Correlations

[Gumby]

It is no longer a dialogue when opposing views are ridiculed.

When did I ridicule anyone? I am simply stating operational facts and opinions.

But my impression is that you want to re-start that debate at every opportunity.

Only when people say things like...

The Fed continuing to buy bonds until the dollar blows up.

...Because to say that is to engage in fear-mongering.

And fear-mongering causes people, who don't stop to think about the mechanics of such a statement, to run to the "fear trade." And personally, I find that to be irresponsible on an investment forum, because it's fear-mongering without explaining how the Fed buying bonds will "blow up" the dollar. Even if the Fed bought all of the bonds in the world, no such thing would happen — the broad money supply would be unchanged. (Treasury spending does increase the broad money supply — but usually not by much when you compare a few trillion deficit-dollars to the enormous size of private credit).

It's like someone coming along and saying that my mechanic is going to blow up my car because they are changing the oil too much. Anyone who understands the mechanics of a car knows that it's not possible for your mechanic to "blow up" your car by changing the oil over and over again. So, if people start going onto forums and telling people that JiffyLubes all across America are going to cause massive casualties by changing our oil, it would be fear-mongering and it would be irresponsible without anyone explaining how that could possibly happen.

The "broad money supply" includes Treasuries (i.e. savings that are easily converted into cash). Swapping one form of broad money for another form of broad money cannot cause significant inflation.

[Mdraf]

For me, dogma implies a discussion centering around morality, or social principles.

The current discussion is simply about the operational mechanics of the Fed, which doesn't strike me as dogma.

But, like Gumby, I am certainly interested in evidence that will indicate where my understanding is incorrect.

Definition: rDogma is a principle or set of principles laid down by an authority as incontrovertibly true.  It serves as part of the primary basis of an ideology or belief system, and it cannot be changed or discarded without affecting the very system's paradigm, or the ideology itself. They can refer to acceptable opinions of philosophers or philosophical schools, public decrees, religion, or issued decisions of political authorities.

For alternative viewpoint you can start here:
http://en.wikipedia.org/wiki/Criticism_ ... al_Reserve

Or google the writings of David Stockman, former director of OMB under Reagan

[Mdraf]

Only when people say things like...

The Fed continuing to buy bonds until the dollar blows up.

...Because to say that is to engage in fear-mongering.

And in my opinion you are wrong. What is meant by "blow up" is the devaluation of the currency, ie. reducing its value to a dangerous level.

[Gumby]

Only when people say things like...

The Fed continuing to buy bonds until the dollar blows up.

...Because to say that is to engage in fear-mongering.

And in my opinion you are wrong. What is meant by "blow up" is the devaluation of the currency, ie. reducing its value to a dangerous level.

That's not an explanation. Please explain how the Fed, alone, could cause inflation by buying all the $16 trillion dollars worth of bonds that are in existence. Please tell me how changing one form of "broad money" to another form of "broad money" causes inflation. That would be like every bank in America closing people's savings accounts and transferring the balance to their checking accounts. Nothing would happen! Nobody would be any richer.

I would love to learn how — in your own words — you think I'm wrong so that I can evolve my thinking.

[Pointedstick]

Without speaking for anyone else, I can tell you that I used to hold most of the views outlined on that Wikipedia page at one point or another. I'm very familiar with those criticisms. MR addresses them in a way that made sense to me.

None of this requires that you turn into a raving pro-government statist autocrat. In practical terms, all it did was cause me to blame the Treasury--and by extension Congress--for everything I used to gripe about the Fed doing. To use an analogy, the Fed is the gun, Congress is the person holding it. The Fed is just an enabler of what Congress wants done. If not for the Fed, they'd just find another way to mess with things and create money.

[moda0306]

Mdraf,

As long as Austrians preach hyperinflation based on misunderstanding our monetary system on a public board where people are trying to make sense of their investment decisions, we will respond with well-thought-out counterpoints.

It would be one thing if it was only our egos at stake, and not entire family investment portfolios.  I could just "get sick" of this argument and pull out if it weren't for all the people out there reading this board that are essentially where I was a few years ago.  Investing under the premise of certain hyperinflation could cost readers massive amounts of wealth.  There are inquisitive minds running around here that deserve a second take, cuz I doubt they'll just happen upon the 22nd "Other Discussions" page where we started a MMT thread.

[MediumTex]

Only when people say things like...

The Fed continuing to buy bonds until the dollar blows up.

...Because to say that is to engage in fear-mongering.

And in my opinion you are wrong. What is meant by "blow up" is the devaluation of the currency, ie. reducing its value to a dangerous level.

But if a certain understanding of the cause and effect relationships that will lead to chaotic dollar devaluation have so far not proven to be reliable, perhaps it would be a good idea to consider a new cause and effect framework.

While there are a variety of theories about what the future may hold for our monetary system, when describing what is presently occurring, it shouldn't be a theoretical debate; rather, it should just be a matter of observing what is actually occurring.  In the case of the Fed, what is actually occurring is different that what the media is reporting.  To me, it makes more sense to try to understand what the Fed is actually doing than to take the media's Fed narrative and use it to extrapolate future scenarios.

There can only be one accurate description of what the Fed is currently occurring with our monetary system, but it appears that we are having trouble even agreeing upon what is actually happening right now, much less what the likely future consequences of that action may be.

One thing, however, that I think we can all agree on is that inflation is a serious future threat under all scenarios being discussed.  If you want to take that basic assumption and try to reverse engineer some kind of common ground in the present, then perhaps it is this:

Since any sustained inflation requires wages to rise along with the prices of everything else (since without rising wages people will run out of money to pay higher prices), in deciding how dangerous the Fed's policies are today with respect to future inflation, all we really need to pay attention to is whether wages are rising today.  Until wages start rising in an upward spiral along with the prices of everything else in the economy, we really don't have much to worry about.

If I am missing something, let me know.

If we can all agree that future inflation is the basic danger, and that necessary ingredient for this danger to be realized is rising wages, until wages start rising how can we say that the Fed's current policies are doing the harm that many imagine?

Remember, the dollar is worth 15% more today in relation to other world currencies than it was five years ago before any of this Fed QE stuff started.  What sort of cause and effect relationship does that suggest?

[Mdraf]

That's not an explanation. Please explain how the Fed, alone, could cause inflation by buying all the $16 trillion dollars worth of bonds that are in existence. Please tell me how changing one form of "broad money" to another form of "broad money" causes inflation.

http://gyroscopicinvesting.com/forum/pe ... n#msg73149

[moda0306]

Mdraf,

I'm sorry if you feel disrespected or talked down to.

Keep in mind, as someone who believes that government can do good and has a role in society, I have to argue with Austrians and some libertarians under the premise that I am in favor of murder, coercion, theft, etc.  Austrians and libertarians operate from this premise, and to be honest it's kind of true... government, in all its forms, is going to engage in some form of theft, coercion, and often what might appear to be murder.

So, realize that when we argue with Austrians, in kind of a extremely muted sick way, we feel like you see us as the murderer on death row trying to explain why he killed their kid 15 years ago.

That's NOT a fun position to argue from... that you've EARNED something and that I'm STEALING it... and all for the sake of deadbeats who are worthless baby factories.  It feels condescending.  It feels like we're being talked down to. 

However, I've gotten over that, and I know it's a natural extension of the moral position Austrians take.

So realize that we DO think we've got the operational side pretty much figured out, cuz we've read, re-read, analyzed, had our mind blown, came back months later, asked questions, re-analyzed, forgotten, re-learned, and had our mind blown again, all the while having the arguments Austrians make all around us... of course our approach is going to be pretty short and bordering-on condescending to someone whose assertions we get EXCITED at blowing out of the water because we once went through the same process.

Just like libertarians and Austrians make anyone who believes government has a role in society a bit uncomfortable due to their premise and ability to articulate it, I'm not surprised a similar feeling is had when MR'ists bust into an argument.  I do apologize though if you feel like we're talking down to you, even if I don't appear to be when I'm in the heat of a discussion.  I think there's a quote that goes something like this that exhibits how I feel in these discussions...

"I don't tell you these things because I'm smarter than you.  I say them because I've made enough mistakes to be given perspective that you simply can't have."

I'm probably way off on that quote... but, while not an Austrian or Libertarian, per se, there was a point where I had many of the same concerns and they took up a good chunk of my mental energy... the moral and economic premises of Austrians always seemed to carry a lot of weight with me.  They still do in some ways.  It took me MONTHS, if not just over a year, to get "comfortable" with MR/MMT premises.  There are still some operational interpretations and complications I have to work out, but they don't fundamentally change much.  I feel like I've gone through enough mental anguish over this stuff for a lot of people to benefit from.  It's not that we're smarter.  We've just been through the test you're going through now, and it wasn't fun or easy, and we came out with some perspective on the other side.  That's all we have that you don't.... perspective.... and we practically came upon it by accident, not skill or intelligence.

So as condescendng as this all probably sounds, it's my excuse for sounding condescending this whole time .

[Mdraf]

Only when people say things like...
...Because to say that is to engage in fear-mongering.

And in my opinion you are wrong. What is meant by "blow up" is the devaluation of the currency, ie. reducing its value to a dangerous level.

But if a certain understanding of the cause and effect relationships that will lead to chaotic dollar devaluation have so far not proven to be reliable, perhaps it would be a good idea to consider a new cause and effect framework.

While there are a variety of theories about what the future may hold for our monetary system, when describing what is presently occurring, it shouldn't be a theoretical debate; rather, it should just be a matter of observing what is actually occurring.  In the case of the Fed, what is actually occurring is different that what the media is reporting.  To me, it makes more sense to try to understand what the Fed is actually doing than to take the media's Fed narrative and use it to extrapolate future scenarios.

There can only be one accurate description of what the Fed is currently occurring with our monetary system, but it appears that we are having trouble even agreeing upon what is actually happening right now, much less what the likely future consequences of that action may be.

One thing, however, that I think we can all agree on is that inflation is a serious future threat under all scenarios being discussed.  If you want to take that basic assumption and try to reverse engineer some kind of common ground in the present, then perhaps it is this:

Since any sustained inflation requires wages to rise along with the prices of everything else (since without rising wages people will run out of money to pay higher prices), in deciding how dangerous the Fed's policies are today with respect to future inflation, all we really need to pay attention to is whether wages are rising today.  Until wages start rising in an upward spiral along with the prices of everything else in the economy, we really don't have much to worry about.

If I am missing something, let me know.

If we can all agree that future inflation is the basic danger, and that necessary ingredient for this danger to be realized is rising wages, until wages start rising how can we say that the Fed's current policies are doing the harm that many imagine?

Remember, the dollar is worth 15% more today in relation to other world currencies than it was five years ago before any of this Fed QE stuff started.  What sort of cause and effect relationship does that suggest?

You make a good point. But the answer may lie in your own post yesterday about changing demographics which is counterbalancing the effect of the Fed's printing. In addition we have the dollar getting stronger because of things being the same or worse everywhere else.  Since all central banks are monetizing like mad we remain the "least vulnerable" because of the sheer size of our economy.

[Gumby]

That's not an explanation. Please explain how the Fed, alone, could cause inflation by buying all the $16 trillion dollars worth of bonds that are in existence. Please tell me how changing one form of "broad money" to another form of "broad money" causes inflation.

http://gyroscopicinvesting.com/forum/pe ... n#msg73149

Mdraf,

It would help if you actually described your opinion in your own words. That link was a link to my own explanation — and I stand by it.

Once again, I asked you to... "Please explain how the Fed, alone, could cause inflation by buying all the $16 trillion dollars worth of bonds that are in existence. Please tell me how changing one form of "broad money" to another form of "broad money" causes inflation."

How. I want you to explain how.

You linked to link where I discuss a fantasy situation where Congress spends $160 trillion in new deficit spending would absolutely cause inflation — something that would never happen in a short amount of time with a gridlocked Congress.

I'm asking you to help me evolve my thinking and you seem unable to articulate your opinion in your own words. If you simply can't refute my statements on the Fed being unable to create inflation on its own (i.e. without Congress issuing new debt) then I'm not sure what your argument even is. Please explain. I'm asking for your help to understand your position.

[Mdraf]

That's not an explanation. Please explain how the Fed, alone, could cause inflation by buying all the $16 trillion dollars worth of bonds that are in existence. Please tell me how changing one form of "broad money" to another form of "broad money" causes inflation.

http://gyroscopicinvesting.com/forum/pe ... n#msg73149

Mdraf,

It would help if you actually described your opinion in your own words. That link was a link to my own explanation — and I stand by it.

Once again, I asked you to... "Please explain how the Fed, alone, could cause inflation by buying all the $16 trillion dollars worth of bonds that are in existence. Please tell me how changing one form of "broad money" to another form of "broad money" causes inflation."

How. I want you to explain how.

You linked to link where I discuss a fantasy situation where Congress spends $160 trillion in new deficit spending — something that would never happen in a short amount of time.

I'm asking you to help me evolve my thinking and you seem unable to articulate your opinion in your own words. If you cannot refute my statements on the Fed being unable to create inflation on its own (i.e. without Congress issuing new debt) then I'm not sure what your argument even is. Please explain.

I pointed to that post because the argument is always the same and if you follow the thread from that post onward we will save repetition here.

[Gumby]

I pointed to that post because the argument is always the same and if you follow the thread from that post onward we will save repetition here.

Not true. You never explained how the Fed "monetizing" $16 trillion in highly liquid Treasury bonds would cause any significant inflation.

[Mdraf]

I have to go have some lunch now.  Meanwhile I'll leave you guys with this graph...

[MediumTex]

You make a good point. But the answer may lie in your own post yesterday about changing demographics which is counterbalancing the effect of the Fed's printing. In addition we have the dollar getting stronger because of things being the same or worse everywhere else.  Since all central banks are monetizing like mad we remain the "least vulnerable" because of the sheer size of our economy.

Yes.  The Fed knows that when you have a true financial crisis that triggers a once in a generation period of deleveraging, and it happens to coincide with a historic demographic shift that was already underway, those are two deeply deflationary forces that will dramatically reduce the risk of inflation from almost any set of monetary and economic policies.

Bernanke is not as dumb as he looks.

What concerns me a bit, though, is that if Larry Summers is the next Fed chief, he may actually be dumber than he looks.

[Gumby]

Meanwhile I'll leave you guys with this graph...

Umm... That graph does not measure inflation. Please explain HOW monetizing all of the $16 trillion in existing Treasury bonds — that are already a part of the broad money supply — causes inflation. I'm not trying to be disrespectful, but I'm getting the feeling that you are unable to explain that.

[moda0306]

I have to go have some lunch now.  Meanwhile I'll leave you guys with this graph...

Mdraf,

I can't speak for others, but I am quite aware that the dollar as an asset under our mattress has lost value against gold (though the period from 1981-2000 appears to show little of the massive loss of gold from $850 down to $250 (about, if memory serves).

How does this tell some kind of hyperinflationary tale?  I would not expect a raw dollar to beat gold over most 20-year periods.  This changes very little of our premise.  I'm not sure what you're trying to get at.

[MediumTex]

I guess a basic question is this: When the government engages in deficit spending through the mechanism of pieces of paper that say the government will pay a certain amount of money back at some point in the future (as opposed to simply printing the money and spending it on guns, welfare and other items), why does it matter if it's the Fed or some other private sector party that actually owns these pieces of paper (i.e., the treasury bills and bonds)? 

In what way does the identity of the bond holder have anything to do with the significance of the outstanding debt?

If the identity of the bond holder is not relevant, then why couldn't the government just roll over maturing debt into perpetuity, assuming that inflation didn't sink the whole system?

Note, though, that when I talk about inflation sinking the whole system, I am mostly talking about a dramatic reduction in the productive capacity of the economy as a result of capital flight against a backdrop of continued high government spending.  If there are fewer goods and services around to spend money on, and the government is doing a large amount of the spending, then of course there will be price inflation that can easily turn into a wage/price spiral that can quickly render a currency worthless, but this process has nothing to do with the way a government finances its debt when its debt is denominated in its own currency.

One of the basic features of the world's current monetary system is that it is completely abstract.  It's just a bunch of numbers moving from ledger to ledger.  There are no specific tangible items that correspond to any of these ledger entries.  As a result, the normal sense of awe that we would have at seeing a dollar figure representing a particular ITEM, such as a work of art or a diamond, does not apply to similar expressions of currency values that DON'T correspond to specific items.

For example, if I say that I bought a work of art for $150,000,000, then it's right to be impressed that I actually traded $150,000,000 for this piece of canvas with some interesting brush strokes on it.  If, however, I say that the government issued $150,000,000 in bonds today, there is less reason to be impressed because nothing really happened except that the government simply created $150,000,000 by issuing a piece of paper.  It's sort of like check kiting, except that (to paraphrase Richard Nixon) when the government does it, it's not illegal.

[Mdraf]

Meanwhile I'll leave you guys with this graph...

Umm... That graph does not measure inflation. Please explain HOW monetizing all of the $16 trillion in existing Treasury bonds — that are already a part of the broad money supply — causes inflation. I'm not trying to be disrespectful, but I'm getting the feeling that you are unable to explain that.

Gumby, as I said in the discussion last week, it is the certainty that the Fed will buy the gov paper (at zero interest)  that enables it (the Treasury) to issue it in the first place.

Let's see if we can set some stipulations in our debate. That way we don't keep going back to square one.  Do you agree with the following generic statements ?:

1) As the volume of credit rises, the creditworthiness of the issuer declines
2) A T-bond (an IOU) is not identical to cash (medium of exchange)

[Mdraf]

Note, though, that when I talk about inflation sinking the whole system, I am mostly talking about a dramatic reduction in the productive capacity of the economy as a result of capital flight against a backdrop of continued high government spending.  If there are fewer goods and services around to spend money on, and the government is doing a large amount of the spending, then of course there will be price inflation that can easily turn into a wage/price spiral that can quickly render a currency worthless, but this process has nothing to do with the way a government finances its debt when its debt is denominated in its own currency.

Indeed! But the Fed is supposed to be an independent entity owned by banks and not subject to government control. In practice it is nothing more than the printing department of the Treasury. If the Fed simply buys every bond the Treasury issues at zero interest then the Treasury may as well print its own currency like it does coins.

[Pointedstick]

Note, though, that when I talk about inflation sinking the whole system, I am mostly talking about a dramatic reduction in the productive capacity of the economy as a result of capital flight against a backdrop of continued high government spending.  If there are fewer goods and services around to spend money on, and the government is doing a large amount of the spending, then of course there will be price inflation that can easily turn into a wage/price spiral that can quickly render a currency worthless, but this process has nothing to do with the way a government finances its debt when its debt is denominated in its own currency.

Indeed! But the Fed is supposed to be an independent entity owned by banks and not subject to government control. In practice it is nothing more than the printing department of the Treasury. If the Fed simply buys every bond the Treasury issues at zero interest then the Treasury may as well print its own currency like it does coins.

Yes exactly!!!!!!!!  This is basically what we've been saying all along. The Fed is just a machine that helps the Treasury--and therefore Congress--create and spend the money that it wants to. If that amount is way too high or they wreck the economy, the result will be inflation.

Agree?

[Mdraf]

Note, though, that when I talk about inflation sinking the whole system, I am mostly talking about a dramatic reduction in the productive capacity of the economy as a result of capital flight against a backdrop of continued high government spending.  If there are fewer goods and services around to spend money on, and the government is doing a large amount of the spending, then of course there will be price inflation that can easily turn into a wage/price spiral that can quickly render a currency worthless, but this process has nothing to do with the way a government finances its debt when its debt is denominated in its own currency.

Indeed! But the Fed is supposed to be an independent entity owned by banks and not subject to government control. In practice it is nothing more than the printing department of the Treasury. If the Fed simply buys every bond the Treasury issues at zero interest then the Treasury may as well print its own currency like it does coins.

Yes exactly!!!!!!!!  This is basically what we've been saying all along. The Fed is just a machine that helps the Treasury--and therefore Congress--create and spend the money that it wants to. If that amount is way too high or they wreck the economy, the result will be inflation.

Agree?

Nope

The Fed does have the authority to NOT buy all the t-bonds. It has the power to set a market based  (or close thereto) interest rate which would then discourage the Treasury from issuing endless bonds.  That's why MediumTex is worried about Larry Summers.

[Mdraf]

What is the y axis in the plot?

Honestly I came across this graph last week and just posted it here quickly without really analyzing it. While the currency/gold plot lines look reasonable I too can't figure out y-axis either

[Pointedstick]

Right, but that's like the way that I worry about Barack Obama messing up the country. These are political bodies we're talking about.

The point is that even if Larry Summers took the helm and said, "Thank you Mr. President for appointing me to this position; to repay you, I've decided to stop purchasing T-bonds!" then nothing really dramatic would actually happen. The Primary Dealers would still eagerly purchase them. Whatever meager interest they'd receive would still be better than the zero they'd get sitting on cash.

For that matter, foreigners and American citizens would still eagerly buy them as well.

[Mdraf]

What is the y axis in the plot?

Honestly I came across this graph last week and just posted it here quickly without really analyzing it. While the currency/gold plot lines look reasonable I too can't figure out y-axis either

If you don't know what the axes are, how do you know if the plot says anything about inflation?  Or was that not the point of the graph?  If not, what was the point?

The point of the graph is what it says in the headline. Are you being argumentative on purpose now?