Tapering called off

[moda0306]

As I've already explained, the Fed can never stop buying bonds, because if they do, the markets will crash.
Again I have been shown to be correct, but of course no one will ever admit it.
That's the fate of all Cassandras: always right, never acknowledged.

This is no different than gold in a growing economy.  Eventually there won't be enough gold to pay off all the debt plus the outstanding interest payments.  The lack of the growth of the gold supply would create a market crash, eventually.

So yes, tech, any fixed-supply monetary arrangement is bound to collapse.  If you tried to turn the dollar into such an arrangement, it's no different.

[Kshartle]

As I've already explained, the Fed can never stop buying bonds, because if they do, the markets will crash.
Again I have been shown to be correct, but of course no one will ever admit it.
That's the fate of all Cassandras: always right, never acknowledged.

I will acknowledge it. I've been saying the same thing for a long time. Since I understand what QE is, what it does, and how it hurts the economy it's been clear to me that the economy will continue to deteriorate. Price fixing and counterfitting interferes with the distribution of capital. If it was small the economy could shrug it off. Now it's so large we probably need a full scale depression to repair the damage.

Don't worry, we'll get it eventually (Depression). Let's hope they don't don't nuke the economy by accelerating the printing beyond what can be deflated.

That being said, I think after a period of calm now that taper talk will go away, eventually the bad reports will give the FED cover to up the ante over 100 billion per month. I hope you have gold, silver, foreign stocks and foreign bonds in your VP.

[Kshartle]

I've wasted too much of my life explaining these concepts over and over in increasingly simple terms here. When the cumulative weight of propping up ridiculous non-counter points crushes some people the subject is either changed or the electronic equivalent of sticking their fingers in their ears and say "na na na na na" goes on.

We aren't sticking our fingers in our ears. You are telling us the definition of Metallism — which we are well aware of — and we are telling you that Metallism might make a little sense if we had commodity money, but our society is based on Credit Money. That's all there is to it.

Come on Kshartle/Mdraf... even the Austrians don't agree with your denial of Credit Money.

This is what I'm talking about. 

Clearly I'm defining Metalism even though I've never heard of it and denying the credit theory of money even though I've never heard of it. Ohhh yeah, and I really don't care what Austrians think. Or Germans, or Lebanese, or Hutus or Tootsies.

What I'm stunned by is the inability of MR/MMT devotees and Cullen Roche acolytes to answer simple economic questions:

For Example I asked the following: If I print one trillion dollars (perfect counterfeits) do I have more purchasing power?

Several MR/MMT students responded:

1. Are you the Fed?
2. Depends on what you do with that $1 trillion. If the Fed were to buy a bag of dirt with that $1 trillion, that would be the equivalent of a helicopter drop (since the bag of dirt has no value) and it would be highly inflationary.
3. What if you built a bonfire with it and burned it all up?
4. I don't understand the question.. YOU don't have the power to print $1 trillion.
5. No. Your purchasing power doesn't change if you lost a financial asset of equal value — which is what would happen if a Primary Dealer got that money from the Fed.
6. You don't have more purchasing power after a POMO transaction
7. Then you are probably going to jail.
8. A counterfeiter is creating a fake financial asset that defrauds people into believing he has purchasing power. It's known as fraud. What's your point?
9. If private sector credit is contracting on your island, people might not even notice the extra money you are printing.

Now this is a question even a child can easily answer. Cleary I have more purchasing power. And since it can't be created by printing it had to be stolen from it's rightful owners.

There are other examples. Such as If A has zero money and B has $100, if B loans the $100 to A and gets an IOU in return, has their respective purchasing power changed?

If you explain to a child that purchasing power is the ability to buy stuff they will answer this easily.

The MR/MMT students really struggled with this one. Yes, no, I don't get it, I don't understand, A has more but B has the same, A doesn't have more etc.

No one got it right. A now has the purchasing power that B had. He has borrowed it. They cannot by loaning create purchasing power.

My question is, how does studying MR/MMT turn very simple economic questions into such mind-benders that getting the right answer would seemingly have to happen by accident?

[Gumby]

The MR/MMT students really struggled with this one.

KShartle... It's simply because you've asked a question that doesn't happen in reality. There are no perfect counterfeiters. Counterfeiters commit fraud. You can't expect a descriptive framework — based on reality — to answer a question about hypothetical fantasylands where counterfeiters are causing moral issues. It just ain't going to happen.

But, hey... Keep it up with the bedtime stories. I'm sure you'll figure something useful out from them.

[Kshartle]

The MR/MMT students really struggled with this one.

KShartle... It's simply because you've asked a question that doesn't happen in reality. You can't expect a descriptive framework — based on reality — to answer a question about hypothetical fantasylands where counterfeiters are causing moral issues. It just ain't going to happen.

But, hey... Keep it up with the bedtime stories. I'm sure you'll figure something out from them.

Which one doesn't happen in reality? People don't counterfeit or people don't borrow money? What alternate reality are you talking about?

[Gumby]

The MR/MMT students really struggled with this one.

KShartle... It's simply because you've asked a question that doesn't happen in reality. You can't expect a descriptive framework — based on reality — to answer a question about hypothetical fantasylands where counterfeiters are causing moral issues. It just ain't going to happen.

But, hey... Keep it up with the bedtime stories. I'm sure you'll figure something out from them.

Which one doesn't happen in reality? People don't counterfeit or people don't borrow money? What alternate reality are you talking about?

There are no "perfect" counterfeiters. Counterfeiters commit fraud. You are basically talking about a crime and MR is simply a manual for the banking system.

For instance, your descriptive car manual doesn't cover crimes of car theft. That doesn't make the manual incorrect. It simply means that the manual isn't interested in discussing crime.

You have this desire to turn every conversation into a political one. And I just don't care about political conversations that much.

[Kshartle]

KShartle... It's simply because you've asked a question that doesn't happen in reality. You can't expect a descriptive framework — based on reality — to answer a question about hypothetical fantasylands where counterfeiters are causing moral issues. It just ain't going to happen.

But, hey... Keep it up with the bedtime stories. I'm sure you'll figure something out from them.

Which one doesn't happen in reality? People don't counterfeit or people don't borrow money? What alternate reality are you talking about?

There are no "perfect" counterfeiters. Counterfeiters commit fraud. You are basically talking about a crime and MR is simply a manual for the banking system.

For instance, your descriptive car manual doesn't cover crimes of car theft. That doesn't make the manual incorrect. It simply means that the manual isn't interested in discussing crime.

You have this desire to turn every conversation into a political one. And I just don't care about political conversations that much.

When did I mention politics? Are you telling me if you study/believe MR you can no longer understand the effects of counterfeiting? That last question is really rhetorical.

[Kshartle]

The time to do something about out current system will be when the economy has completely healed and private sector credit is expanding at a healthy rate.  At that point, the Fed should aggressively raise rates to make sure that credit expansion doesn't begin to fuel more speculative asset bubbles.

Do you think it's possible QE is actually hurting the economy? If it is in fact hurting it, will they ever stop and why in your opinion?

[Gumby]

When did I mention politics?

You always mention politics. Every question and retort is setting up another conversation about how bad the government is and how it steals from us and how we are all slaves, etc. Oh the government this and oh the government that. On and on... Who cares? This is an investment forum — we just want to know why the government is able to avoid nominal defaults on LTTs and we'll take care of the inflation with stocks and gold.

Are you telling me if you study/believe MR you can no longer understand the effects of counterfeiting? That last question is really rhetorical.

Look. If this line of questioning about counterfeiting is somehow connected to inflation (what we are really interested in here), then please explain yourself with real data. Show us how massive counterfeiting is supposedly destroying our purchasing power with real data and then we can continue. But, if you'd rather stick to bedtime stories, fairytales and fantasyisland scenarios, then I'm afraid we're done here.

The entire credit-based monetary system is based upon the Credit Theory of Money. You need to learn that theory if you want to understand why everyone on the planet and $14 trillion in S&P 500 market cap can get by with only $3.4 Trillion in base money.

The real world of economics is complex. There is credit, there are banks, there are deposits, there are money market funds, there are Primary Dealers, there are Treasury auctions, there are direct bidders and indirect bidders, there are excess reserves, there's IOR, there's FFR, there's overnight lending, and there are contracts that hold all of those operations together, and so on. Those are our realities — not some silly island with "Pointedstick notes". Trying to boil our economic realities down to fairytales and island bedtime stories will miss the real complexity entirely. And it seems that you are hoping to avoid that complexity so that you can inject your political morals into the conversation.

But, I keep telling you that I don't care about politics. If you have evidence of significant inflationary effects from "counterfeiting," then get on it with already and show us.

[Kshartle]

Eventually there won't be enough gold to pay off all the debt plus the outstanding interest payments.  The lack of the growth of the gold supply would create a market crash, eventually.

The implication of this is that significant resources would have to be expended to dig more gold out of the ground.  This would be incredibly silly.  I can't decide if it would be less or more dumb than financial engineering, though.

Or the price of gold just has to go up. The price in relation to other stuff...if gold is functioning as money.

[moda0306]

Eventually there won't be enough gold to pay off all the debt plus the outstanding interest payments.  The lack of the growth of the gold supply would create a market crash, eventually.

The implication of this is that significant resources would have to be expended to dig more gold out of the ground.  This would be incredibly silly.  I can't decide if it would be less or more dumb than financial engineering, though.

Or the price of gold just has to go up. The price in relation to other stuff...if gold is functioning as money.

There's still not enough gold to sustain the level of debt denominated in gold plus interest to be paid in gold. It's simple math.

[Kshartle]

The implication of this is that significant resources would have to be expended to dig more gold out of the ground.  This would be incredibly silly.  I can't decide if it would be less or more dumb than financial engineering, though.

Or the price of gold just has to go up. The price in relation to other stuff...if gold is functioning as money.

There's still not enough gold to sustain the level of debt denominated in gold plus interest to be paid in gold. It's simple math.

All loans are not due at the same time. Every individual loan can still be paid off if the borrower can provide goods and services required to trade for the required amount. Some will not be able to do this. They will default just like they do in dollars. The total amount of money in circulation does not require expansion to accomodate new production. Prices will fall to adjust. Rapidly moving prices can cause additional confusion in the marketplace and difficulties in planning that reduces efficiency. I think falling prices because money is gaining value causes fewer problems than rising prices due to money losing value.

If you had an island with 100 people, and 10 of them have gold and loan in to the other 90, all payable in 30 days with interest, some will not be able to pay. Those lenders who lent more foolishly will lose. Having someone counterfeit the gold to ensure everyone can pay does not change the fact that there was a loss, it only spreads it around to everyone, rewarding the risky unprofitable lenders at the expense of the prudent intelligent lenders. In that way also it makes us poorer by missallocating resources towards less profitable ventures (guys borrowed gold and bought stuff that had value but combined them and ended with less value than required for the loan to be made good).

Ideally the amount of money in circulation would rise to meet exactly the value of new goods and services. Who on Earth can possibly be in charge of this monumental task and not abuse that power?

[moda0306]

Kshartle,

There is some healthy level of debt given a certain amount of productive investment.  With the same amount of gold servicing an ever-growing nominal debt-base, it will eventually fail to meet those demands.

Unless you're arguing that our total aggregate debt plus interest to be paid should be limited to the amount of gold already in mined existence, which would significantly hamper investment.

Debt may appear an awful thing, but some amazing entrepreneurs depend heavily on debt early on, and never would have been able to bring their innovation to market without that tool.

I'm surprised that people so supportive of "businessmen" want to limit their access to economic tools to bring their ideas to market by limiting our growth to the quantity of a shiny yellow metal.

[Libertarian666]

Kshartle,

There is some healthy level of debt given a certain amount of productive investment.  With the same amount of gold servicing an ever-growing nominal debt-base, it will eventually fail to meet those demands.

Unless you're arguing that our total aggregate debt plus interest to be paid should be limited to the amount of gold already in mined existence, which would significantly hamper investment.

Debt may appear an awful thing, but some amazing entrepreneurs depend heavily on debt early on, and never would have been able to bring their innovation to market without that tool.

I'm surprised that people so supportive of "businessmen" want to limit their access to economic tools to bring their ideas to market by limiting our growth to the quantity of a shiny yellow metal.

One more time: No, limiting debt to the amount of gold in existences would NOT hamper investment. The total amount of goods in existence is NOT increased by printing money. All printing money can do is to REARRANGE existing goods. Thus, there is no increase in REAL investment available by printing money.

Of course NOMINAL investment can be increased by printing money; that is one of the effects of the "money illusion". But real investment cannot be increased other than by saving (spending less than one earns).

This is elementary, people.

[moda0306]

Kshartle,

There is some healthy level of debt given a certain amount of productive investment.  With the same amount of gold servicing an ever-growing nominal debt-base, it will eventually fail to meet those demands.

Unless you're arguing that our total aggregate debt plus interest to be paid should be limited to the amount of gold already in mined existence, which would significantly hamper investment.

Debt may appear an awful thing, but some amazing entrepreneurs depend heavily on debt early on, and never would have been able to bring their innovation to market without that tool.

I'm surprised that people so supportive of "businessmen" want to limit their access to economic tools to bring their ideas to market by limiting our growth to the quantity of a shiny yellow metal.

One more time: No, limiting debt to the amount of gold in existences would NOT hamper investment. The total amount of goods in existence is NOT increased by printing money. All printing money can do is to REARRANGE existing goods. Thus, there is no increase in REAL investment available by printing money.

Of course NOMINAL investment can be increased by printing money; that is one of the effects of the "money illusion". But real investment cannot be increased other than by saving (spending less than one earns).

This is elementary, people.

Generally, entrepreneurs can't build a widget factory unless there is debt to help them pay for the cost of it. Lack of credit prevents investment from occurring that otherwise could have.  If I have a great idea, but instead of our economy being limited by productive potential it's limited by not enough quantity of medium of exchange, we have a situation where we're far less productive than we otherwise could be.

This, my friend, is elementary.  Not only is an economy's growth limited by insufficient monetary expansion, but it's actually a policy decision.  As some of the other threads have shown, gold was a store of value initially used to help governments, not individuals.

I'm not saying that simply printing gobs of money will miraculously make our economy a utopia.  But it's monetizing an economy in the first place that leaves us exposed to the Mexican standoffs that we call recessions.  Having a fixed money supply amidst a growing economy is a recipe for disaster.  We might as well use bartar at that point.

[Kshartle]

This is elementary, people.

Evidently it is not. I thought I explained clearly how prices just adjust to the new money/goods equilibrium. Rapid changes of either the numerator or denominator cause planning problems but the reality is they only move rapidly if rapid inflation or deflation is possible. Those are only possible when you use money substitues and not real money. Real money isn't going to just appear and dissapear in huge quantites or the market will not choose/use it.

Evidently this is extremely advanced. I can't believe we go through this every single week.

[Kshartle]

I give up. Stuff can't be made unless we can get our hands on enough gold first.

They had a great economy going with all kinds of production that was profitable and self-sustaing and growing and then they ran out of gold. They got stuck in neutral until they could find another mine or pull it out of teeth from corpses in their graves.

[MediumTex]

This is elementary, people.

Evidently it is not. I thought I explained clearly how prices just adjust to the new money/goods equilibrium. Rapid changes of either the numerator or denominator cause planning problems but the reality is they only move rapidly if rapid inflation or deflation is possible. Those are only possible when you use money substitues and not real money. Real money isn't going to just appear and dissapear in huge quantites or the market will not choose/use it.

Evidently this is extremely advanced. I can't believe we go through this every single week.

If the only data points you had were the prices in a basket of goods and services (including wages) over the last five years, what conclusions would you draw about central bank policies over that period?

[Kshartle]

Unless you're arguing that our total aggregate debt plus interest to be paid should be limited to the amount of gold already in mined existence, which would significantly hamper investment.

How on Earth could you limit loans? Loans are limited by the risk a lender wants to take and the availability of savings. I mean, it would be except we have a bunch of maniacs distorting the markets making bad loans with no savings prior because they just print it and rob everyone else in the process.

[MediumTex]

I give up. Stuff can't be made unless we can get our hands on enough gold first.

They had a great economy going with all kinds of production that was profitable and self-sustaing and growing and then they ran out of gold. They got stuck in neutral until they could find another mine or pull it out of teeth from corpses in their graves.

Why do you think that money was in such short supply in the 1930s?

My understanding is that people even resorted to using "scrip" because there was so little currency circulating in some communities.

What caused this shortage of money?  What would have fixed it short of a World War II-type event?

[MediumTex]

Unless you're arguing that our total aggregate debt plus interest to be paid should be limited to the amount of gold already in mined existence, which would significantly hamper investment.

How on Earth could you limit loans? Loans are limited by the risk a lender wants to take and the availability of savings. I mean, it would be except we have a bunch of maniacs distorting the markets making bad loans with no savings prior because they just print it and rob everyone else in the process.

Couldn't bank regulators just raise reserve requirements?

The central bank could also raise interest rates.

Those are two ways to limit loans.

[Libertarian666]

Unless you're arguing that our total aggregate debt plus interest to be paid should be limited to the amount of gold already in mined existence, which would significantly hamper investment.

How on Earth could you limit loans? Loans are limited by the risk a lender wants to take and the availability of savings. I mean, it would be except we have a bunch of maniacs distorting the markets making bad loans with no savings prior because they just print it and rob everyone else in the process.

Couldn't bank regulators just raise reserve requirements?

The central bank could also raise interest rates.

Those are two ways to limit loans.

In a free market economy with enforcement of contract law against gold warehouses ("banks"), there would be no bank regulators or central bank.

So that wouldn't be a problem.

[Kshartle]

This is elementary, people.

Evidently it is not. I thought I explained clearly how prices just adjust to the new money/goods equilibrium. Rapid changes of either the numerator or denominator cause planning problems but the reality is they only move rapidly if rapid inflation or deflation is possible. Those are only possible when you use money substitues and not real money. Real money isn't going to just appear and dissapear in huge quantites or the market will not choose/use it.

Evidently this is extremely advanced. I can't believe we go through this every single week.

If the only data points you had were the prices in a basket of goods and services (including wages) over the last five years, what conclusions would you draw about central bank policies over that period?

My conclusions about central bank policies are not based on any time period so they wouldn't change. They are based on logic and reason. Central bank printing is functionaly the same as counterfeiting. More money than there otherwise would be divded by the same goods equals atrificially high prices with those prices that get touched first rising first.

You think the new money hasn't resulted in higher prices? Have you looked at bond prices? Stock prices? Home prices? Where do you think these would be absent the printing? It is clear distortion to the detriment of the economy as a whole and the benefit of a select few. Not to mention it lets the government create more agencies and give more handouts like we need that extra burden.

Is it any wonder the labor participation rate is declining? The birth rate for more affluent people is dropping? Kids are delaying entering the workforce because the economy sucks? I know I know it's lack of demand. Look, human desire is limitless. The only constraint on demand is production. You can't demand what hasn't been produced. We need more production. Production is punished and sloth rewarded however. Gosh if only we had more paper we could really get this thing rolling!

If I look at the last five years of central bank policy I would say it's probably in the running for the worst five year strech by an American central bank I can think of. I'm sure there's been worse. I'm confident Yellen or whoever is up to the challenge of taking the title.

[moda0306]

If all this is so elementary to you, Kshartle and Libertarian666, then why does the economy not behave the way you want or predict it to.

You say that rates are being held grossly artificially negative, but it's not inspiring any of the inflation that one would assume would occur if a price was being controlled by that much (remember, price controls have the element of either surpluses or shortages... if interest rates are at a grossly artificially low rate, you should see a shortage of willing lenders/savers and a glut of willing borrowers/spenders, driving up inflation considerably).


But to hit on another point... Kshartle, so if the fed was pushed to the point of having to "bail out" the treasury by funding it directly, and in doing so it would be acting outside its mandate of balancing inflation with unemployment, what do you think the fed would do?

The fed is currently working well-within its mandate (in fact it's failing at one aspect way more than the other), and if you believe it will continue to do so, that means our money supply (base, not broad) could very well shrink if inflation fires up and the fed reduces QE. 


So the fed is currently working within its mandate, and the market is predicting low inflation and no treasury debt crisis... what the heck is so extreme about all this?  Why are we having a fit about all this?  Like I said in another post, there's one of three options...

- The market sets rates, in which the market is begging the federal government to borrow from it at negative real interest rates, which justifies not only our current rate of borrowing, but even higher.

- The fed sets rates and is independent, and is well within its mandate because inflation is low and unemployment is high, but if inflation increases, the fed will taper and roll back the money supply it has created, and we don't have to worry about perpetual vast increases in the base money supply.  In fact it might go down due to the removability of reserves from the system.

- The fed sets rates and ISN'T independent, and it will fund government, making treasury bills/bonds as good as cash, as they are default-risk free.


You can't have it all ways.  You can't say that the fed isn't independent and is in cahoots with the status-quo-patrol banks and federal government and that the banking system is fraudulent and ignores reserve ratios, but simultaneously that treasury debt is fundamentally different than cash/reserves within the banking system.

You can't say that the bond market will "reject our rates," but then say that the fed controls the bond market.

You can't say that the fed is grossly manipulating the economy, and then completely ignore the signals the market is sending that it is NOT manipulating much.... whether those indicators are low rates, low inflation, low demand for loanable funds, or low velocity of money.

[Libertarian666]

Kshartle,

There is some healthy level of debt given a certain amount of productive investment.  With the same amount of gold servicing an ever-growing nominal debt-base, it will eventually fail to meet those demands.

Unless you're arguing that our total aggregate debt plus interest to be paid should be limited to the amount of gold already in mined existence, which would significantly hamper investment.

Debt may appear an awful thing, but some amazing entrepreneurs depend heavily on debt early on, and never would have been able to bring their innovation to market without that tool.

I'm surprised that people so supportive of "businessmen" want to limit their access to economic tools to bring their ideas to market by limiting our growth to the quantity of a shiny yellow metal.

One more time: No, limiting debt to the amount of gold in existences would NOT hamper investment. The total amount of goods in existence is NOT increased by printing money. All printing money can do is to REARRANGE existing goods. Thus, there is no increase in REAL investment available by printing money.

Of course NOMINAL investment can be increased by printing money; that is one of the effects of the "money illusion". But real investment cannot be increased other than by saving (spending less than one earns).

This is elementary, people.

Generally, entrepreneurs can't build a widget factory unless there is debt to help them pay for the cost of it. Lack of credit prevents investment from occurring that otherwise could have.  If I have a great idea, but instead of our economy being limited by productive potential it's limited by not enough quantity of medium of exchange, we have a situation where we're far less productive than we otherwise could be.

This, my friend, is elementary.  Not only is an economy's growth limited by insufficient monetary expansion, but it's actually a policy decision.  As some of the other threads have shown, gold was a store of value initially used to help governments, not individuals.

I'm not saying that simply printing gobs of money will miraculously make our economy a utopia.  But it's monetizing an economy in the first place that leaves us exposed to the Mexican standoffs that we call recessions.  Having a fixed money supply amidst a growing economy is a recipe for disaster.  We might as well use bartar at that point.

This is completely wrong. In a free market economy with gold money, whoever has gold can lend it if he wishes to do so, which he is likely to do if he thinks the reward outweigs the risk. Doubling the amount of "money" by printing an additional amount of warehouse receipts equal to the actual monetary gold will not increase the amount of wealth; all it will do is rearrange the wealth in favor of the printers.

So if someone wants to build a widget factory and they can't afford the equipment, etc., they have two choices:
1. Take an equity partner who will accept part of the profit and part of the loss in exchange for supplying money; or
2. Take on debt, agreeing to pay the money back regardless of the profit or loss, presumably from other sources of wealth if there is a loss.

Neither of these is helped by money printing... other than by allowing the parties to the transaction to extract wealth from others via dilution of the money due to the printing. But of course in that case they don't even need to build the factory at all; they can just live off the extracted wealth, as the government does.

Again, this is elementary logic, not even moderately complex economic theory. You can't get something for nothing unless someone else gets nothing for something.