offer no evidence. Real wages have increased significantly (a measure of our "living standards") over the past century. I'm not sure how you get away with saying/believing such things when you can't back up a word you're saying with evidence.

I've explained how the deflationary recession is caused by artificially low rates not unstable private credit (nonsense, people are much more careful loaning out their money than the government).

Please. If people were so "careful" about loaning money, the shadow banking credit debacle of 2008 wouldn't have happened.

I've explained how during the deflation no purchasing power is lost, it's just redistributed to those who have dollars and saved ahead of time. They are the rightful owners of purchasing power. People who were relying on credit no longer have someone willing to loan them purchasing power because they are too risky.

Sorry, but who do you think actually had "dollars" in our society during right before the 2008 crisis? There was only ~$1 trillion in base money before 2008. The National Debt was ~$8 Trillion, and the total credit market was ~$50 Trillion. Are you suggesting that only 1/58th or 1/50th of the private sector had savings?? That's a ridiculous statement.

We temporarily have less to buy because production reduces as the economy tries to re-adjust to something sustainable.

Because there is no demand. If there was a high demand for something, you can bet someone would start selling it. There are no bread lines with people complaining about short supplies.

I've explained in simple terms how the government interfering with this process only stimulates economic activity, not growth

That's your political opinion on fiscal operations. You are entitled to that opinion, and it's not something I need to argue with you about.

I've gone over these things so many times. It's boring.

Again, you're not just not very convincing. If you truly are the "finance" master you claim you are, you would be able to address the points I've made above and show evidence to support your theories. Otherwise, they are just unproven theories and we shouldn't put too much faith in them.

I've tried to point them out with simple logic and basic economic truths we can agree on.

Economics is complex. Your problem is that you are using overly simplistic theories that were debunked ages ago (such as the Quantity Theory of Money) and you offer no evidence to support anything you say.

At this point if you don't get those points it's not an intellectual thing it's an emotional problem.

Pointing out that the Quantity Theory of Money is false is not an "emotional" problem. (Not being able to accept or understand that probably is though.)

It's an irrational attachment to a belief system that is, at a minimum, very incomplete.

Says the guy who can't explain why the Quantity Theory of Money hasn't worked in the US, can't explain the past century of growth, and is oblivious to the fact that the standard of living has increased dramatically over that time.

Leaving out all of the above, even if someone or some branch of economic thought is technically correct on mechanics, is leaving out reality. It's tiring to keep having economic discussions that ignore reality.

Again... Says the guy who can't explain why the Quantity Theory of Money hasn't worked in the US, can't explain the past century of growth, and is oblivious to the fact that the standard of living has increased dramatically over that time.

Can we move on from this

I hope so. You're just not convincing and you offer no evidence to support what you are saying. Maybe you should give it a rest.

[Lowe]

@ Kshartle

To use Dalio's video as an illustration, you're positing that either the short or long-term debt cycles are wasteful (i.e. result in misallocation of capital) and that they are exacerbated by the Fed influencing rates?

If I am not mistaken, in the video Dalio remains agnostic as to whether the debt cycles have a net positive, neutral, or negative effect on GDP growth (increased production, or the linear trend line over which the cycles are laid).  The theory they are negative makes sense, but it would also make sense for someone to theorize a net positive effect.  More credit means more opportunities for the credit-worthy.

Perhaps you're saying that the debt cycles alone are net positive (suggested by the increase in credit, i.e. usury, that accompanied the Renaissance), but that the Fed exacerbates them to the point that they are negative.  That might be true, but I can't see that you could find evidence for it.  There aren't any examples of a developed country without a central bank.

[Lowe]

Ohhh boy, I've explained a dozen times in a half-dozen ways how QE expands the money supply.

Sorry, but it's not a very convincing argument, KShartle. You are referring to the "Quantity Theory of Money". It's a theory that originated in the 16th century and was disproven in the 1930s and the only people who still believe it are Monetarists that have been wrong about everything since 1980. Monetarists were laughed out of economics when their theories couldn't explain anything post-1980. There is no evidence that expanding the base money supply results in inflation if other highly liquid financial assets are being removed — particularly when base money is such a tiny part of our economy's purchasing power.  A "finance major" should know all this — and I'm shocked that you don't.

Yes, but it does increase the money supply, over what the money supply has been reduced to, due to the contraction of private credit.  By money supply I mean the supply of loanable reserves.

Treasurys aren't loanable reserves, so I don't think they should count.  Is there a reason they should?

It is true that the banks are never short of reserves, since in the last resort they can borrow from the Fed itself.  In thinking about this, would you say it makes more sense to describe QE as a method of locking banks out of Treasurys, as opposed to an expansion anything or other?  Even then, there is a distinction to be drawn between cash reserves and Treasurys, however we describe one relative the other.


EDIT:  I bring this up because I am confused about what the argument is.  Kshartle's complaint sounds like a purported mis-allocation of capital compared with a hypothetical economy with no fiat money.  I don't see where he explicitly said that price inflation would result from increases in the money supply / bank reserves ( or restoration of those reserves to pre-deflation levels ).  Maybe he claimed that in previous threads, or somewhere in this thread, and I didn't read it.

[moda0306]

The idea that people are careful about lending money is flabbergasting to me. Most people go crazy at the idea of not getting interest on their money, even now when inflation is under 2%.  People essentially allow banks to lend their money out for them for almost no interest.

[Kshartle]

@ Kshartle

To use Dalio's video as an illustration, you're positing that either the short or long-term debt cycles are wasteful (i.e. result in misallocation of capital) and that they are exacerbated by the Fed influencing rates?

Since interest rates are heavily influenced by the FED to say the least, I'm saying they are a major cause of the cycles if not the greatest cause.

They are unquestionably wasteful. They drive people to borrow when absent manipulation they would prefer to save. They distort behavior. We know people act in their own self-interest already. If people aren't doing something (borrowing) there is a reason. They either prefer to not borrow or lenders (people with the money) prefer to not lend.

Let the market participants sort out their dealings without another entity interferring with violent control over the price of money or the supply of it. Their authority stems from the Army and police protection of the Government. The moral condemnation isn't needed to prove that the interference is bad, just the understanding that using violent force to get humans to do things they don't want makes them worse off than otherwise and all of us worse off.

The clearest example of their interference causing a bubble is the last housing bubble. Artificially low rates and government gauranteed loans sucked people into buying that otherwise would have not and bid up housing prices causing people to get into the home-buying business when they should have been doing something else. It could only be sustained with cheap money. The cheap money can't go on forever without inflation getting out of control (anyone remember $150 a barrel oil)?

There are millions of examples though of activity that is either happening or not happening due to the FEDs interference, daily. Our entire society is consuming it's savings and taking on debt it otherwise wouldn't because of low rates and inflation.

We need additional capital (property, plant, equipment, etc.) to improve productivity. Capital improvements come from saving a part of our production and not consuming it all.  Improving productivity is how the standard of living is increased. The politicians never want this because it's bad politics in the short run. The period of liquidation that follows these low-interest rate, inflation booms (can't even get a boom anymore now) is painful as the economy fights off the government intervention of the past and tries to re-adjust. We call that a recession and it makes the government look bad. So they appoint and encourage guys like greenspan and bernanke to flood us with credit and money to keep things going. They can only push it so far though.

[Gumby]

By money supply I mean the supply of loanable reserves.

The reserve requirement is zero — and has been since December 1990. So, banks aren't reserve constrained in the first place (i.e. they have the ability to loan an infinite amount of money). The only thing that limits loans is the supply of creditworthy borrowers walking in the door of the bank.

MR explains it like this...

It's important to understand that banks are unconstrained by the government (outside of the regulatory framework) in terms of how they create money. When we go through business school we are taught that banks obtain deposits and then leverage those deposits up by 10X or so. This is why we call the modern banking system a “Fractional Reserve Banking”? system. Banks supposedly lend a portion of their “reserves”?. There’s just one problem here. Banks are never reserve constrained! Banks are always capital constrained. This can best be seen in countries such as Canada where there are no reserve requirements.[13] Reserves are used for only two purposes – to settle payments in the interbank market and to meet the Fed’s reserve requirements. Aside from this, reserves have very little impact on the day-to-day lending operations of banks in the USA. This was recently confirmed in a Fed paper:

“Changes in reserves are unrelated to changes in lending, and open market operations do not have a direct impact on lending. We conclude that the textbook treatment of money in the transmission mechanism can be rejected.”?

Source: http://www.federalreserve.gov/pubs/feds ... 041pap.pdf

This is very important to understand because many have assumed that various Fed policies in recent years (such as Quantitative Easing) would be inflationary or even hyperinflationary. But all the Fed has been doing is adding reserves to the banking system in exchange for (mostly) government bonds. Because banks are not reserve constrained, i.e, they don’t lend their reserves or multiply their reserves, this doesn’t necessarily lead to more lending and will not result in the private sector being able to access more capital.

Because banks are not reserve constrained it can only mean one thing – banks lend when creditworthy customers have demand for loans (assuming the banking system is healthy and banks are engaging in the business they are designed to transact). Loans create deposits, not vice versa. Banks create new loans independent of their reserve position and the Federal Reserve is in the business of altering the composition of outstanding financial assets in an effort to maintain a target interest rate and maintaining the smoothly operating payments system that it oversees (this is part of monetary policy which only loosely impacts the direct issuance of inside money). In the loan creation process, banks will make loans first (resulting in new deposits) and will find necessary reserves after the fact (either in the overnight market or via the Fed).

Source: http://papers.ssrn.com/sol3/papers.cfm? ... id=1905625

It is true that the banks are never short of reserves, since in the last resort they can borrow from the Fed itself.  In thinking about this, would you say it makes more sense to describe QE as a method of locking banks out of Treasurys, as opposed to an expansion anything or other?

Yes. It's a crowding-out of Treasuries.

Even then, there is a distinction to be drawn between cash reserves and Treasurys, however we describe one relative the other.

There is. To a bank, the excess reserves are a pain in the butt. They can't get much beyond IOR (or FFR) as a return on those excess reserves so they use those reserves to bid up other financial assets (as Dalio explained in simpler terms).

EDIT:  I bring this up because I am confused about what the argument is.  Kshartle's complaint sounds like a purported mis-allocation of capital compared with a hypothetical economy with no fiat money.  I don't see where he explicitly said that price inflation would result from increases in the money supply / bank reserves ( or restoration of those reserves to pre-deflation levels ).  Maybe he claimed that in previous threads, or somewhere in this thread, and I didn't read it.

He said it in other threads. He thinks that QE will result in the collapse of the dollar or hyperinflation if it is continued.

The problem is that QE for T-Bonds is not a fiscal operation — the excess reserves from QE don't enter circulation.  And yet, he believes that is somehow highly inflationary — despite the fact that there is no evidence to support that theory. He certainly has the right to argue that fiscal deficit-spending is morally damaging to our society and dilutes purchasing power  — that's a political discussion about fiscal spending. But, to argue that QE is highly inflationary — without offering any evidence to support his theories — just isn't convincing.

[Kshartle]

The idea that people are careful about lending money is flabbergasting to me. Most people go crazy at the idea of not getting interest on their money, even now when inflation is under 2%.  People essentially allow banks to lend their money out for them for almost no interest.

I don't think people even really understand what's happening when they put money in the bank. They don't think there's any risk because there is a sticker in the window with the words FDIC on it. They are tricked into thinking their money is completely safe even though the FDIC doesn't have the funds to bail them out.

Most of them know nothing of investments and take what they can get at the bank. They see no other safe option that pays more. Withholding their meager savings from the banks wouldn't help anyway. The banks can't pay more because they don't have high-yielding lending opportunities worth pursuing. They're buying treasuries and speculating themselves. They're making loans with government (taxpayer) guarantees attached.

[Gumby]

We need additional capital (property, plant, equipment, etc.) to improve productivity. Capital improvements come from saving a part of our production and not consuming it all.

I wonder where KShartle thinks that savings, in dollars, comes from. If he says people who were saving with private credit weren't actually saving real dollars, that must mean that the real savings in dollars comes from the government? Hmmm

It's funny to think about people who want the government to spend less and the private sector to save more — they are talking out of both sides of their mouths. The only way for the private sector to save more while the government spends less is for the private sector to issue more credit. But all that does is fuel another credit bubble!

[Kshartle]

We need additional capital (property, plant, equipment, etc.) to improve productivity. Capital improvements come from saving a part of our production and not consuming it all.

I wonder where KShartle thinks that savings comes from. If he says people who were saving with private credit weren't actually saving real dollars, that must mean that the real savings in dollars comes from the government? Hmmm

Savings come from producing and not consuming. It doesn't come from the government, that is laughable. You can't print savings. It doesn't come from nothing. Something can't come from nothing. It comes from production that is not consumed. I catch 2 fish and instead of eating them both I eat one and save one for tomorrow so I can spend the time (another resource) making a net to catch 3 a day and improve my standard of living.

We are now consuming all production and even more as eviddnced by the trade deficit.

Take a look at debt to GDP.

[moda0306]

The idea that people are careful about lending money is flabbergasting to me. Most people go crazy at the idea of not getting interest on their money, even now when inflation is under 2%.  People essentially allow banks to lend their money out for them for almost no interest.

I don't think people even really understand what's happening when they put money in the bank. They don't think there's any risk because there is a sticker in the window with the words FDIC on it. They are tricked into thinking their money is completely safe even though the FDIC doesn't have the funds to bail them out.

Most of them know nothing of investments and take what they can get at the bank. They see no other safe option that pays more. Withholding their meager savings from the banks wouldn't help anyway. The banks can't pay more because they don't have high-yielding lending opportunities worth pursuing. They're buying treasuries and speculating themselves. They're making loans with government (taxpayer) guarantees attached.

Kshartle,

So you just confirmed for me that people aren't being very careful with who they're lending their money to.  I'm not trying to make a profound moral judgement on the "sheeple" that don't understand the system, but the LAST thing they are is "careful."  I'm surprised there's disagreement here.

And yes, there are government guarantees, but those are only as good as the banking system that can give people their money back.

I think this gets to something more telling, though.  The government obviously facilitates lending with its interactions with the banking system.  It does this all the time, though.  When the government sets up courts that allow party A to sue party B for something and force party B to pay, this is an unnatural machination that facilitates lending.

Maybe we should abolish courts as well, because they create "artificially low" barriers to trade.

[Gumby]

You can't print savings...I catch 2 fish and instead of eating them both I eat one and save one for tomorrow so I can spend the time (another resource) making a net to catch 3 a day and improve my standard of living.

Not sure about you, but I don't save and invest using fish. Like most people, I prefer to save in dollars. It's a bit more convenient. Dollars either come from private credit or the government.

[Kshartle]

You can't print savings...I catch 2 fish and instead of eating them both I eat one and save one for tomorrow so I can spend the time (another resource) making a net to catch 3 a day and improve my standard of living.

Not sure about you, but I don't save and invest using fish. Like most people, I prefer to save in dollars. Dollars either come from private credit or the government.

I earn $2,000 mowing lawns with a push mower. Instead of blowing it all on consumption I save $1,500 and buy a riding mower. Now I can do twice as many jobs in the same time. The price of mowing lawns in my community is lower now also.

If no one ever saved anything we'd never get any improvements. We'd all be producing to consume immediately and just subsiting.

How has the Chinese economy been able to grow at such a fast pace for decades all the while the government is taking in reserves (not deficit spending) and the Chinese have one of the highest savings rates in the world?  Imagine if the government had been running deficits the entire time and the Chinese consuming their production rather than saving.

[Gumby]

I earn $2,000 mowing lawns with a push mower. Instead of blowing it all on consumption I save $1,500 and buy a riding mower.

Right... Do you know where that $1,500 came from? It either came from private credit — which you said was not really savings this morning — or it comes from the government. There is no way for people to "save" more dollars without either increasing private credit or increasing government net spending.

How has the Chinese economy been able to grow at such a fast pace for decades all the while the government is taking in reserves (not deficit spending) and the Chinese have one of the highest savings rates in the world?  Imagine if the government had been running deficits the entire time and the Chinese consuming their production rather than saving.

Yes. A trade surplus. But, in the US we don't have that. So, our dollar savings either comes from private credit or government spending. Are you saying you'd rather be a trade surplus nation and have us all work in factories?

[Kshartle]

The idea that people are careful about lending money is flabbergasting to me. Most people go crazy at the idea of not getting interest on their money, even now when inflation is under 2%.  People essentially allow banks to lend their money out for them for almost no interest.

I don't think people even really understand what's happening when they put money in the bank. They don't think there's any risk because there is a sticker in the window with the words FDIC on it. They are tricked into thinking their money is completely safe even though the FDIC doesn't have the funds to bail them out.

Most of them know nothing of investments and take what they can get at the bank. They see no other safe option that pays more. Withholding their meager savings from the banks wouldn't help anyway. The banks can't pay more because they don't have high-yielding lending opportunities worth pursuing. They're buying treasuries and speculating themselves. They're making loans with government (taxpayer) guarantees attached.

Kshartle,

So you just confirmed for me that people aren't being very careful with who they're lending their money to.

Moda do you think you are better at guaging the riskiness of an investment with your own money or someone else using your money that you have ZERO recourse against for losses and who loans it for political purposes, not financial ones? I am surprised this would even merit a sentence of discussion.

Unless you think the government is a good steward of money, better than the people who earned it. Come on you're just being disagreeable about obvious stuff. We were talking about the government, you brought up the banks to prove some point that people aren't good with their money. Well ok, that might be true but you can't honestly think the government would be better do you?!?!?!

Let me remind you the government is staffed with people.

[Kshartle]

The government obviously facilitates lending with its interactions with the banking system.  It does this all the time, though.  When the government sets up courts that allow party A to sue party B for something and force party B to pay, this is an unnatural machination that facilitates lending.

You'd call it facilitate, some others might call it disruption. You think courts are a good solution to guarantee loan repayment? 

Escrow, risk assesment, business reputation, collateral.....this is what facilitates lending and repayment assurance. Not the hope that you can sue someone for not paying you back. Christ the court costs alone and the time would only make it worth it if it's a huge sum. The free market solutions facilitate it much much more.

[Kshartle]

I earn $2,000 mowing lawns with a push mower. Instead of blowing it all on consumption I save $1,500 and buy a riding mower.

Right... Do you know where that $1,500 came from? It either came from private credit — which you said was not really savings this morning — or it comes from the government. There is no way for people to "save" more dollars without either increasing private credit or increasing government net spending.

If you save 100 dollars and get paid 10% interest, but prices have risen 30%, what do you think of your savings? Has the government helped you by printing or lowering rates to encourge the banks to loan?

We don't need more dollars to have more savings if the dollars we save can buy more because prices are lower because we are producing more.

Ever hear the B. Franklin quote "A penny saved is a penny earned"? If money is real and not FIAT being devalued then saving today facilitates greater future consumption through lower prices. We don't need more dollars. We need more savings and more production of goods and services. We can't more of the latter without more of the former. The low rates and inflation discourage the former so we get less of the latter.

[Pointedstick]

You're talking past each other. Kshartle, you're talking micro but Gumby and others are talking macro. If you want to discuss macro things like QE, you can't rely on micro.

[Kshartle]

How has the Chinese economy been able to grow at such a fast pace for decades all the while the government is taking in reserves (not deficit spending) and the Chinese have one of the highest savings rates in the world?  Imagine if the government had been running deficits the entire time and the Chinese consuming their production rather than saving.

Yes. A trade surplus. But, in the US we don't have that. So, our dollar savings either comes from private credit or government spending. Are you saying you'd rather be a trade surplus nation and have us all work in factories?

You might not be aware but at one point the US was a creditor nation. I'm sure some of the older members remember.  We had far and away the highest living standard in the world and the fastest growing economy and fastest growing standard of living. This was not in spite of the trade surplus but due in large part to it. High savings rates which facilitated capital improvements led to massive productivity and the chance to consume and save even more.

The government has squandered all that and grown immensely by borrowing against our productivity and taxing away the incentive to work and inflating away the incentive to save.

You can't print a higher standard of living and the banks can't loan us one. Neither can the Chinese.

Would I rather see all these unemployed Americans working in factories building stuff for us to use and export around the world? Yup. Who the hell wouldn't? Or maybe you'd rather support them with money out of your check.

[Lowe]

He said it in other threads. He thinks that QE will result in the collapse of the dollar or hyperinflation if it is continued.

I can't disagree that QE is unlikely, if not totally unable, to result in hyperinflation.

QE in itself can't produce any inflation.  Only increased lending of the reserves could do that.

The problem is that QE for T-Bonds is not a fiscal operation — the excess reserves from QE don't enter circulation.

However increased lending is the purpose of QE, whether it occurs immediately over an extended period.  Therefore the money should enter circulation, in that it is loaned to people.  If it doesn't then QE fails, and price deflation continues until it bottoms out of its own accord.

So it is accurate to say successful QE is inflationary (since increased private credit will lead to price inflation, at least to the point of recovery from price deflation), while QE in itself is not.  Alternatively QE is not inflationary in the short term, but should be in the long term.

Another way for QE to fail is for too much lending to occur, resulting in inflation beyond price-recovery.  This situation is less likely than the other mode of failure because private banks are careful about whom they lend to, and not many people look credit-worthy during deflation and consequent recession.

And yet, he believes that is somehow highly inflationary — despite the fact that there is no evidence to support that theory. He certainly has the right to argue that fiscal deficit-spending is morally damaging to our society and dilutes purchasing power  — that's a political discussion about fiscal spending. But, to argue that QE is highly inflationary — without offering any evidence to support his theories — just isn't convincing.

Some argue an analogous failure is what occurs with fiat money over a long time period, exacerbating the next debt cycle.  That is difficult to know, but I can't definitively say it is false.  Citing increasing living standards is not a rebuttal, because there is nothing to say living standards might not have been higher, given this or that.

Whether real or not, it cannot be problem of QE because QE doesn't last long enough for this.  It would be a problem of the suppression of interest rates, in the face of an over-heating economy.  I agree this is a fiscal problem, in that it is political pressure that must cause it.  I had read somewhere that this happened during the 2000s with Greenspan.  I am not sure if that is true.

However it is also a monetary problem, in that is is the Fed's open market operations which make it possible.  It is not a rebuttal to cite other kinds of fiscal problems, which predate fiat money.