How many people agree with MR/MT theory described on the forum

[Mdraf]

I for one am not disagreeing with the mechanics. I am disagreeing with the conclusions being drawn that the Fed purchasing all kinds of debt assets, being government bonds, MBS's etc is not inflationary because they are merely "asset swaps".

I think that this actually makes the whole discussion much simpler because all we need to do is wait around and see what actually happens to determine whether you are right or not.

Do you believe that over the last five years there has been the kind of inflationary effects you are concerned about, or do you believe that these bad inflationary effects are still in front of us?  If you think that they are still in front of us, how long do you think it will be before they will start showing up?

Do you agree that sustained high rates of inflation year after year require at least SOME increase in average wages?  That's an important question.

In response to all the above I can only say that we cannot know the future - but we can understand mathematics and refer you back to Kshartle's equation:

Same dollars / same goods and services = same price level

[Gumby]

I for one am not disagreeing with the mechanics. I am disagreeing with the conclusions being drawn that the Fed purchasing all kinds of debt assets, being government bonds, MBS's etc is not inflationary because they are merely "asset swaps".

If a bank holds ~$2 Trillion in deposit assets and 90% of its balance sheet is fluctuating assets on a Wednesday, and then on Thursday it makes some sales and only 86% of its ~$2 Trillion in balance sheet assets for deposits are now fluctuating, how does that cause inflation?

[MediumTex]

In response to all the above I can only say that we cannot know the future - but we can understand mathematics and refer you back to Kshartle's equation:

Same dollars / same goods and services = same price level

What do you think about this equation:

Contracting private sector credit offset by expanding public sector credit / same goods and services = same price levels

[Mdraf]

I for one am not disagreeing with the mechanics. I am disagreeing with the conclusions being drawn that the Fed purchasing all kinds of debt assets, being government bonds, MBS's etc is not inflationary because they are merely "asset swaps".

If a bank holds ~$2 Trillion in deposit assets and 90% of its balance sheet is fluctuating assets on a Wednesday, and then on Thursday it makes some sales and only 86% of its ~$2 Trillion in balance sheet assets for deposits are now fluctuating, how does that cause inflation?

You're changing the subject because you don't want to answer what happened to that $9.75

[Kshartle]

1. Secular deflationary trend across the whole economy due to a combination of factors, especially contracting private sector credit and bad demographics. The FED has vowed to fight off deflation. Do you think they will fail?

2. Secular bull market in treasuries with fundamentals still intact. What are those fundies? are they what you said in #1?

3. Cyclical bull market in equities that looks like it is finally running out of gas. Why is it running out of gas? I think it's because the current level of monetary expansion is not fast enough and it will pick up. How can this be good for bonds? Do you think the FED will actually taper or stop? If they do how are bond prices sustained?

4. Inability of the U.S. economy to tolerate interest rates at any higher levels (and probably not even at current levels) without tipping back into recession. Inability to tolerate lower bond prices isn't a reason for them to stay up. Why would that keep the prices up? It has to be something else.

Now I don't own any. I've asked for people here to state cases for ownership. This is the best answer I think I've seen. I think they need to go a little further (more analysis). See I think they're dammed no matter what. The FED can buy to prop up prices but only by increasing the money supply at a higher rate. (I know some people think this doesn't actually increase the money supply). The increased rate means people will demand higher bond yields and will be hitting sell and going to Short-term or other things.

[Mdraf]

In response to all the above I can only say that we cannot know the future - but we can understand mathematics and refer you back to Kshartle's equation:

Same dollars / same goods and services = same price level

What do you think about this equation:

Contracting private sector credit offset by expanding public sector credit / same goods and services = same price levels

I don't agree that public sector credit is equal to private sector credit. I have argued before that the private sector is the eventual guarantor of that public sector credit and has to pay it eventually with productivity.  See other threads. I don't want to repeat everything again.

[Gumby]

I for one am not disagreeing with the mechanics. I am disagreeing with the conclusions being drawn that the Fed purchasing all kinds of debt assets, being government bonds, MBS's etc is not inflationary because they are merely "asset swaps".

If a bank holds ~$2 Trillion in deposit assets and 90% of its balance sheet is fluctuating assets on a Wednesday, and then on Thursday it makes some sales and only 86% of its ~$2 Trillion in balance sheet assets for deposits are now fluctuating, how does that cause inflation?

You're changing the subject because you don't want to answer what happened to that $9.75

My apologies. I'm not an expert on the Egg market. I can only properly answer questions about the banking system.

If you have questions about eggs, ask a farmer. If you have questions about banks, ask me.

Oddly, you seem unable to answer questions about banks — which is what we are supposed to be discussing here.

[Kshartle]

I for one am not disagreeing with the mechanics. I am disagreeing with the conclusions being drawn that the Fed purchasing all kinds of debt assets, being government bonds, MBS's etc is not inflationary because they are merely "asset swaps".

I think that this actually makes the whole discussion much simpler because all we need to do is wait around and see what actually happens to determine whether you are right or not.

Do you believe that over the last five years there has been the kind of inflationary effects you are concerned about, or do you believe that these bad inflationary effects are still in front of us?  If you think that they are still in front of us, how long do you think it will be before they will start showing up?

Do you agree that sustained high rates of inflation year after year require at least SOME increase in average wages?  That's an important question.

In response to all the above I can only say that we cannot know the future - but we can understand mathematics and refer you back to Kshartle's equation:

Same dollars / same goods and services = same price level

It's a classic equation

[MediumTex]

1. Secular deflationary trend across the whole economy due to a combination of factors, especially contracting private sector credit and bad demographics. The FED has vowed to fight off deflation. Do you think they will fail?

In a word, yes, just like they have failed in Japan (I'm not talking about price levels, I'm talking about structural economic contraction).  When an economy is experiencing a structural contraction, it's really hard to stop it without forgiving a bunch of debt,  importing a bunch of young productive people and hoping that a bunch of old people will die.

2. Secular bull market in treasuries with fundamentals still intact. What are those fundies? are they what you said in #1?

Sorry, I should have said technicals intact.  I'm not a technical analysis person, but the 30 year downward trending yield channel is intact, which suggests that the secular bull market has not ended.  When the channel is decisively broken (which right now would have long term treasuries yielding 6%+) I will probably feel differently.  I am just using the technical analysis perspective as a way of validating my fundamentals analysis.

3. Cyclical bull market in equities that looks like it is finally running out of gas. Why is it running out of gas? I think it's because the current level of monetary expansion is not fast enough and it will pick up. How can this be good for bonds? Do you think the FED will actually taper or stop? If they do how are bond prices sustained?

I think it's running out of gas because earnings prospects are not good enough to justify higher stock prices from current levels.  As people sell equities in response to this realization I believe they will move into bonds.  I don't know what the Fed will do, but I'll bet they will keep trying to juice the economy in whatever ways they can think of (see Japan).

4. Inability of the U.S. economy to tolerate interest rates at any higher levels (and probably not even at current levels) without tipping back into recession. Inability to tolerate lower bond prices isn't a reason for them to stay up. Why would that keep the prices up? It has to be something else.

What I'm saying is that I don't think people can afford house payments and payments on other items at higher interest rates.  When interest rates hit those levels (as I believe they are doing now), people will stop buying houses and this will have a ripple effect that will ultimately translate into lower yields (as it did in 2008).

[MediumTex]

I think that this actually makes the whole discussion much simpler because all we need to do is wait around and see what actually happens to determine whether you are right or not.

Do you believe that over the last five years there has been the kind of inflationary effects you are concerned about, or do you believe that these bad inflationary effects are still in front of us?  If you think that they are still in front of us, how long do you think it will be before they will start showing up?

Do you agree that sustained high rates of inflation year after year require at least SOME increase in average wages?  That's an important question.

In response to all the above I can only say that we cannot know the future - but we can understand mathematics and refer you back to Kshartle's equation:

Same dollars / same goods and services = same price level

It's a classic equation

Yes, but how are we defining "same dollars"?

If the government were to enact an austerity program in the midst of a deep recession with contracting private credit (as it did in the late 1930s), do you think that there would be the same or fewer dollars out there?

If you say that there would be fewer dollars out there, why would there be fewer dollars out there?  If there were fewer dollars out there in that scenario, what would happen if the government were to increase its spending through increased deficits at a level that matched the contraction of private credit?  Would it help to bring the number of dollars out there back to the level it was prior to the recession--i.e., would it ultimately create a situation where the number of dollars available to buy stuff hadn't changed at all?

[Kshartle]

I'm not an expert on the Egg market.

I am. I'm sharing a plate of scrambled eggs with my dog right now.

The historical price according to the Sacramento Bee in Sept '03 was $1.26 - now it's $1.84, a 46% increase.

That's a compound rate average annual rate of 3.9%, even through the big deflation. Does that jive with the CPI or have we substitued air for eggs?

Unless I'm reading this charting software wrong, which I could be: http://markets.financialcontent.com/mi. ... 10&Range=3

[Pointedstick]

In response to all the above I can only say that we cannot know the future - but we can understand mathematics and refer you back to Kshartle's equation:

Same dollars / same goods and services = same price level

It's a classic equation

And it's a good one. What we keep trying to say though is that the "quantity of dollars" numerator is actually determined by both the government--by its taxation/spending policy--and also the private-sector banks--by their lending "policy". So when the government is expanding its contribution to the money supply by, say, a trillion dollars per year, you need to add that to what the banks are doing to determine how many new dollars are actually getting added to the money supply in totality. If the banks have halted lending to the tune of 1.5 trillion/year, then in fact the total money supply has contracted even though government spending may have exploded.

If banks start lending a lot again and government keeps spending, then yes, the money supply will start to expand, and if all that spending and spending doesn't result in more goods and services, we're gonna have some inflation.

If you can agree with me that the total size of the money supply is determined by both the government AND the banks, I think we'll have gone a long way to resolving our differences of opinion.

[Kshartle]

If you can agree with me that the total size of the money supply is determined by both the government AND the banks, I think we'll have gone a long way to resolving our differences of opinion.

PS I agreed with that before I ever made my first post here.

[Gumby]

If you can agree with me that the total size of the money supply is determined by both the government AND the banks, I think we'll have gone a long way to resolving our differences of opinion.

PS I agreed with that before I ever made my first post here.

Then why didn't you tell us?!

[MediumTex]

If banks start lending a lot again and government keeps spending, then yes, the money supply will start to expand, and if all that spending and spending doesn't result in more goods and services, we're gonna have some inflation.

UNLESS we also have strong growth in economic output to match all of that extra money being created by the government and private sector.

That's what happened in the 1980s (collapsing oil prices also helped A LOT), and the net effect was pretty tame inflation, despite a dramatic increase in both private sector AND public sector credit.

[Pointedstick]

Now I'm no longer sure what we're actually disagreeing about.

[Mdraf]

Now I'm no longer sure what we're actually disagreeing about.

Darn it! Rats! I'm off to lunch

[Kshartle]

If you can agree with me that the total size of the money supply is determined by both the government AND the banks, I think we'll have gone a long way to resolving our differences of opinion.

PS I agreed with that before I ever made my first post here.

Then why didn't you tell us?!

Are you guys joking? No one has ever disagreed with that to my knowledge. We (everyone) have not been disagreeing with that ever. We are disagreeing about other things.

[Kshartle]

If banks start lending a lot again and government keeps spending, then yes, the money supply will start to expand, and if all that spending and spending doesn't result in more goods and services, we're gonna have some inflation.

UNLESS we also have strong growth in economic output to match all of that extra money being created by the government and private sector.

That's what happened in the 1980s (collapsing oil prices also helped A LOT), and the net effect was pretty tame inflation, despite a dramatic increase in both private sector AND public sector credit.

This is what we're disagreeing about. You guys seems to think that we need strong economic output or banks to create inflation or an expanding money supply.

We don't.

The government can do it all by itself just by printing.

I have put forth that they will continue to print until price inflation gets to a point that they have to stop at which point the whole thing crashes.

They don't need the banks to lend to make this happen although that would accelerate it.

The non-lending is slowing it down. That's a symptom of a crappy economy...and one that's getting worse IMO.

[Pointedstick]

This is what we're disagreeing about. You guys seems to think that we need strong economic output or banks to create inflation or an expanding money supply.

We don't.

The government can do it all by itself just by printing.

As a general principle, and all else being equal, yes. If the quantity of goods and services is unchanged, and banks land exactly the same amount, then government money printing will lead to inflation.

But in order to arrive at the correct answer in the real world, you can't just look at that half of the numerator. You also have to look at the other half of the numerator and the denominator.

[Gumby]

PS I agreed with that before I ever made my first post here.

Then why didn't you tell us?!

Are you guys joking? No one has ever disagreed with that to my knowledge. We (everyone) have not been disagreeing with that ever. We are disagreeing about other things.

Are we talking to the same Kshartle?

I seem to remember we had endless heated discussions about credit and money being two different things. But, if you now say that state money and bank money make up our "money supply" then that means that you now understand the Credit Theory of Money... and you've since changed your tune (since bank money is mainly composed of credit).

Originally you denied the Credit Theory of Money and now you seem to be on board with it.

[Kshartle]

Now I'm no longer sure what we're actually disagreeing about.

Darn it! Rats! I'm off to lunch

I'm off to get a few Belgian beers.

[Kshartle]

Then why didn't you tell us?!

Are you guys joking? No one has ever disagreed with that to my knowledge. We (everyone) have not been disagreeing with that ever. We are disagreeing about other things.

Are we talking to the same Kshartle?

I seem to remember we had endless heated discussions about credit and money being two different things. But, if you now say that state money and bank money make up our "money supply" then that means that you now understand the Credit Theory of Money... and you've since changed your tune (since bank money is mainly composed of credit).

Originally you denied the Credit Theory of Money and now you seem to be on board with it.

I have changed nothing. Nada. I understnad perfectly where dollars come from, what they represent and fractional reserve banking. My BS is in Finance with a minor in Accounting and MBA is Forensic Accounting & Taxation.

I understand these concepts perfectly, not that degrees prove this. The content of my writing proves it.

We are disagreeing on something else entirely.

[Gumby]

I have changed nothing. Nada. I understnad perfectly where dollars come from, what they represent and fractional reserve banking. My BS is in Finance with a minor in Accounting and MBA is Forensic Accounting & Taxation.

I understand these concepts perfectly, not that degrees prove this. The content of my writing proves it.

We are disagreeing on something else entirely.

Gotta say I find this all hard to believe. A few days ago you you said you never heard of these concepts and were trying to convince us that M0 represents our nation's purchasing power and most of us (as well as Wikipedia and virtually all economists) vehemently disagreed with that assertion.

[Libertarian666]

Well it is Groundhog's day, everyday.

Scary that there are 13 people in America who actually believe this stuff ! And they're ALL HERE!

I think that most people feel this way the first time they are exposed to this perspective on our monetary system.

As I posted before, I think that one of the reasons that many people continue to think about our monetary system in gold standard terms is that it strengthens the "confidence game" element of our fiat currency.  It's almost like preserving certain gold standard era fictions in a post-gold standard world helps to stabilize the post-gold standard world (that's pretty bizarre, but probably has some truth to it).

For years, people have thought I was foolish to own ANY long term treasuries, but once you internalize the concepts we are discussing here you understand how long term treasuries can still have huge upside even at very low yields, and this idea has been validated through experience repeatedly in recent years. 

This is an important concept for any PP investor to understand, otherwise he would sell all of his long term treasuries in response to the seemingly irrefutable arguments made by certain market pundits.  Once you see the larger picture, though, the pundits' arguments are only irrefutable within a certain paradigm, and that paradigm may not take account of all of the variables that are involved in the functioning of our monetary system.

For example, right now I am hugely bullish on long term treasuries.  I think that Kshartle, Mdraf and Libertarian666 might say that this just confirms that I don't understand very well how the world actually works.  The thing is, though, I am bullish on long term treasuries because people like Kshartle, Mdraf and Libertarian666 feel the way that they do.  If everyone agreed with me, I would be a lot more concerned that I was wrong, since the crowd is usually wrong about where the market is headed next.

If you're counting on me as a contrary indicator, you are leaning on a very weak reed indeed. My ideas on the economy (and most other topics) are different from almost everyone else's.

Of course, that doesn't mean I'm right, but it does mean that I'm not very useful as an indicator of public sentiment.