What economic cycle are we in right now?

[Kshartle]

How do you have inflation as a result of currency devaluation that doesn't reach across the entire economy?

It gets exported.

[Pointedstick]

Sorry, shorthand for "Austrian economics." There's a lot of value in Austrian Economics, IMHO, but it never really dealt with the death of the gold standard and the monetary changes that it entailed.

I've heard the term but I don't really know what it means.

Didn't they teach that in "Econ 1.0"?

Not in my Econ 101! It was mostly big-government Keynesian tripe, which is what originally drew me to Austrian Economics; it was a good palate-cleanser. But despite its attractiveness for micro, it falls apart on macro.

[MediumTex]

Well, get a dustpan ready, because you are about to have your economic world shattered.

That is awesome

If it makes you feel any better. My economic world was shattered a little over a year ago. The world hasn't looked the same since. I used to be where you are now.

Me too.

I used to make the exact same arguments Kshartle is making now.  I knew it was just a matter of time before I was right.  At some point, though, I began to see that there was more to the story than I originally thought.

[Gumby]

How do you have inflation as a result of currency devaluation that doesn't reach across the entire economy?

It gets exported.

Start reading...

Warren Mosler: Seven Deadly Innocent Frauds of Economic Policy

PragCap: Understanding The Modern Monetary System

No sense having this debate until you've read everything the rest of us have read.

[Kshartle]

If it makes you feel any better. My economic world was shattered a little over a year ago. The world hasn't looked the same since. I used to be where you are now.

It doesn't really. Does that mean you also used to believe the US government would be unable to service it's debt without an expanding supply of FRNs?

[Kshartle]

Start reading...

I'll take a look. Promise.

[Gumby]

It doesn't really. Does that mean you also used to believe the US government would be unable to service it's debt without an expanding supply of FRNs?

I used to believe a lot of myths. I try not to anymore. Generally speaking, the funds to pay taxes and buy government securities come from government spending. There are a few exceptions covered in the second paper, but in general that is true (as hard as it is to believe).

The two important links (as I said, above) are:

Warren Mosler: Seven Deadly Innocent Frauds of Economic Policy

PragCap: Understanding The Modern Monetary System

The first one is in plain english. The second one is a bit more complex — took me weeks to really understand it. Neither are perfect, but they explain our debt-based/credit-based monetary system better than anything else I have seen.

Swallow the red pill. Take your time. See you on the other side.

[Pointedstick]

Get ready for the economic ride of your life.




Taxes destroy money… deficit spending creates savings… it will terrify you right up until the point where you will master it, and then you will be enlightened.


Then you'll, like, break boards with your mind and shit.

[MediumTex]

Then you'll, like, break boards with your mind and shit.

And at some point, you'll be like this...

And, finally, after many adventures and strange journeys you will return to the village and be like this:

[Kshartle]

If the private sector banking industry destroys a trillion dollars through bad lending and credit defaults, and the fed creates a trillion dollars and uses it to buy bonds and MBS contracts, has the money supply actually expended? Or has the fed restored the money supply back to its previous size?

What you're missing is that the money supply grows and shrinks from two sides: the Fed, led by congressional spending, and also the private banking system as people take out loans, repay them, or default on them. One side can make up for a deficit in the other. Both can grow or shrink at the same time.

What you're describing is a stable supply of FRNs. I haven't overlooked this. The fed can create new FRNs and the supply can still go down.

Question, if the total supply of FRNs in circulation goes down does it get easier or harder for the government to service the debt? If it stays the same and the debt grows does it get easier or harder to service?

[Kshartle]

I hope no one is taking anything personally. I'm not. There are few people out there with the aptitude to discuss these things.

[Gumby]

Question, if the total supply of FRNs in circulation goes down does it get easier or harder for the government to service the debt? If it stays the same and the debt grows does it get easier or harder to service?

You're forgetting that every time the debt grows, the Treasury is — for all practical purposes — spending new money into existence. That money can be used to purchase the next round of debt issuance. The funds to pay taxes and buy government securities come from government spending.

Have you started reading yet? All of this is covered in those two papers.

[Kshartle]

I believe debt can be issued from nothing and swapped for dollars created out of thin air.

You aren't aware of this (yet), but the Fed does not print money from nothing. The Treasury issues debt and the Fed swaps it with the private sector. The Fed doesn't really print in the way you suggest. The Fed can only swap assets with the private sector — it doesn't do helicopter drops.

Where does the FED get the assets? Do the assets have purchasing power? Do you believe purchasing can be created out of thin air?

[Gumby]

I believe debt can be issued from nothing and swapped for dollars created out of thin air.

You aren't aware of this (yet), but the Fed does not print money from nothing. The Treasury issues debt and the Fed swaps it with the private sector. The Fed doesn't really print in the way you suggest. The Fed can only swap assets with the private sector — it doesn't do helicopter drops.

Where does the FED get the assets? Do the assets have purchasing power? Do you believe purchasing can be created out of thin air?

Read the papers first. Ask questions later.

[Kshartle]

You're forgetting that every time the debt grows, the Treasury is, for all practical purposes, spending new money into existence. That money can be used to purchase the next round of debt issuance.

Not forgetting that. It's my basic premise. The supply of FRNs has to grow for the debt to be serviced. The debt is so high now the supply of FRNs has to grow at expanding rates to keep rolling it over. Future FRNs have to decrease in purchasing power or the default will have to be outright. The government is defaulting when it inflates. It is paying back in FRNs that buy less. Imagine you loaned it 100 chickens......and it paid you back only 90. Isn't this a partial default? How is that different from getting back FRNs that have lost purchasing power?

[Gumby]

The supply of FRNs has to grow for the debt to be serviced. The debt is so high now the supply of FRNs has to grow at expanding rates to keep rolling it over. Future FRNs have to decrease in purchasing power or the default will have to be outright. The government is defaulting when it inflates. It is paying back in FRNs that buy less. Imagine you loaned it 100 chickens......and it paid you back only 90. Isn't this a partial default? How is that different from getting back FRNs that have lost purchasing power?

Not sure why you keep saying "FRNs". Treasury spending into your bank account is not exactly the same thing as (paper) "FRNs". FRNs are a small part of the broad money supply. Are you trying to describe the base money supply (M0)?

Debt-based/credit-based monetary systems tend to grow exponentially. Yes, it's problematic. But, it doesn't necessarily mean the world is ending or that money is becoming worthless. I share your concern, but it helps to understand the monetary system you are describing.

Please read those papers. All of your questions are answered there. Not trying to be rude but I don't have time to keep discussing something when the answers are already documented for you.

[Kshartle]

Read most of the 2nd. Nothing new there. The government doesn't ever have to outright default because it can create more currency to pay it's debts is the summary. The constraint is inflation (destroying the currency). Fiat (money) has no intrinsic value.

Here's a quote I agree with "Therefore, government has an incentive to promote productive output and maintain sound stewardship of its currency. Otherwise, they risk devaluing the currency and possibly threaten the stability of their currency system. Paying its citizens to sit at home doing nothing, buy cars they don’t need or purchase homes they can’t afford are unproductive forms of spending that are likely to turn a nation of producers AND consumers into a nation of consumers. If government is corrupt in its spending and becomes an institution that is mismanaged and detracts from the private sector’s potential prosperity then it is only right that the citizens revolt, denounce the nation’s currency and demand change."

Where do you think we are right now.

I would say I agree with the theme of the 2nd article, even though he doesn't fully understand why Americans accept FRNs or USD or whatever as payments. He says they have no intrinsic value which is correct but then says they have value based on our production. Nonsense. The production has value. The FRNs/USD are required to be accepted as payment or you get put in a cage. You have to pay your taxes in them or you get put in a cage. That's why they have value. Otherwise they are just peices of paper with ink on them. We have to use them so we make due and set the prices of goods and services in those terms. The more the supply expands the more we allocate to goods and services. If the price of everything in USD keeps going up it proves they don't have value on their own. It also proves their value can be completely destroyed. And the Author admits this. He just doesn't claim it's a default.

[Kshartle]

Debt-based/credit-based monetary systems tend to grow exponentially. Yes, it's problematic. But, it doesn't necessarily mean the world is ending or that money is becoming worthless. I share your concern, but it helps to understand the monetary system you are describing.

No one said the world was ending, I just said the US government is at the point where it can only afford negative real interest rates. That means real losses to bondholders even if they don't lose nominally.

[Kshartle]

Money is a store of value. If it can become worthless, is it money? Can fiat currency become worthless?

[Gumby]

I just said the US government is at the point where it can only afford negative real interest rates. That means real losses to bondholders even if they don't lose nominally.

What do you mean by "afford"? There is no issue of solvency (other than inflation).

[Kshartle]

Outright default and default through inflation are a distinction without a difference.

[Gumby]

I would say I agree with the theme of the 2nd article, even though he doesn't fully understand why Americans accept FRNs or USD or whatever as payments. He says they have no intrinsic value which is correct but then says they have value based on our production. Nonsense. The production has value. The FRNs/USD are required to be accepted as payment or you get put in a cage. You have to pay your taxes in them or you get put in a cage. That's why they have value. Otherwise they are just peices of paper with ink on them.

I can agree with that premise — at least for this conversation. If you believe that, you're really going to enjoy the first e-book (not sure why you haven't read it yet).

The more the supply expands the more we allocate to goods and services. If the price of everything in USD keeps going up it proves they don't have value on their own.

Now you're jumping to conclusions that don't necessarily have to come true. Read the first paper, please.

It also proves their value can be completely destroyed. And the Author admits this. He just doesn't claim it's a default.

Outright default and default through inflation are a distinction without a difference.

Potato, potahto. If it makes you feel better, the author completely understands this.

http://pragcap.com/throwing-the-hyperin ... sts-a-bone

Now, please read the first paper.

[Kshartle]

I just said the US government is at the point where it can only afford negative real interest rates. That means real losses to bondholders even if they don't lose nominally.

What do you mean by "afford"? There is no issue of solvency (other than inflation).

I mean the US cannot pay rates above the inflation rate. If the rates go up the inflation has to go up. Of course it's a slovency issue. If they don't inflate they won't be able to pay (my opinion). That's what we've been talking about for 100 posts. I've asked the question to the board about 50 times now if anyone thinks the government can keep paying without inflation. I don't think anyone has said yes yet. It seems like everyone keeps saying they can pay because they can print. Well.......that's my point. I believe the currency will continue to fall in value. Does anyone disagree with that? I believe if the currency doesn't fall in value the government won't be able to pay.

[Kshartle]

(not sure why you haven't read it yet).

Sorry, I'm trying to work my day job from home. 1 hr for work 1 hr for PP. I'm trying to stay balanced.

[Gumby]

I mean the US cannot pay rates above the inflation rate. If the rates go up the inflation has to go up. Of course it's a slovency issue. If they don't inflate they won't be able to pay (my opinion). That's what we've been talking about for 100 posts. I've asked the question to the board about 50 times now if anyone thinks the government can keep paying without inflation. I don't think anyone has said yes yet. It seems like everyone keeps saying they can pay because they can print. Well.......that's my point. I believe the currency will continue to fall in value. Does anyone disagree with that? I believe if the currency doesn't fall in value the government won't be able to pay.

You're referring to the Quantity Theory of Money. It was disproven by Keynes in the 1930s. Only pundits and naive Monetarists believe in QToM anymore. Perhaps in the extreme long term there is some validity, but our lives can be very short compared to that timeline. So, it's not valid for the kind of forecasting you are applying it to. In reality, predicting inflation is not that simple. If it was, we would have had very high inflation years ago, when government spending shot up in the 1990s.

Printing money can lead to inflation, but other things need to happen as well for it to take hold. Many people point to Weimar or Zimbabwe inflation as evidence that printing leads to inflation, but those individuals usually leave out the important exogenous factors that allowed money printing to cause inflation in those economies (such as war, or owing foreign-denominated debt).

Here's how Harry Browne explained it on his investment radio show (recorded on 12/12/04):

Harry Browne: Inflation results from the supply of money increasing faster than the demand for money. Now, mostly what we hear though is that inflation results from the increase supply of money. In other words, an increase in the supply of money is "A" and inflation is "B". When you get "A" then "B" follows. But what happens is periods like the past few years when the money supply has been increasing at a fairly rapid rate, and yet, we do not see any appreciable price inflation whatsoever. So, what we're seeing here is that the money supply has increased, but the consequence has not ensued. And that's because of two things. One of which is timing, and the other is that other factors can be introduced. So, what we do mean to say, really, is that an increase in the supply of money makes the inflation rate greater than it would be without that increase in the supply of money. We also take into account the demand for money — the desire of individuals to hold money in their pocket, to hang on to money, rather than spending, saving, or investing it. And if that is increasing as fast as the supply of money, then there is no increase in the inflation rate. So, all other things being equal, the increase in the supply of money leads to an increase in the price inflation rate. But, there are other things that have to be considered and that case, mostly the demand for money. These other factors always play a part, but we can't always see them.

Source: https://web.archive.org/web/20160324133 ... -12-12.mp3 (skip to 13:20)

See also...

Some interesting Japan graphs...

Note: This cannot be unseen and might lead to a different perspective, and possible brain re-wiring.




Notice how expansions in the money supply do not always result in inflation. There is always supply and demand at play.