Hyperinflation

[Summa]

I was actually talking about this with a 25 year old chick I was working with at a festival this past saturday

so many kids our age don't even know what's going on with the economy, they just vaguely know it hasn't been doing well recently.

I got interested in finance and economics back in late august/early september right before the shit hit the fan. It's been a blast learning about all this stuff.

yay for the apathetic youth and our amazing education system

[kthx]

Yay for a liberal educational system in America that worried more about banning mother and father from schools than teaching them about real life.

[Jerome Scuggs]

Part One

Before I get down to biz-nass, I need to get some clarity on your position - but in doing so I think I'll present a hefty argument

Because it's not the nominal money supply that causes monetary inflation, it's the available supply of money that causes it. It is absolutely necessary that you understand the difference between these two or you won't understand how monetary inflation works. The available money supply is part of the nominal money supply, but not all of the nominal supply is available.

The nominal money supply is the supply of money that is not adjusted for inflation. The nominal money supply in-of-itself does not cause inflation - you're right, but that's because inflation is not even considered when looking at nominal values.

Opposing that is the real money supply - which is adjusted for inflation. The very existence of a "real" money supply opposed to a "nominal" money supply implies that inflation does exist - and considering that $300 bucks from 1908 is now worth roughly $3000 bucks - I'd say inflation has occurred.

The availability of money that you talk about has nothing to do with "real" versus "nominal". The phrase liquidity would be roughly what you are looking for.

That's the difference as far as I understand it.

Before the credit crunch started, the supply of money on the capital market was provided for by private (non-government) entities like banks, who in turn have money entrusted to them by other private entities (consumers, corporations). A bank uses all of this money to fulfill its main task: to bring supply and demand together on the capital market. This is all done on the basis of confidence, the confidence that the money you lend plus interest will be paid back for by the receiving party.

Before the credit crunch started, money came from the exact same place it is now: the Federal Reserve. The Federal Reserve "lends" money to banks (usually they call it "providing equity"), though the usual process of money expansion (ie "credit expansion") involves the selling off of bonds/securities/etc.

This is not a problem of banks not having equity to lend to consumers - they have plenty and can always get more, thanks to fractional-reserve banking (which allows bank to loan amounts above what it in their actual deposits) backed up by a centralized money supply, the Federal Reserve.

The credit crisis is more or less dealing with interbank loans. The Fed assumes they could magically fix the "credit freeze" that occurred because banks are refusing to lend to one another - by lowering interest rates.

Banks "create" money from these interbank loans. They borrow money at a short-term maturity rate, but then loan it to a consumer for a long-term maturity rate, which usually has higher interest rates attached to it. Assuming short-term rates stay low and long-term rates stay high, a bank can generate profit from the different in interest.

The reason banks are not doing these loans is because yes, they have lost confidence in the system. Why - who knows, but a particular point of concern is the obscenely low interest rates the central banks have settled down to. At 1.5%, the target rate is so low that at some point, it is going to have to rise - which adds potential risk to normal interbank loans because they stand to lose money if the Federal Reserve raises rates. This is backed up by the stats:



The Federal Reserve rate is not derived from a process of market supply/demand - they arbitrarily set the rate in order to manipulate supply and demand. You can see this very easily above: banks' interbank rates have skyrocketed even though the target rate has only gone down. This is because bank rates are accurate reflections of the market, whereas the Reserve's rate is not.

But what if this confidence disappears, which is what the credit crunch has done? Banks are scared to death to lend other banks any money because no one knows for sure whether they will get their money back. Because how do you know that the bank you lend your money to is not on the brink of collapse and won't be able to repay you? The inevitable result is that interbank money flows and credit lines are severed; banks hold on to their money, the capital market dries out, the available money supply to fill demand shrinks. This has the added effect of less insolvable banks not being able to refinance their debts, which is the cause of many, but not all recent bank failures.

Banks take two types of losses, accounting losses and payment losses. Accounting losses occur when a bank takes a loss - for instance, a $100 treasury bond only yields $50. But when someone defaults totally, that becomes a payment loss.

In a fiat money regime, money is "created" through loans. In short - the money supply is built on credit expansion. In this case - there is no "previous" money, because the loans come from the Federal Reserve. Considering that fiat-money is not attached to a commodity of some sort, technically speaking none of the money exists before it is loaned.

Thus, the available money supply in hinged entirely on the ability of the Federal Reserve to make loans.

Assuming this, "capital", therefore has not "dried up" - just bank capital. Any one who has money saved up has capital - thats why web-2.0-startups are always seeking investor capital, as opposed to going to a bank to make a loan.

Sadly, America is not a society that runs on saving and accumulating capital, but acquires capital by going into debt. This might be because that process of debt is what allows a fiat-money regime to "create" money - and as we can see, it's a quite fatal flaw.

[Jerome Scuggs]

Part Two

So this is where the governments and central banks come in to replace the private available money supply by injecting money into the system and thus keeping the capital market flowing. Since this money is there to replace the private money that no banks want to lend out to each other anymore, on a net basis there is effectively no change in the amount of the available money supply. This money is literally being created out of thin air, or being pulled out of their asses, so to speak, and there is no gold or dollar bills to back it up (only a fraction of the total money supply is cash, the rest is virtual). This is the very essence of capitalism. People have confidence that the money that is being "created" is worth anything, and that everyone will attach the same nominal value to something that does not exist.

Your analysis is more or less correct except for the phrase "this is the essence of capitalism". It's not. In a "capitalist" system - ie, a system driven by capital - banks are only one of many institutions that generate wealth. When any company innovates and their products get cheaper, the same amount of available money buys more of that product - meaning the consumer is now wealthier.

What you are describing is the essence of central banking, and I argue that the very process of "thin-air" money you describe is a serious flaw within such a system. One of the reasons is because inflation is inherent to central banking. Prices must rise, or stay the same in order to maintain the process of constant credit "availability". Since markets tend towards lower prices, why have prices for goods only increased? When adjusted for inflation, a majority of goods have become cheaper over time, yet their nominal value has risen.

One of the main causes of of inflation - ie a rise in prices - is when demand exceeds supply. Now, I must ask: how does the Federal Reserve supposedly "track" market supply and demand, and adjust rates accordingly? Quick answer: they don't. In fact, they do the reverse. When an economy goes into a "recession", the generally agreed-upon cause is, as Marx puts it, "over-consumption" - ie, too many goods chasing too few consumers. A recession, in that sense, is a period where market forces clear the glut. Companies cut back on production, and eventually the overall level of supply drops down to closer follow actual consumer demand.

The Federal Reserve's job is to make sure a recession never happens. So, how do they do that? They lower interest rates, which increases demand for money - which is then spent, thereby artificially propping up consumption - "demand".

When the economy began slowing down in 2001, Greenspan hacked interest rates to incredibly low levels. The recession ended - because Greenspan artificially increased consumer demand. Assuming what I say is true, then the Fed would have engineered a bubble. The Fed's position, by your logic and their admission, is that the Fed is not responsible for bubbles - and likewise, can not predict or see them.

Now - if what I say is accurate - then predicting a bubble is then just a manner of watching the markets and seeing where a demand begins to form - and you can narrow that down by looking where demand is based on the availability of capital - in today's world, that means the availability of credit.

With that in mind, check out this article from 2003.

Aside from that, as you can see, the available money supply has not really increased as the central banks pour in dollars to keep the capital market flowing and to restore confidence. As confidence is gradually restored, the private money supply that became immobilised due to the distrust will slowly become mobile again, and this is where the governments and central banks will withdraw money from the market (by selling securities on the open market, but that's a different topic) and thus making sure the available money supply doesn't increase as the previously immobile capital starts flowing again. The result: No increase, no decrease, no inflation. The money that is being poured in right now shouldn't be viewed as unlimited, but more like "as much as is necessary to keep the available money supply on the capital market on healthy levels".

I think the previous analysis demonstrates why this conclusion is flawed, which explains why your assertion that there is no "increase, decrease, or inflation" is incorrect - if that was true then this recession/credit crisis would not have occurred.

A few questions to illustrate:

At any given time, what is the "correct" amount of money within the economy? How can one tell? What objective, static phenomenon can the Fed observe in order to see what is the perfect amount of available credit?

How can the Fed observe when there is "too much" or "not enough" available credit? It seems all they can do is compare two different time periods, and then adjust to the relative change. So, if they see available money supply decrease from one period to another, then they respond by injecting money. But suppose the market wanted the overall supply to decrease - because it wasn't needed? In a free market, the interest rate serves as a way to see the demand of money. As demand rises, interest rates rise; as demand lowers, interest rates decrease. Since the Fed cannot track this - they control the interest rate - how do they accurately gleam market demand?

On your last sentence: what is "necessary"? What is "healthy levels"? How can the Fed see what "healthy levels" are? Did the Fed consider the period leading up to the actual housing bubble collapse to reflect "healthy levels"? Would you say that the housing market was at "healthy levels"?

[Jerome Scuggs]

...I wonder why!

For everyone who still thinks we can manage with as minimal government regulation as possible... I hope this will make you think again.

Just a footnote to this: yesterday's record gains broke the old records - set in 1929, 1931, 1932, and 1933. I believe those years all fall within the period known as "The Great Depression".

[Capital Knockers]

Just a footnote to this: yesterday's record gains broke the old records - set in 1929, 1931, 1932, and 1933. I believe those years all fall within the period known as "The Great Depression".

Dude, I'm really curious. Do you CONSTANTLY read. Like on the bus, while eating, playing SS, on the can and in your sleep? I love reading, but shit bro

[Jerome Scuggs]

Dude, I'm really curious. Do you CONSTANTLY read. Like on the bus, while eating, playing SS, on the can and in your sleep? I love reading, but shit bro

I read a fuckton. I read very fast, and absorb ideas pretty fast, so I can usually read through something once and that's that.

In the morning I read news - A few websites, the NY Times, and the local paper. At work, I usually read essays by a variety of people - today I read "Our Enemy, The State" by Alfred J. Nock and "The Revolution Was" by Garet Garrett.

Besides that I'm always reading up on things, usually economics. Usually this process is multi-step: I'll read something from somewhere raising a problem or flaw or any sort of assertion that contradicts what I hold true. Then I'll think it through / read up on it, until I feel satisfied. Recently, I've been reading up on Paul Krugman and Joseph Stiglitz - two mainstream economists who I disagree with. At some point I'll be able to extensively critique both men.

When I get bored, I just hit up a library and read books. Currently I'm reading "The Failure of New Economics" by Henry Hazlitt and "The Mystery of Banking" by Murray Rothbard.

When I was young I used to be very anti-social and stay in my house all day, reading books. My parents would punish me by taking my books. Suffice to say - yeah, I read... alot

[Jerome Scuggs]

As an example, today California announced it was raising the yield on their short-term notes. This means California will receive $4 billion - but it will, eventually, have to pay back more than $4 billion. Thus, money is created by going into debt - and how is California going to pay it back? And perhaps more relevantly - how does the Government plan to pay back its debt that it racks up via the Reserve "creating" money?

You can see why inflation then is not only inherent, but necessary - suppose inflation pushes that $4 billion's worth of money to $6 billion - then California can pay back the amount it agreed to, which was the $4 billion plus interest. FDR had this in mind when he confiscated gold and then rapidly devalued our currency - which gave him a cool $3 billion to play with.

[Nycle]

The availability of money that you talk about has nothing to do with "real" versus "nominal". The phrase liquidity would be roughly what you are looking for.

That's the difference as far as I understand it.

You're kinda right, you caught me on an error in translation. Since I don't know all of the proper English terminology when it comes to economics or even worse, maths, I just grab any words I see fit to describe what I mean. "Nominal" is not the correct term and I realize that now. What I meant to describe is the total money supply, or as it is defined in the European Union: M3. I believe the US maintains this terminology as well, though I'm not sure of that.

Your analysis is more or less correct except for the phrase "this is the essence of capitalism". It's not. In a "capitalist" system - ie, a system driven by capital - banks are only one of many institutions that generate wealth.

I didn't really mean to say that. What I meant to say was that confidence is one of the most important fundaments of capitalism, especially in the monetary economy. Capitalism is nothing more than a product of human cultural evolution, and demonstrates something that seperates us from the animals: the ability to attach value to tangible or even intangible objects beyond their intrinsic value. It takes confidence to make this possible, and once confidence is damaged in any way, it will make the entire capitalistic system, including the monetary and "real" economy, unstable until it is restored. That's why governments and central banks are trying to preserve and restore confidence at any cost, with measures like the unlimited dollar injection we see now, but also by acting as a guarantee for interbank money loans for a certain time.

Since markets tend towards lower prices, why have prices for goods only increased? When adjusted for inflation, a majority of goods have become cheaper over time, yet their nominal value has risen.

This can very easily be explained through the wage-price spiral. Employees are in constant negotiation with their employers over their salary, and this is mainly caused by decreasing purchasing power on an average basis. Once employees start to notice this, they will demand an increase in wages. This increase will set a precedent for producers and retailers to increase their prices in order to maximise profits further, but by doing that, they will also decrease the purchasing power per capita and the cycle starts again. This is a generally accepted and acknowledged development, and provides for evermore increasing prices even if scarcity or supply exceeding demand don't play a role. This is also why unions in Europe, which generally hold a lot more sway than in the US, are always called upon by their governments to temper their wage increase demands whenever we hit rough economic times. This isn't only to prevent a sudden acceleration of the inflation, but also to maintain a competitive advantage relative to other countries regarding labour costs.

The Federal Reserve's job is to make sure a recession never happens. So, how do they do that? They lower interest rates, which increases demand for money - which is then spent, thereby artificially propping up consumption - "demand".

I'd like to add a footnote to this: the Fed is in an exceptionary position in the central banking world. Whereas most central banks have only a single mandate for which they use their instruments accordingly, namely to maintain price stability, the Fed has a dual mandate: to maintain price stability while promoting maximum employment. This is also why you can't really see a general trend in the base borrowing rates between the Fed and the ECB in the graph you showed.

When the economy began slowing down in 2001, Greenspan hacked interest rates to incredibly low levels. The recession ended - because Greenspan artificially increased consumer demand. Assuming what I say is true, then the Fed would have engineered a bubble. The Fed's position, by your logic and their admission, is that the Fed is not responsible for bubbles - and likewise, can not predict or see them.

I don't really see how lowering interest rates and fending off a recession can be the direct cause of a bubble? What bubble in particular are you referring to? A bubble is created whenever people deem something more worthy than it actually is. When the perceived worth of something starts colliding with other economic indicators that imply that the value has reached unsustainable levels relative to other indicators, a sudden devaluation (or "correction") takes place and the bubble bursts. Lowering or increasing interest rates has nothing to do with that, why exactly do you think that is so?

I think the previous analysis demonstrates why this conclusion is flawed, which explains why your assertion that there is no "increase, decrease, or inflation" is incorrect - if that was true then this recession/credit crisis would not have occurred.

What I'm trying to explain is that in the current financial crisis, where confidence is seriously damaged, it's only natural for banks to hold on to their money because of the uncertainty that arises when they lend it out (will they get their money back at all from the receiving party?). Once they start freezing parts of their money/capital and decide not to trade it on the capital market anymore, this money is not readily available to be spent (or from the bank's point of view: to be loaned out) on anything by anyone. It doesn't make sense that money that cannot be spent can cause inflation. What you seem to do is to count this frozen capital in the available (or spendable) amount of money anyways. From that point of view, sure it's rational to assume that this will cause monetary inflation. But since much of it is frozen it should be left out and the dollars that the central banks are pouring in right now are there to replace the frozen capital that otherwise would have entered the capital market had this crisis not occured.

At any given time, what is the "correct" amount of money within the economy? How can one tell? What objective, static phenomenon can the Fed observe in order to see what is the perfect amount of available credit?

Do you mean the "correct" total amount of money within an economy (M3) or the total amount on the capital market? In the former case: inflation rates. In the latter one, it's not up to a central bank to have this determined because the free market is designed to do so. But once the capital market shrinks or becomes more "expensive" (higher interest rates) in such a way that it will have a detrimental effect on the real economy, I suggest they inject as much money as is necessary to keep the capital market flowing, provided of course that the only normal way the capital market would shrink is due to fading confidence which naturally leads to banks holding their money back from the capital market which causes it to shrink in the first place.

On your last sentence: what is "necessary"? What is "healthy levels"? How can the Fed see what "healthy levels" are? Did the Fed consider the period leading up to the actual housing bubble collapse to reflect "healthy levels"? Would you say that the housing market was at "healthy levels"?

See my former answer.

[Pearl Jam]

Short version for those who don't want to read 5,000 word posts:

The stock market is very volatile (large swings in both directions). People are incredibly reactionary right now based on new information hitting the streets on a daily basis concerning this bailout bill. Due to this, the market becomes even more volatile.

EDIT: Can we give Jerome his own economic/government commentary forum?

[Fluffz]

yes, lets call it anarchic propaganda.

[Jerome Scuggs]

That post will take a while to fully examine, but here's something I noticed today that further demonstrates my view on the "business cycle" and recession.

In the past week, stocks have plummeted down, and tons of companies are taking massive hits. The general consensus is that the "giants" of industry are "too big to fail".

I've been arguing that the recession is result of the Federal Reserve's distorting the markets, and attempting to keep the economy above what would otherwise be considered generally equilibrium.

Following this, the recession is, then, the market attempting to "clear" itself, because there is too much supply chasing not enough demand. Normally small differences in demand and supply don't cause problems, because businesses can generally hold off on short-term production until supply decreases and demand once again picks up. But th Federal Reserve, by continuously injecting new "capital", merely drives the demand and supply far above what is actually sustainable. At some point the market must return to normal levels - the Federal Reserve makes booms and busts inevitable.

Anyways, today I checked up on individual stocks. Check out the top businesses whose stock increased massively:

BankAtlantic (BBX) - 247.37%

Dearborn Bancorp (DEAR) - 78.50%

LNB Bancorp (LNBB) - 49.86%

BRT Realty Trust (BRT) - 36.17%

The Bank Holdings (TBHS) - 34.41%

First Federal Bankshares (FFSX) - 33.40%

Ameriana Bancorp (ASBI) - 25.85%

Origen Financial (ORGN) - 25.93%

Penns Woods Bancorp (PWOD) - 20.35%

I seem to notice a trend - there are quite alot of banks. Why? Because it seems people have forgotten that there are thousands of small banks across the country. And somehow, none of them are in any serious trouble.

These banks, with their well-capitalized assets and clean portfolios, could stand to increase their market share. Do people forget that every single one of these huge companies who are on the brink of failure, were all once small businesses?

This recession is not an "economic slump", its a "market reorganization" - on a massive scale, thanks to the Federal Reserve and its distortions.

If the "big" banks failed, the market would be wide open for smarter banks who had no problems to step up. Consumers who are informed enough would do well to put their assets into a local bank - saving them from potential loss, as well as increasing the strength of the local bank. Of course, consumers' information is strongly distorted by people who are so focused on "preserving the free market" that they've forgotten how a free market functions.

Maybe "capitalism" wouldn't fail if it were allowed to operate - bailing out the banks who made bad decisions (being as they were under the most political pressure) is the opposite of "entrepreneurship". It is the opposite of innovation, of prosperity, of the idea that even the little guys can one day become one of the big guys. The bailout is saving the big guys and holding back the little guys - in the name of protecting the little guys.

As far as I can tell, it's not the little guy who needs protecting.

[Vykromond]

What I meant to describe is the total money supply, or as it is defined in the European Union: M3. I believe the US maintains this terminology as well, though I'm not sure of that.

Yes, we have those terms as well. Let's not dwell on this any further though, I think Jerome knew it was a semantic quibble when he brought it up.

[Jerome Scuggs]

Actually, the Fed stopped publishing the M3 money supply in 2006. I find that interesting. The Fed's position:

The decision to discontinue publication of the M3 monetary aggregate was based, in part, on a determination that the M3 does not appear to convey any additional information about economic activity that is not already embodied in the M2 aggregate. In addition, the role of M3 in the policy process has diminished greatly over time. Consequently, the costs of collecting the data and publishing M3 now seem to outweigh the benefits.

Ron Paul attempted to give a little - what's the buzzword these days? Transparency? - by introducing legislation to require the Fed to publish it, in 2006. This was in response to Ron Paul's noting that M3 was rising disproportionately faster than the M2.

So this means one of two things. Either one: the Federal Reserve truly does not take M3 into account - which inevitably means their ability to truly track the market is crippled from the get-go. On the other hand, the Federal Reserve could be well aware of the M3 - but choose not to publish it for reasons unknown. Either possibility presents obvious problems.

[Zerzera]

Jesus Jerome, you say you read very fast and get the meaning of things. But I accuse you of finding the same patterns in anything you read.
Christ, you would even find confirmation of your agenda in chicken blood. Whenever someone brings up arguments you can't counter you will suddenly change subjects to something 'more interesting' or leave it until you find a big chunk of text that lends itself for a twist into a counter argument.

While it's very easy to point out the flaws in the system we currently have -especially since it's in heavy weather- you have never been convincing on proving why your ideology is anywhere near to being realistic. So I think anyone on this forum, especially the ones that grasp what you are saying, will rather stick to our current system than your drug spawned utopia.