Patterico's Pontifications

12/19/2014

The Collapsing Ruble: A Cautionary Tale for the United States

Filed under: General — Patterico @ 3:54 am

I don’t know if you have noticed, but the Russian ruble has utterly collapsed in recent days. It’s basically in free fall. Here’s Zero Hedge:

On the year, the ruble has lost more than 55 percent of its value against the dollar, breaking psychological barrier after psychological barrier.

What is the explanation? The Voxsplainer types will tell you this is about Ukraine sanctions or the price of oil. Here’s what they won’t tell you: in the last sixteen years, the Russian central bank’s balance sheet has exploded from 9 billion rubles to $2.1 trillion:

Central Bank Balance Sheet in Russia averaged 394.21 RUB Billion from 1997 until 2014, reaching an all time high of 2101.50 RUB Billion in December of 2014 and a record low of 8.90 RUB Billion in September of 1998.

Screen Shot 2014-12-19 at 3.31.15 AM

Carmen Elena Dorobăț says:

In this light, Russia’s case isn’t special, but just a textbook example of currency collapse due to fiat inflation. It resembles the more recent experiences in Argentina or Venezuela, as well as a possible future of the United States, if for some reason or another the dollar can no longer make its way into foreign (Chinese) bank vaults.

Our own central bank, the Fed, has increased its balance sheet precipitiously in recent years — surely you have heard of “quantitative easing,” yes? Since the 2008 crisis, according to Heritage, “[t]he Fed’s balance sheet expanded from about $850 billion to more than $4.4 trillion.”

We face a day of reckoning. As I explained in November 2012, we are in a government debt bubble. Upside: maybe some day you can own a $100 trillion dollar note, like the $100 trillion dollar note I own from Zimbabwe, or like the one Andrew Breitbart used to carry in his wallet.

So that’s your upside. And the downside? Yeah, let’s just say it’s going to be pretty bad.

What Russia’s collapsing economy is telling us is this: it can also happen quickly.

A little perspective for you, the next time Congress debates how important it is whether the federal government expands its spending from year to year by x percent or y percent.

159 Responses to “The Collapsing Ruble: A Cautionary Tale for the United States”

  1. Upside: Dr. Evil’s demand for ONE MEEELYUN DOLLARS will just get funnier and funnier over time.

    There will be chaos, riots, terrible suffering, and perhaps even nuclear wars . . . but we still got that joke going for us.

    ONE MEEELYUN DOLLARS!!! Heh.

    Patterico (9c670f)

  2. I, for one, am happy that our lizard overlords put the brakes on Putin’s ambitions, something that the West was incapable of.

    Currency inflation is by-product of capitalism’s essential nature — to create surplus value and maximize profit to the greatest possible extent. It is not created by the government. It is created by the natural laws of economics. The commodity will always be the one with the constant value and when too much of the medium of exchange is demanded for it by those who control its production and distribution it will be the medium of exchange which will lessen in value.

    We see it in the mantra of “economic growth”. Economic growth is desirable because it makes people richer. But it cannot be forced growth of the profits line on a balance sheet. It must occur naturally in the exchange of value for value.

    Is it possible for the real economy — the value of the existing goods and services — to catch up with the surplus medium of exchange? I doubt it, too, in our case.

    nk (dbc370)

  3. We have a couple of advantages over Russia, the primary one being that our debt, foreign and domestic, is denominated in dollars, which means that we pay our debt in our own currency. (Or, really, in our own electrons these days.) Because the government really can just print money, it can always pay its debts. Zimbabwe’s famed $100 trillion note was worthless, because their debts weren’t in Zimbabwan dollars.

    If you wanted to get technical about it, we wouldn’t have to pay any federal taxes at all. Think about what happens when you write a check: either you have enough money in your account, and tyhe bank pays the check, or you don’t, and the bank bounces the check. But when it comes to the federal government, if there isn’t enough money in the account, there’s nobody to bounce the check! That means that the check is good, and winds up being accepted by the bank or the business or the individual to whom that government check is written.

    If that sounds stupid, it’s just a variation on how commercial banks create money, by lending part of their demand deposits to people. The banks have reserve requirements that they have to meet, to insure that they have enough money on hand to meet demand deposit withdrawals — which is why the response to a run on a bank is to call in loans — but, for the federal government, the reserve requirement for the Treasury is essentially zero. We could pay nothing in taxes, and the government could keep writing checks, and those checks would be good just as long as people kept accepting them as good!

    It seems obvious that such a method wouldn’t work for very long, as people would stop having confidence in the Treasury, but it would work for a while.

    The economist Dana (f6a568)

  4. In this light, Russia’s case isn’t special, but just a textbook example of currency collapse due to fiat inflation.

    The gdp deflator in this country has increased at a mean rate of 1.65% per year since the second quarter of 2008. “Fiat inflation” is really not our problem. (Russia deflator has increased at a mean rate of 18% these last 15 years and they tried to maintain a currency peg). Your complaint about federal spending is non sequitur. Russia has run surpluses most years and the central government debt amounts to about 10% of domestic product.

    http://www.tradingeconomics.com/russia/government-budget

    What Russia has suffered is a large drop in the nominal price of the commodity which accounts for about 2/3 of its foreign exchange earnings.

    Art Deco (ee8de5)

  5. Our only consolation (if it could be called that) is that if we fall, we’re
    taking the whole world with us.

    Sure some will be better off than others but the entire world’s economy will
    collapse when we go.

    So it might just wind up being a correction of the baseline.

    Sort of like resetting a clock.

    jakee308 (f0aa61)

  6. Well, at least to be on the same level of Russia’s Central Bank, ours would have to be carrying $200 Trillion in debt to match the Russian example.

    What exactly SHOULD people do if faced with a currency collapse beyond purchase assets?

    DejectedHead (5443cc)

  7. On the bright side for Comrade Putin, this could spur Russian economic growth. The collapse of the ruble means that Russians cannot afford as many imported goods, which would enable Russians to start domestic industries to replace the imported goods.

    The Russian industrial economy is still suffering the backwardness of the Soviet system, and needs to modernize. With the nation’s export economy so dependent upon just oil and natural gas, it’s just too narrowly structured. A growing, modernizing manufacturing sector could provide not only more goods for Russians, but, due to the ruble’s weakness, be more competitive as exports.

    Russia is self-sufficient in virtually every industrial raw material, so that isn’t a problem for them. The country needs to modernize its internal transportation system to move raw materials (much of which are located in the Urals and Siberia), which could provide more and better jobs inside Russia.

    But Russian civil engineering needs to be radically improved; it absolutely sucks. Soviet-style engineering was based on mass, with many concrete structures using what we would call a two-bag mix, very lean on cement, and making up strength through excessive mass; that’s why Soviet-era housing looks the way it does. The Chernobyl reactor is a spectacular example of how bad Soviet engineering really was.

    Дана,экономист (f6a568)

  8. The Dejected Mr Head asked:

    What exactly SHOULD people do if faced with a currency collapse beyond purchase assets?

    If you are asking about individuals, rather than countries, the answer is: buy land, guns and ammunition!

    The landowning Dana (f6a568)

  9. Organize the proletariat; take over the means of production; enforce order; purge the parasites and reactionary elements; and distribute the available commodities equitably to the people.

    nk (dbc370)

  10. I’m awaiting the arrival of Цыпленок Цыпа (Tsyplenok Tsypa) of Minnesota to weigh in on the situation.

    Colonel Haiku (2601c0)

  11. What’s actually happenning is that the dollar is gaining value, because everybody is converting rubles and so on into dollars.

    It’s good to be the reserve currency.

    Sammy Finkelman (6a57b5)

  12. jakee308 (f0aa61) — 12/19/2014 @ 5:18 am

    is that if we fall, we’re
    taking the whole world with us.

    That’s probably true, right now.

    When the Roman currency inflated, there was no reliable money. The Emperor Diocletian imposed very strict wage and price controls, which turned into feudalism.

    Sammy Finkelman (6a57b5)

  13. This is probably enough to send the Chinese back into the US currency market, didn’t they just create a bilateral trade agreement with Russia to trade outside of the dollar?

    Dejectedhead (ec3741)

  14. 10. Russia is but the 800 lb. canary in the coal mine.

    FX war, cyber war, entitlement war, etc., are in full swing as those employing ordnance.

    We led the way in the FX blitzkrieg and Russia is paying an early price for the collapse of oil but we will join them in due time. Already layoffs and cancelled exploration projects have been announced here.

    Hyperinflation cannot proceed until global economic growth crawls out from its spider hole. We are in for a regime of deflation just now as emerging economies devalue.

    Deflation is the affluence killer the Fed has feared all along as debt rises faster than income. Government is already defaulting at local, state and federal levels it will simply become much worse.

    DNF (d52fb5)

  15. The economist Dana wrote:

    We have a couple of advantages over Russia, the primary one being that our debt, foreign and domestic, is denominated in dollars, which means that we pay our debt in our own currency. (Or, really, in our own electrons these days.) Because the government really can just print money, it can always pay its debts. Zimbabwe’s famed $100 trillion note was worthless, because their debts weren’t in Zimbabwan dollars.

    If you wanted to get technical about it, we wouldn’t have to pay any federal taxes at all. Think about what happens when you write a check: either you have enough money in your account, and tyhe bank pays the check, or you don’t, and the bank bounces the check. But when it comes to the federal government, if there isn’t enough money in the account, there’s nobody to bounce the check! That means that the check is good, and winds up being accepted by the bank or the business or the individual to whom that government check is written.

    If that sounds stupid, it’s just a variation on how commercial banks create money, by lending part of their demand deposits to people. The banks have reserve requirements that they have to meet, to insure that they have enough money on hand to meet demand deposit withdrawals — which is why the response to a run on a bank is to call in loans — but, for the federal government, the reserve requirement for the Treasury is essentially zero. We could pay nothing in taxes, and the government could keep writing checks, and those checks would be good just as long as people kept accepting them as good!

    It seems obvious that such a method wouldn’t work for very long, as people would stop having confidence in the Treasury, but it would work for a while.

    Oh, goodness. There are a lot of arguments here to respond to, and I’m afraid I disagree with almost all of them.

    We have a couple of advantages over Russia, the primary one being that our debt, foreign and domestic, is denominated in dollars, which means that we pay our debt in our own currency. (Or, really, in our own electrons these days.) Because the government really can just print money, it can always pay its debts. Zimbabwe’s famed $100 trillion note was worthless, because their debts weren’t in Zimbabwan dollars.

    Hyperinflation is primarily a monetary phenomenon: too much money printed to deal with a crappy economy, usually caused/exacerbated by govrnment policy. In Zimbabwe, Mugabe seized land from experienced whites and gave it to inexperienced blacks (I bring up their race only to explain why he did it) who had no idea what to do with it. Shockingly, that led to a dramatic decline in food production and exports. Mugabe and his central bank printed up a bunch of cash to deal with the unsustainable debts caused by his cratering economy, and printing money always leads to inflation. So the economy in Zimbabwe collapsed because of government interference with the economy, married with (surprise) issuance of excessive currency to pay debts that the government had run up due to its own mismanagement. If this story sounds familiar, it’s because this is what happens in basically every economy that experiences hyperinflation.

    If you wanted to get technical about it, we wouldn’t have to pay any federal taxes at all. Think about what happens when you write a check: either you have enough money in your account, and tyhe bank pays the check, or you don’t, and the bank bounces the check. But when it comes to the federal government, if there isn’t enough money in the account, there’s nobody to bounce the check! That means that the check is good, and winds up being accepted by the bank or the business or the individual to whom that government check is written.

    This reminds me of the Voxsplainers: remember that ridiculous Matthew Yglesias video that not only misrepresented the amount of the national debt, but (going from memory here) had a little cartoon showing a government happily printing money incessantly? The problem is inflation. Sure, many economists forecast that the rounds of QE would cause prices to rise more quickly than they have, but a) asset prices like stocks and real estate have reinflated for no good reason, which is an effect of the government-created monetary expansion, and b) just because the major bust from all this artificial credit creation hasn’t happened yet, does not mean it’s not going to. And, mark my words: it will. For the most part, the banks have been holding onto this additional money, but when they start to lend again, the expanded money supply will indeed drive up prices.

    Essentially, money is a good like anything else, while having other properties, and it responds to economic laws like anything else. If the supply of dollars increases, then the value decreases. Which brings us to your next point:

    If that sounds stupid, it’s just a variation on how commercial banks create money, by lending part of their demand deposits to people. The banks have reserve requirements that they have to meet, to insure that they have enough money on hand to meet demand deposit withdrawals — which is why the response to a run on a bank is to call in loans — but, for the federal government, the reserve requirement for the Treasury is essentially zero. We could pay nothing in taxes, and the government could keep writing checks, and those checks would be good just as long as people kept accepting them as good!

    It seems obvious that such a method wouldn’t work for very long, as people would stop having confidence in the Treasury, but it would work for a while.

    That is the type of quote that derails a thread, as people fly into action to deny that fractional reserve banking creates money out of thin air. I will contribute to the potential derailing by agreeing with you that it most certainly does, and this phenomenon related to QE (and is enabled by it) which is also money creation, which will lead to inflation. Sure, it will work until it won’t, but the point is that you can’t just keep printing money without devaluing it. This is the lesson of Zimbabwe and every other country that has tried to inflate its way out of unsustainable debt. Hyperinflation seems to be our unavoidable fate; it’s just a matter of time.

    Patterico (9c670f)

  16. Interesting, Gary… one wonders how to best prepare, other than bending over to kiss one’s ass goodbye.

    thanks.

    Colonel Haiku (2601c0)

  17. Government is already defaulting at local, state and federal levels it will simply become much worse.

    Which government defaulted?

    Art Deco (ee8de5)

  18. Well, at least to be on the same level of Russia’s Central Bank, ours would have to be carrying $200 Trillion in debt to match the Russian example.

    Funny you should choose that number, since some claim that is the amount of our debt once you factor in the unfunded liabilities.

    I’m not sure how you are making your calculation, though. Are you going by today’s exchange rate of 58 rubles to the dollar? The rate we saw on Tuesday of (at one point in the day) 79 rubles to the dollar? Or January’s of only 33 rubles to the dollar?

    You see the problem?

    Patterico (9c670f)

  19. Fundamentally it doesn’t matter what we demominate our currency in.

    The question is, are we getting more goods and services per person, or not?

    That any money–gold, paper, quatloos, whatever–has any value at all requires a sustained and shared suspension of disbelief.

    Suppose ten years from now 1 dollar now is equivalent in purchasing power to 100 dollars then. If the total quantity of goods and services per person is higher than now, we’ll be richer. If it’s lower, we won’t.

    Mind you I’m not talking about the total monetary value–I’m talking the actual quantities, bushels of wheat, gallons of gasoline, etc.

    The question is not, is our money getting worth less per unit? Of course it is. The question is, by allowing this to happen do we somehow persuade ourselves to produce and consume more stuff and thus have a higher standard of living?

    The chain of causation from one to the other has so many variables I don’t think you can answer this except by correlation, with all the caveats implied by that.

    Gabriel Hanna (64d4e1)

  20. For example, in the days of $20 dollar to the oz of gold we were not richer than we are now.

    Gabriel Hanna (64d4e1)

  21. What’s actually happenning is that the dollar is gaining value, because everybody is converting rubles and so on into dollars.

    It’s good to be the reserve currency.

    I am looking at long-term trends. Short-term strength in the dollar and asset price bubbles do not wow me.

    Patterico (9c670f)

  22. The collapse of the ruble is obviously Obama’s fault.

    Turk (00431d)

  23. The question is not, is our money getting worth less per unit? Of course it is. The question is, by allowing this to happen do we somehow persuade ourselves to produce and consume more stuff and thus have a higher standard of living?

    Gabriel: I agree with you that the real measure of economic health is whether goods and services are being provided in abundance at an affordable rate. But I can’t agree that hyperinflation is irrelevant. Too many people believe the pathway to prosperity is the Keynesian one of consuming more stuff. Granted, you also mention producing more stuff — but how does more stuff get produced? Businesses must expand. That requires capital expenditure. That requires borrowing, which requires saving. If you we have hyperinflation, nobody will save because it would be insane to do so, as the value of your savings will be wiped out. That has real consequences throughout the economy.

    Patterico (9c670f)

  24. The collapse of the ruble is obviously Obama’s fault.

    You spelled “dollar” and “will be” wrong. Also you left out a qualifier (“partially” or better yet “largely”) since the government debt crisis was not created by this particular awful president, it was just made substantially worse by him.

    Are you Perry or imdw? I’m too lazy to look it up. Maybe JD will.

    Patterico (9c670f)

  25. The gdp deflator in this country has increased at a mean rate of 1.65% per year since the second quarter of 2008. “Fiat inflation” is really not our problem.

    Not yet, smart guy. It will be.

    Patterico (9c670f)

  26. We’re not suffering from hyperinflation (or much inflation at all), because the money multiplier has declined pari passu with increases in the dimension of the monetary base (because the Federal Reserve pays interest to banks with reserves on deposit). The Treasury reports an increase in outstanding debt of $837 bn in the last 12 months, or 4.8% of domestic product. That should not be, but the dimensions of the flow are not altogether unprecedented. You saw deficits in that range during the period 1981-86 and again in 1991-93. However, our total stock of debt was proportionately much smaller at that time.

    Art Deco (ee8de5)

  27. Not yet, smart guy. It will be.

    The increase in the Federal Reserve’s balance sheet has been notable for six years. The effects of increases in M1 and M2 on price dynamics do not have six year lags. Again, the effect on the real economy has been contained by the decline in the money multiplier.

    Art Deco (ee8de5)

  28. #18. I made the calculation based off of the debt of Russia Central Bank growth vs American Central Bank growth. They went from $9 Billion to $2.1 Trillion…(2100/9 = 233 times increase) vs $850 Billion * 233 = Roughly $200 Trillion.

    Of course, that’s a very simple calculation that doesn’t take country GDP into account.

    Dejectedhead (ec3741)

  29. 1. Patterico:

    Upside: Dr. Evil’s demand for ONE MEEELYUN DOLLARS will just get funnier and funnier over time.

    Fortunately, “Dr Evil” isn’t real, nor does anyone make him a hero or else we might not see that movie again.

    The 2004 film ““Team America: World Police” has been pulled by Paramount, evidentaly, because it Kim Jong Un’s father, the late dictator Kim Jong Il, as a singing puppet who is at one point impaled.

    In the past – well, did you know that Boris and Natasha weren’t Russian, but came from some fictional country?

    Sammy Finkelman (d22d64)

  30. Our esteemed host wrote:

    Hyperinflation is primarily a monetary phenomenon: too much money printed to deal with a crappy economy, usually caused/exacerbated by govrnment policy. In Zimbabwe, Mugabe seized land from experienced whites and gave it to inexperienced blacks (I bring up their race only to explain why he did it) who had no idea what to do with it. Shockingly, that led to a dramatic decline in food production and exports. Mugabe and his central bank printed up a bunch of cash to deal with the unsustainable debts caused by his cratering economy, and printing money always leads to inflation. So the economy in Zimbabwe collapsed because of government interference with the economy, married with (surprise) issuance of excessive currency to pay debts that the government had run up due to its own mismanagement. If this story sounds familiar, it’s because this is what happens in basically every economy that experiences hyperinflation.

    Except, of course, that this isn’t Zimbabwe, and the causes you specified don’t exist here: we haven’t been taking land out of production or anything like that. We have, in effect, exported our manufacturing jobs, by choosing to buy manufactured goods from overseas, but despite a long-lasting balance of trade deficit and a national debt which exceeds a year’s GDP, other people are still accepting our dollars and we aren’t experiencing significant inflation at all.

    One of the things which “every economy that experiences hyperinflation” has had in common is that they owed debts in something other than their own currency, whether it was in some other country’s currency, or in gold, or in commodities, and they couldn’t make the required payments because they didn’t control the medium of payment. We could, very literally, continue as we are going as long as people accept our currency. And, despite our high national debt, the dollar has been rising against the yen, the ruble and the euro of late.

    The economist Dana (f6a568)

  31. “The collapse of the ruble is obviously Obama’s fault.”

    Obama’s not that smart.

    daleyrocks (bf33e9)

  32. #18. I made the calculation based off of the debt of Russia Central Bank growth vs American Central Bank growth. They went from $9 Billion to $2.1 Trillion…(2100/9 = 233 times increase) vs $850 Billion * 233 = Roughly $200 Trillion.

    Of course, that’s a very simple calculation that doesn’t take country GDP into account.

    Dejectedhead (ec3741) — 12/19/2014 @ 9:27 am

    You’re comparing Russia’s increase over 16 years with America’s over 5 years.

    Granted, that’s how the numbers were presented in the post, but that’s because I could not easily figure out reliable numbers for Russia’s five-year increase. I have solid numbers only for the U.S. Five Year Plan, comrade.

    Patterico (3d1266)

  33. Our honored host wrote:

    This reminds me of the Voxsplainers: remember that ridiculous Matthew Yglesias video that not only misrepresented the amount of the national debt, but (going from memory here) had a little cartoon showing a government happily printing money incessantly? The problem is inflation. Sure, many economists forecast that the rounds of QE would cause prices to rise more quickly than they have, but a) asset prices like stocks and real estate have reinflated for no good reason, which is an effect of the government-created monetary expansion, and b) just because the major bust from all this artificial credit creation hasn’t happened yet, does not mean it’s not going to. And, mark my words: it will. For the most part, the banks have been holding onto this additional money, but when they start to lend again, the expanded money supply will indeed drive up prices.

    As you noted, “many economists forecast that the rounds of QE would cause prices to rise more quickly than they have.” I never made that prediction, but I was certainly wrong about the inflation I expected from the 2009 stimulus bill; it should have happened, but it didn’t. Things just aren’t going the way people have anticipated, and that has been true for seven years now.

    Actually, I had expected the government to push for more inflation, because inflation lowers the value of the debt, in real terms, because it is denominated in dollars. When you look at Fed as well as Obama Administration policies, you are looking at policies which should have pushed inflation higher, but they haven’t. The reason is that, according to my own interpretation, people have changed their behavior since the crash, and are taking on less debt, and the debt that they are taking on is more wisely done. (The Wall Street Journal just reported a decrease in the average household debt.)

    This was at least part of the reason that the stimulus didn’t work: it was based on consumers behaving after the stimulus the same way they did before the crash, and that didn’t happen. Rather than taking out second mortgages to buy Christmas presents, people paid down debts.

    It would certainly seem likely, by every economic truth we think that we know, that the government simply making payments without collecting taxes would be a huge stimulus program, leading to inflation, but the simple truth is that that hasn’t been happening, despite the stimulus program, and despite importing dollars from China and everywhere else; we have been living beyond the means justified by our production since the 1970s — in effect applying Keynesian stimulus every year — yet inflation has been relatively low since the mid 1980s.

    If this was just an Obama Administration policy effect, it would be too short term to draw any conclusions, but has been the case ever since the end of the 1981-1983 recession: we’ve borrowed money at prodigious rates, and while we’ve had cyclical ups-and-downs throughout that period, inflation has remained relatively low.

    What we have seen is over-exuberant inflation in stocks and in home prices, and people betting on those things have gotten their feelings hurt. Home prices have self-corrected more than once since 1983, in 1988-89 and again in 2008-9. I had expected them to correct in in 2001, but they didn’t, as easy money helped home building keep on going through the 2001 recession. (I’ve long thought that the persistence of home building problems this time around is due to home building and housing prices having skipped the 2001 correction.) Stocks have appreciated too much, in my opinion, because interest rates are so low that investors can’t make much money outside of stocks; I expect another crash there.

    The armchair economist Dana (f6a568)

  34. Except, of course, that this isn’t Zimbabwe, and the causes you specified don’t exist here: we haven’t been taking land out of production or anything like that. We have, in effect, exported our manufacturing jobs, by choosing to buy manufactured goods from overseas, but despite a long-lasting balance of trade deficit and a national debt which exceeds a year’s GDP, other people are still accepting our dollars and we aren’t experiencing significant inflation at all.

    It will be great until they stop. Print enough and they will. We have no machine that will invalidate basic economic principles of supply and demand.

    Patterico (3d1266)

  35. I have two questions that perhaps some of you could answer. 1) What are the chances that the Fed eases back on the balance sheet enough to eliminate the threat of hyperinflation before it occurs? 2) Does the $18 trillion federal debt make hyperinflation inevitable? If not, is there a level which would make hyperinflation inevitable?

    Jim C (fd39c8)

  36. as easy money helped home building keep on going through the 2001 recession.

    The Federal Funds rate was abnormally low from the fall of 2002 to the fall of 2004, not before and not during the period running from the fall of 2004 to the end of 2007. (John Taylor dates the abandonment of rules-based monetary policy to 2003). Housing prices began to diverge from nominal incomes around about 1997 in the Case-Shiller 10-city sample (perhaps later elsewhere). Very few underwater mortgages were originally issued prior to 2004. The bubble antedates departures in monetary policy and it took a while for the distance between inflated prices and crazy prices to be traversed.

    Art Deco (ee8de5)

  37. Regarding inflation decreasing the debt in terms of real dollars, won’t a corresponding increase in interest rates prevent that from occurring? I’m not sure what the duration of the debt is, but my understanding is that it’s pretty low based on the low interest portion of the budget.

    Jim C (fd39c8)

  38. 1) What are the chances that the Fed eases back on the balance sheet enough to eliminate the threat of hyperinflation before it occurs? 2) Does the $18 trillion federal debt make hyperinflation inevitable? If not, is there a level which would make hyperinflation inevitable?

    1. No, not inevitable.

    2. The Fed would have to withdraw the excess currency from circulation pari passu with cuts in the interest rate on reserves on deposit to increase the money multiplier. The question would be whether there is some sort of inflection point wherein cuts in that rate induce massive bank lending.

    Art Deco (ee8de5)

  39. 38.

    Regarding inflation decreasing the debt in terms of real dollars, won’t a corresponding increase in interest rates prevent that from occurring?

    There won’t be an increae in interest rates, if the Fed doesn’t want there to be an increase in interest rates.

    Sammy Finkelman (d22d64)

  40. There is a limit the Fed can have on interest rates. Who is going to lend to the US if interest rates are far below inflation? If the gov’t is operating on a deficit, resources (however you want to define them) have to be borrowed at current market rates.

    Jim C (fd39c8)

  41. Our own central bank, the Fed, has increased its balance sheet precipitiously in recent years — surely you have heard of “quantitative easing,” yes? Since the 2008 crisis, according to Heritage, “[t]he Fed’s balance sheet expanded from about $850 billion to more than $4.4 trillion.”

    Well, yeah, but with the United States, it’s different.

    Somehow.

    /sarcasm

    J.P. (6e49bf)

  42. Jim C (fd39c8) — 12/19/2014 @ 10:28 am

    Who is going to lend to the US if interest rates are far below inflation?

    Everybody who prefers U.S. government debt to mattreesses and metal boxes full of cash.

    Interest rates were way below the level of inflation 1940 through 1948.

    the thing you might have to worry about is WHEN THE TOTAL DEBT GETS TOO HIGH. Or if too much has to be rolled over at once. But it is still posisble to take care of it.

    Sammy Finkelman (d22d64)

  43. Well, yeah, but with the United States, it’s different.

    American exceptionalism.

    It’s for real.

    Sammy Finkelman (d22d64)

  44. “Very few underwater mortgages were originally issued prior to 2004.”

    Art Deco – Mortgage default rates were ticking up well before the end of 2004. The GSE’s had pushed lower down payment and simpler documentation requirements on lenders and told mortgage insurers to provide deeper and riskier coverage for years. When you could look at a Bloomberg screen at the end of 2004 and see 35 pages of ARM quotes, you knew there was a bubble. Up until the mid-1990s we tended to have regional real estate bubbles, but with the consolidation of banks in the later 1990s, problems became more national in scope.

    You had people accepting SISA loans, stated income/stated assets, using second mortgages or home equity loans to come up with the minimal down payments if any required. Looking at it from whether the loan is underwater masks the basic problem that the loans should not have been made in the first place. No lender or mortgage insurer wants to be in the business of owning real estate.

    daleyrocks (bf33e9)

  45. Mortgage default rates were ticking up well before the end of 2004.

    Irrelevant to my point, but never mind. (And perhaps true of mortgages in the secondary market. Not true of mortgages on the books of deposits-and-loans institutions).

    It was in 2003 that Freddie Mac slashed underwriting standards.

    Art Deco (ee8de5)

  46. “Irrelevant to my point, but never mind.”

    Art Deco – You explicitly made the point, but never mind.

    In terms of loans on the books of loan institutions, well they tended to sell off sub-prime loans and keep the best stuff so in 2004 what they had was probably inventory in process, prime loans still above water and residuals of crap deals that could not be peddled elsewhere.

    daleyrocks (bf33e9)

  47. 36.1. Near zero. The Fed tried on two occasions to sell $8 Billion in Maiden Lane toxic MBS debt before letting it go to Goldman-Sachs on undisclosed terms.

    Moreover, it will certainly hold its 10-year and longer Treasuries to maturity rather than undercut yields further. Its balance sheet is $4.5 Trillion last I checked.

    Finally, the Fed currently cannot curtail Interest Paid on Reserves as banks have put it on notice they will have to charge interest on demand deposits in that eventuality.

    2. Until the American consumer largely deleverages and gains confidence that their income will rise over the near to medium term there is no expectation by business that they can increase their margin and thus begin the cascade of inflationary expectations.

    DNF (d52fb5)

  48. Art Deco – You explicitly made the point, but never mind.

    No, I did not. My point concerned underwater mortgages, not mortgages in arrears.

    well they tended to sell off sub-prime loans and keep the best stuff so in 2004

    Subprime and Alt-A loans amounted by 2008 to about 16% of the sum of loan balances.

    I’ve asked bankers of my acquaintance what sort of home mortgages they keep on their books and they tell me that one criterion they adhere to is that out of state loans are retained in the portfolio. It used to be (and may still be) that jumbo mortgages have to be retained or sold to private conduits.

    By the way, the most recent promissory note we contracted for was sold by the local bank to Freddie Mac just a year later.

    Art Deco (ee8de5)

  49. 36.1. Near zero. The Fed tried on two occasions to sell $8 Billion in Maiden Lane toxic MBS debt before letting it go to Goldman-Sachs on undisclosed terms.

    The books are closed on the Maiden Lane deals. And what does this have to do with general monetary policy? The Federal Reserve’s assets consists of Treasuries and GSE issues, not anything toxic.

    Until the American consumer largely deleverages

    Household debt service ratios are near 35 year lows.

    Art Deco (ee8de5)

  50. Finally, the Fed currently cannot curtail Interest Paid on Reserves as banks have put it on notice they will have to charge interest on demand deposits in that eventuality.

    Come again?

    Art Deco (ee8de5)

  51. 16. I’ll bet most here will survive, if only because we are better educated, more circumstantially privileged and include a number of vets.

    But anyone listening to His Somnolence just now will be caught unaware.

    DNF (d52fb5)

  52. While we’re at it, the Freddie Mac report here

    http://www.freddiemac.com/speeches/pdf/NAHB_IBS.pdf

    has it that the upsurge in delinquencies in their portfolio began in 2006.

    Art Deco (ee8de5)

  53. Greenspan’s interest rate slashes had an effect on lowering interest rates, but the two rates (federal funds and mortgage rates) did not go in lockstep. When Greenspan slashed the federal funds rate to 1% mortgage lenders did not follow them with a commensurate drop. That being said, 30-year rates went from 8.5% in the middle of 2000 to under 5.5% three years later. That was enough to fuel a boom. The fact that they didn’t go all the way to, say, 3% in 2003-2004 doesn’t mean the historically low rates didn’t fuel a boom — they did. And when Greenspan whipsawed the rates back up (though not terribly high), mortgage rates didn’t need to react much because they hadn’t dived down to the greatest possible depths. Again, none of this means that rates didn’t plunge from 2000 to 2003 — they did, because of a couple dozen rate cuts that dropped rates 3 points in 3 years.

    The conclusion is simple. Greenspan should have let the 2000 recession play out. That is what government should do in a recession. (Witness the Great Depression of 1920-1921, which you never heard of because we didn’t flip out and start meddling in the economy like Mr. So-Called Laissez-Faire Herbert Hoover did in 1929.) Instead, however, Greenspan drove interest rates down with the express goal of creating a housing boom (which is what Krugman was calling for at the time as well). The boom spurred malinvestment and we got our bust. Now we’re doing the same thing, with the federal funds rate at effectively zero and several rounds of QE. We’re just deferring the ultimate shakeout that needs to happen, and artificially driving up stock and real estate prices. Combine that with the unsustainable debt bubble and we are royally screwed.

    Patterico (9c670f)

  54. 51. On the contrary, the balance sheet includes $2 Trillion in MBS, the value of banks’ increase in mandatory reserves beginning at the end of 2007 and completed Q1 2008.

    DNF (d52fb5)

  55. Below are the U.S. median and average home sale prices, respectively, as reported by the U.S. Census Department. Easy access to credit provided a significant degree of demand driven inflation in home prices prior to 2008.

    2000 $169,000 $207,000
    2001 $175,200 $213,200
    2002 $187,600 $228,700
    2003 $195,000 $246,300
    2004 $221,000 $274,500
    2005 $240,900 $297,000
    2006 $246,500 $305,900
    2007 $247,900 $313,600
    2008 $232,100 $292,600
    2009 $216,700 $270,900
    2010 $221,800 $272,900

    daleyrocks (bf33e9)

  56. The debt held by the Russian central bank (200B) is about 20% of the Russian gdp (1.2T) when both are measured in Rubles. The debt held by the Federal Reserve is about $4.4T, and our gdp is currently around $17T. So those things are proportionate.

    The U. S. balance of trade is currently about -$700B, with China accounting for about $300B of that total. The difference is largely accounted for with foreign investment in the U. S. both in Federal notes and in the stock- and real estate markets. China and Japan currently have about $1.2T each in Federal notes, but China is reducing their balance while Japan is increasing theirs.

    My thinking about the level of debt and inflation has matured a bit with the realization that the past analyses did not account for the very high level of foreign trade we enjoy today. This trade is very one-sided when measured in goods, and that has been of great benefit to the consumer. The government “prints” a pile of money, and that money is spent on some things created here, but also on a lot of things made elsewhere. This defeats the Keynesian idea that the extra demand will encourage domestic manufacturers to produce more and thus to increase employment. It also explains why the middle class is getting hammered while the very rich are prospering from the ebullient markets.

    As things now stand, foreign producers are willing to make flat screen displays (approaching the size of ping pong tables,) tennis shoes, microwave ovens, computers, etc., in return for dollars, and they then invest these earned dollars in our financial markets, either stocks or bonds of various types. They are also investing in real estate, million dollar condominiums in Hawaii, for example.

    Russia is hurting because the price of oil and platinum are tanking, and this deprives the country of foreign currency that it needs to buy manufactured goods. The lower price of Pt suggests that the global economy is not as strong as many would like to believe since Pt is an important component in many important high end manufactured goods, principally catalytic converters for transportation equipment.

    The hyperinflation Germany following WWI was an intentional policy of the government. The reparations imposed on Germany were beyond their means, and so it was decided to slowly ramp up the printing of marks which were quickly exchanged for francs and pounds, and those were then used to satisfy the payments owed in that time period. This only worked for a short time before their trading partners caught on to the scheme, but it probably helped Germany deal with their payment crisis. After the collapse of the German mark, reparations were often rescheduled requiring payment in goods, but Germany may have got the best of this deal, if you ignore the deprivations imposed on the middle and lower classes.

    Our program of QE is somewhat akin to Germany’s, with the significant difference that the printed dollars used to buy foreign goods can be used to purchase bonds, stocks and real estate in the U. S. How long this will go on is the question. The rest of the world is engaged in the same schemes, and as long as they are in worse shape than we are, our ploy will work. But the moment that investments in our country look overly speculative, the whole thing comes crashing down.

    bobathome (348c8a)

  57. “Subprime and Alt-A loans amounted by 2008 to about 16% of the sum of loan balances.”

    Art Deco – Exactly, the two categories which have the highest default rate.

    “I’ve asked bankers of my acquaintance what sort of home mortgages they keep on their books and they tell me that one criterion they adhere to is that out of state loans are retained in the portfolio.”

    Which makes sense because your local banker has no business making and retaining residential loans out of state. My jumbo loans were made by a local branch of JP Morgan and retained by JP Morgan for 20 years.

    daleyrocks (bf33e9)

  58. 51. “Household debt service ratios are near 35 year lows.”

    Do you see what moby did here? Under ZIRP we’ve shoved our tens of thousands onto balance offers charging no interest for 18 months.

    We’ve made exactly no headway on our total since 2007 but hey, its not going out for new cars, Carnival cruises, or jumbo loans. The groceries are another matter.

    DNF (d52fb5)

  59. Armchair economist Dana says:

    Except, of course, that this isn’t Zimbabwe, and the causes you specified don’t exist here: we haven’t been taking land out of production or anything like that. We have, in effect, exported our manufacturing jobs, by choosing to buy manufactured goods from overseas, but despite a long-lasting balance of trade deficit and a national debt which exceeds a year’s GDP, other people are still accepting our dollars and we aren’t experiencing significant inflation at all.

    One of the things which “every economy that experiences hyperinflation” has had in common is that they owed debts in something other than their own currency, whether it was in some other country’s currency, or in gold, or in commodities, and they couldn’t make the required payments because they didn’t control the medium of payment. We could, very literally, continue as we are going as long as people accept our currency. And, despite our high national debt, the dollar has been rising against the yen, the ruble and the euro of late.

    And also this:

    It would certainly seem likely, by every economic truth we think that we know, that the government simply making payments without collecting taxes would be a huge stimulus program, leading to inflation, but the simple truth is that that hasn’t been happening, despite the stimulus program, and despite importing dollars from China and everywhere else; we have been living beyond the means justified by our production since the 1970s — in effect applying Keynesian stimulus every year — yet inflation has been relatively low since the mid 1980s.

    If this was just an Obama Administration policy effect, it would be too short term to draw any conclusions, but has been the case ever since the end of the 1981-1983 recession: we’ve borrowed money at prodigious rates, and while we’ve had cyclical ups-and-downs throughout that period, inflation has remained relatively low.

    What we have seen is over-exuberant inflation in stocks and in home prices, and people betting on those things have gotten their feelings hurt. Home prices have self-corrected more than once since 1983, in 1988-89 and again in 2008-9. I had expected them to correct in in 2001, but they didn’t, as easy money helped home building keep on going through the 2001 recession. (I’ve long thought that the persistence of home building problems this time around is due to home building and housing prices having skipped the 2001 correction.) Stocks have appreciated too much, in my opinion, because interest rates are so low that investors can’t make much money outside of stocks; I expect another crash there.

    Armchair economist Dana:

    Please take a look at this post of mine on the government debt bubble. I don’t see that you commented on it, so I don’t know if you ever saw it before. I agree with you that there were bubbles in stocks and then housing. I believe both were caused by the Fed. I agree with you that stocks have appreciated too much. I believe that is also caused by the Fed’s expanding balance sheet and refusal to let interest rates rise to market levels. And that there will be another crash.

    But layered on top of that disaster is the coming catastrophe of the collapse of the government debt bubble. And yes, that one has been building for a while: not just since 2008 or 2000, but since at least the 1970s. As I have said, Barack Obama is only part of the problem.

    My story is that this is a huge problem and that the piper will be paid. It could happen in a year, or five, or twenty, or forty. But my belief is that we can’t simply amass an unpayable debt forever without consequence.

    You appear to think we can. So, can you explain to me please: just how is that supposed to work? Surely you agree that there is zero political will to make spending cuts and achieve entitlement reform to the degree that would be necessary to bring us into balance, with a national debt of $18 trillion and unfunded liabilities of well over $100 trillion. Logically, the only way we can pretend to pay this off is to simply print up whatever is necessary. Do you truly believe we can do that without hyperinflation — that we can just print several times the number of dollars currently in existence without seeing a stunning devaluation of that dollar?

    What is your endgame?

    Patterico (9c670f)

  60. Below are the U.S. median and average home sale prices, respectively, as reported by the U.S. Census Department. Easy access to credit provided a significant degree of demand driven inflation in home prices prior to 2008.

    Exactly right.

    Patterico (9c670f)

  61. It seems I have nothing but validation for daleyrocks today!

    Patterico (9c670f)

  62. And the US Fed is not the tale in central bank QE only the instigator. China’s PBoC QE amounted to $25 Trillion since Lehman. Japan’s JoB is currently buying all of its public debt, at a rate adjusted for the relative sizes of the respective GDPs of $3.3 Trillion per annum.

    Because we no longer make anything in the US a significant fraction of the Fed’s largesse funded the world’s economies and did not trickle down here in the US. Now that our QE has ended, they are royally screwed.

    DNF (d52fb5)

  63. Below is an excerpt from the 2004 Annual Report of MGIC, then the largest U.S. mortgage insurer which supports the points I have been making. I have no idea how the formatting will turn out and have included a link.

    Information about the composition of the primary
    insurance default inventory at December 31, 2004, 2003
    and 2002 appears in the table below.
    2004 2003 2002
    Total loans delinquent …………… 85,487 86,372 73,648
    Percentage of loans
    delinquent (default rate) ……..
    6.05% 5.57% 4.45%
    Flow loans delinquent …………… 44,925 45,259 43,196
    Percentage of flow loans
    delinquent (default rate) …….. 3.99% 3.76% 3.19%
    Bulk loans delinquent……………. 40,562 41,113 30,452
    Percentage of bulk loans
    delinquent (default rate) …….. 14.06% 11.80% 10.09%
    A-minus and subprime credit
    loans delinquent* ………………. 35,824 34,525 25,504
    Percentage of A-minus and
    subprime credit loans
    delinquent (default rate) ……..
    16.49% 14.14% 12.68%
    * A portion of A-minus and subprime cr
    edit loans is included in flow loans
    delinquent and the remainder is included in bulk loans delinquent. Most
    A-minus and subprime credit loans are
    written through the bulk channel.
    A-minus loans have FICO credit scores of 575–619, as reported to MGIC at
    the time a commitment to insure is issued, and subprime loans have FICO
    credit scores of less than 575.
    The average primary claim paid for 2004 was $24,438
    compared to $22,925 in 2003 and $20,115 in 2002.

    As of December 31, 2004, 82% of the Company’s
    primary insurance in force was written subsequent to
    December 31, 2001.

    http://library.corporate-ir.net/library/11/117/117240/items/144214/2004ar.pdf

    daleyrocks (bf33e9)

  64. We’ve made exactly no headway on our total since 2007 but hey, its not going out for new cars, Carnival cruises, or jumbo loans. The groceries are another matter.

    Actually, outstanding mortgage debt has declined in nominal terms and real terms. The ratio of outstanding balances to gdp has fallen from 1.18 in 2007 to 0.9 today, about what it was in 2002. That includes commercial and farm real estate. Given the current trajectory, it will take a while for that ratio to fall to 1997 levels, perhaps another seven years.

    Art Deco (ee8de5)

  65. I’ll give you someone to argue with, at least a little.

    I believe in capitalism and also in the good judgment of my fellow citizens, which is why I believe in juries and in people generally living their lives without being told what they can and can’t do. But the reason people vote for more government is that the market (the collective “we”) doesn’t always get to the right decisions quickly or easily. We often make some bad decisions as we struggle to find and make the right ones. As my Dad would say, we usually have to learn the hard way.

    It’s tough to learn things the hard way and most of us look for easy lessons, especially when we’re young. So this is my way of saying I think things will get worse before they get better. It’s also why I don’t mind seeing America learn a hard lesson, because my eternally optimistic hope is that we will end up in a better place if that happens.

    DRJ (a83b8b)

  66. Correction, the ratio of outstanding balances to personal income.

    Art Deco (ee8de5)

  67. Because we no longer make anything in the US

    Actually, real output in the manufacturing sector is higher than it was in 1970. We just employ fewer people.

    Art Deco (ee8de5)

  68. A home in every pot!

    Si se puedo!

    daleyrocks (bf33e9)

  69. Which makes sense because your local banker has no business making and retaining residential loans out of state.

    Well, you can call or write and tell them you think his bank shouldn’t lend someone money to buy a house in Burlington or Erie because, well, it offends you or something.

    Art Deco (ee8de5)

  70. Below are the U.S. median and average home sale prices, respectively, as reported by the U.S. Census Department. Easy access to credit provided a significant degree of demand driven inflation in home prices prior to 2008.

    I would not deny that was a force. I merely pointed out that the phenomenon antedated innovations in Fed policy and antedated Freddie Mac’s changes in underwriting standards. Lots of vectors here.

    Art Deco (ee8de5)

  71. 68. “my eternally optimistic hope is that we will end up in a better place if that happens.”

    I share that optimism and am maximizing, for a misanthrope, my contact with people of all walks.

    I know what it is to be in need, and I know what it is to have plenty. I have learned the secret of being content in any and every situation, whether well fed or hungry, whether living in plenty or in want.

    May we all experience a blessed New Year.

    DNF (d52fb5)

  72. On the contrary, the balance sheet includes $2 Trillion in MBS, the value of banks’ increase in mandatory reserves beginning at the end of 2007 and completed Q1 2008

    Those are not toxic assets. At the height of the financial crisis, GSE issues were trading at 78c on the dollar.

    http://www.mortgagenewsdaily.com/mbs/

    Art Deco (ee8de5)

  73. “Well, you can call or write and tell them you think his bank shouldn’t lend someone money to buy a house in Burlington or Erie because, well, it offends you or something.”

    Art Deco – Why would I do that when it was more profitable to short bank stocks?

    daleyrocks (bf33e9)

  74. But layered on top of that disaster is the coming catastrophe of the collapse of the government debt bubble. And yes, that one has been building for a while: not just since 2008 or 2000, but since at least the 1970s.

    Again, the ratio of federal debt to gdp has fluctuated up and down for 80-odd years. The Congress has had a chronic problem since 1961 in composing balanced budgets, but there have been quite a run of years wherein nominal debt grew slower than nominal gdp. The debt to gdp ratio in 2007 was not much different than what it had been in 1980 (having been higher in intervening years).

    Art Deco (ee8de5)

  75. “I would not deny that was a force. I merely pointed out that the phenomenon antedated innovations in Fed policy and antedated Freddie Mac’s changes in underwriting standards.”

    Art Deco – Your point might have validity if you could point out Fannie and Freddie tightening underwriting standards in the 20 years prior to 2008, but I doubt that you can.

    daleyrocks (bf33e9)

  76. Art Deco – Why would I do that when it was more profitable to short bank stocks?

    That bank isn’t publicly traded (and it’s pretty silly to be telling Mr. Hamlin how to run his quite successful business).

    Art Deco (ee8de5)

  77. Art Deco – Your point might have validity if you could point out Fannie and Freddie tightening underwriting standards in the 20 years prior to 2008, but I doubt that you can.

    That would be irrelevant to my point. My point was that speculative bubbles in assets do not require loose monetary policy or decaying underwriting standards, though they may be exacerbated by monetary policy or the decay in underwriting standards.

    Art Deco (ee8de5)

  78. The conclusion is simple. Greenspan should have let the 2000 recession play out.

    Again, the abnormal monetary policy dates from the fall of 2002. There was little no recession in production, just two quarters of decline (syncopated) in 2001. The labor market did not begin to recover until June 2003, however.

    Art Deco (ee8de5)

  79. Obama Christmas presser: a pause to bask in the adulation of his devotees/fellow travelers in the WH press corps..that’s pronounced “core”, Mr. Preezy… before jetting off to teh Choom Islands

    Colonel Haiku (2601c0)

  80. Hyperinflation is primarily a monetary phenomenon: too much money printed to deal with a crappy economy, usually caused/exacerbated by govrnment policy. In Zimbabwe, Mugabe seized land from experienced whites and gave it to inexperienced blacks (I bring up their race only to explain why he did it) who had no idea what to do with it. Shockingly, that led to a dramatic decline in food production and exports. Mugabe and his central bank printed up a bunch of cash to deal with the unsustainable debts caused by his cratering economy, and printing money always leads to inflation. So the economy in Zimbabwe collapsed because of government interference with the economy, married with (surprise) issuance of excessive currency to pay debts that the government had run up due to its own mismanagement. If this story sounds familiar, it’s because this is what happens in basically every economy that experiences hyperinflation.

    What you said above at 8:58 am was completely wrong. Hyperinflation, or any inflation, for that matter, is not the result of how much money is “printed”. And Zimbabwe did not enter a hyper-inflationary spiral simply because it printed too much money.

    What you are completely missing is the other side of the equation. Money printing does not, let me repeat that, does not = inflation. Inflation is the result of the actors in the economy holding too much currency in relation to the supply and demand for goods that can be purchased with that currency. Zero Hedge has been saying that the US economy will enter a period of significant to even hyperinflation for many years now. All the events you catalog above have occurred during this timeframe. And guess what, we are staring at very low to even in the not too distant future a disinflationary environment. We as conservatives keep saying that when real evidence tells us something, we accept what that is, and not simply going with the narrative. But in this case, by again trotting out Zero Hedge, you are doing exactly that.

    You can go back to 2009 and read the zero hedge article interview with shadow stats John Williams

    http://www.zerohedge.com/article/key-theme-interview-shadowstats-john-williams-you-guessed-it-hyperinflation-and-death-us-eco

    So exactly when can we expect that hyperinflationary death spiral bankruptcy of the US?

    You might think that being wrong for half a decade would lead people to stop with the meme, but no, they just keep plugging along.

    The size of the FRB balance sheet is pretty meaningless. When the Fed buys treasury’s it simply swaps assets from the private economy (bank reserves for treasuries). It has no effect whatsoever (other than a minor portfolio rebalancing effect – the psychological effects are much greater but that is a story for another day).

    The problem with Russia isn’t Russia’s government debt or central bank actions. The problem with Russia is that it has a massive corporate debt overhang in which its corporations issued debt that is now coming due in currencies other than the Ruble. All of that debt is coming due at the same time that there has been a very significant drop in the USD price of oil, which has reduced the amount of USD’s that are entering the Russian economy to help offset the need to acquire USD to repay loans. That is the real issue with Russia. US corporations for the most part issue their debt in US dollars, so again, the problem will not occur here in the US until that changes.

    Jeffrey (2eddb6)

  81. Obama’s Axis of Needlers: Putin… Kim Jong-un… Ed Henry???

    Colonel Haiku (2601c0)

  82. “That bank isn’t publicly traded (and it’s pretty silly to be telling Mr. Hamlin how to run his quite successful business).”

    Art Deco – Since you did not name a bank, how would I know? There were plenty to short. Are you always this obtuse?

    daleyrocks (bf33e9)

  83. “That would be irrelevant to my point. My point was that speculative bubbles in assets do not require loose monetary policy or decaying underwriting standards, though they may be exacerbated by monetary policy or the decay in underwriting standards.”

    Art Deco – I have been trying to what point you have been trying to make other than quibbling with our host and myself over known facts. Government debt has been expanding faster than out economy. Is this good or bad and what do you believe will happen if it continues? I contend we had an inflationary housing boom fueled by easy access to credit and low interest rates which eventually collapsed in 2007 and 2008. You want to focus on minutiae rather than trends for two GSE which have served as dumping grounds to enrich Democrat pols and implement their favored social policy and exceed their federal charter, neither of which could produce timely or accurate financial statements for significant periods of time last decade because they were such a mess. Unfortunately none of their senior managers went to prison when investigations concluded.

    So apart from quibbling, can you succinctly summarize your no doubt marvelously important thesis, please?

    daleyrocks (bf33e9)

  84. “Again, the abnormal monetary policy dates from the fall of 2002.”

    Define abnormal.

    daleyrocks (bf33e9)

  85. I’ll give you someone to argue with, at least a little.

    I believe in capitalism and also in the good judgment of my fellow citizens, which is why I believe in juries and in people generally living their lives without being told what they can and can’t do. But the reason people vote for more government is that the market (the collective “we”) doesn’t always get to the right decisions quickly or easily. We often make some bad decisions as we struggle to find and make the right ones. As my Dad would say, we usually have to learn the hard way.

    It’s tough to learn things the hard way and most of us look for easy lessons, especially when we’re young. So this is my way of saying I think things will get worse before they get better. It’s also why I don’t mind seeing America learn a hard lesson, because my eternally optimistic hope is that we will end up in a better place if that happens.

    You’ll get no argument from me.

    Patterico (9c670f)

  86. Again, the ratio of federal debt to gdp has fluctuated up and down for 80-odd years. The Congress has had a chronic problem since 1961 in composing balanced budgets, but there have been quite a run of years wherein nominal debt grew slower than nominal gdp. The debt to gdp ratio in 2007 was not much different than what it had been in 1980 (having been higher in intervening years).

    Since GDP is a bogus number, as I have been at pains to explain on this site, especially here, I am not heartened. I just got through explaining in the other thread that only voluntary transactions can be confidently said to increase human happiness — and government transactions are not voluntary (my taxes are not “donations” or “contributions” despite Obama’s Orwellian doublespeak). Borrowing and spending does not hurt a debt-to-GDP ratio but it does not contribute to citizens’ well being in the way that voluntary transactions do.

    Even given your metric, it’s interesting that you pick 2007, conveniently bypassing the stratospheric rocketing upwards that has happened since the financial crisis, to levels not seen since WWII and its immediate aftermath.

    Patterico (9c670f)

  87. (1) It can’t happen here!
    (2) ???
    (3) Profit!

    OK, where are the Underpants Gnomes hiding?

    htom (9b625a)

  88. I contend we had an inflationary housing boom fueled by easy access to credit and low interest rates which eventually collapsed in 2007 and 2008.

    Of course, there were other culprits: Fannie and Freddie and their implicit government guarantee serving as a backstop for irresponsible loans; the CRA; affirmative action in lending and lawsuits forcing that policy; government policies such as tax code benefits of home ownership, and the “too big to fail” mentality that assured banks they could be reckless without consequence. But the Fed and its manipulation of interest rates and credit expansion has to be seen as a prime factor interfering with the price mechanism as it applies to credit.

    Patterico (9c670f)

  89. Since GDP is a bogus number, as I have been at pains to explain on this site

    No, you haven’t ‘explained’ it. You recycled a bogus argument by one Thomas Woods who is in turn channeling others on the staff of the von Mises Institute. If you fancy the entire economics profession does not understand the contours of the economy, you are welcome to do so. You should not expect anyone to take what you say on these matters the least bit seriously.

    Art Deco (ee8de5)

  90. Money printing does not, let me repeat that, does not = inflation. Inflation is the result of the actors in the economy holding too much currency in relation to the supply and demand for goods that can be purchased with that currency.

    Perhaps we are arguing over definitions. You may be using the word “inflation” to refer to rising prices. Historically, inflation wasn’t merely seen as being caused by an expansion of the money supply and credit; that was its very definition. I think you are referring to a more modern and looser definition: a rise in prices. Let’s move forward with that understanding.

    Now, when I say money printing I am myself using loose language, so let me be more precise: inflation is a phenomenon that results from expansion of the money supply including credit. Fractional reserve banking greatly expands that supply. Also, the value of dollars today depends not only on the current supply but also the expected future supply — if people expect more to be printed (or created out of thin air through fractional reserve lending practices, which is functionally the same thing) then the value of today’s dollar will be lower than it would be otherwise, even if the current supply remains constant.

    When you say: “Inflation is the result of the actors in the economy holding too much currency in relation to the supply and demand for goods that can be purchased with that currency” — could you be more specific? Are you trying to blame inflation (using your looser modern definition of an increase in prices) on a shortage of goods? Because that is a fallacy; certainly a shortage in one particular good can occur and cause a price spike, but there are almost zero real-world examples of a general shortage of goods causing inflation; it is a monetary phenomenon, albeit complicated by the psychological and other factors I described above.

    This bit right here:

    The size of the FRB balance sheet is pretty meaningless. When the Fed buys treasury’s it simply swaps assets from the private economy (bank reserves for treasuries). It has no effect whatsoever (other than a minor portfolio rebalancing effect – the psychological effects are much greater but that is a story for another day).

    makes no sense at all. The Fed expanding its balance sheet is a creation of trillions of dollars of new money from thin air. Calling it “pretty meaningless” is pretty bizarre.

    Again, as I explained above, the effects of this will not be fully felt until banks start lending again at a more normal pace.

    Patterico (9c670f)

  91. So apart from quibbling, can you succinctly summarize your no doubt marvelously important thesis, please?

    I did not quibble. The host has made a haphazard assemblage of points on an esoteric subject (financial and monetary economics) of which I know little and he knows nothing. To restate: drawing an analogy between the United States and Russia (of which the hinge in the balance sheet of the central bank) is very peculiar. I’m not sure how important the balance sheet of the central bank is. I do know that Russia has had for 20-odd years double-digit inflation of a sort that is not all that unusual in developing countries and it used to be worse than it is now (having fallen to single digits). The United States has had for 30 years unimportant low-single-digits inflation. It is peculiarly misplaced to be anxious about inflation at this time in the United States. There is little inflation, there has been little inflation in response to QE (for reasons noted above), and the bond traders are not expecting much inflation.

    Contemplating the Russian situation and then going off on a tangent about public sector debt in the United States is also odd. Whatever Russia suffers, excess debt and deficit spending is not it (figures provided above). They do suffer from an unbalanced export mix, most particularly a reliance on oil which has volatile prices.

    The host now adds a Maraschino cherry for our edification by informing us all that national income accounting is invalid, and you know it because the von Mises Institute tells you so.

    I’m not quibbling with the host. Other than remarking that our politicians have an excessive tendency to resort to public sector borrowing and that that situation sustained could leave us in danger of a failed bond sale, everything he said was wrong or irrelevant.

    I have stated my points in plain language, to which you respond with odd tangents. I can explain my viewpoint to you. I cannot comprehend it for you.

    Art Deco (ee8de5)

  92. Sammy Finkelman (d22d64) — 12/19/2014 @ 10:34 am

    Mr. Finkelman, I think you just channeled Happyfeet!

    Well done.

    felipe (40f0f0)

  93. 94. “I did not quibble.”

    No, not exactly, you just walked your memory hole forward on each ‘rebuttal’.

    For example, @51 you state that the Fed’s balance sheet consists of just Treasuries. Then @75 you state that the 40% of Fed assets you denied, are not toxic, i.e., worth 10 cents on the dollar. Of course, what they were worth before takeover are not remotely there worth now, but we’ve moved on to another of your dissembles.

    Face it, you are Sammy F. on meds.

    DNF (d52fb5)

  94. DNF (d52fb5) — 12/19/2014 @ 11:55 am

    Amen!

    felipe (40f0f0)

  95. No, you haven’t ‘explained’ it. You recycled a bogus argument by one Thomas Woods who is in turn channeling others on the staff of the von Mises Institute. If you fancy the entire economics profession does not understand the contours of the economy, you are welcome to do so. You should not expect anyone to take what you say on these matters the least bit seriously.

    We have now reached the point in the discussion where Art Deco is losing the argument, so he starts with insults, ad hominems, and appeals to authority.

    I’ve been down this road with Art Deco before, and to keep my blood pressure low, here’s what we’re going to do.

    You’re now in moderation, Art Deco. Rule #1: no comment will be published that contains any sort of ad hominem or appeal to authority. You are to argue facts and logic, or your arguments will not be seen by anyone.

    Rule #2: To show your good faith, you are invited to return to this thread, where you raised ad hominems and appeals to authority, and I responded with a barrage of factual detail that drove you away from the thread, never to return. Feel free to return right here and continue that discussion.

    I’ll remind you where we were. We were discussing the Great Depression, and you said this:

    There’s no point in lobbing insults at me and playing dumb, Mr. Prosecutor. Just look at the internal components of domestic product – agriculture, industry, commercial services, &c – and their evolution over the years running from 1933 to 1937 and from 1938 to 1941. The ratio of federal expenditure to domestic product ranged from 1.5% to 6.5% prior to the mobilization in the year prior to the war. The economic recovery was not a statistical mirage derived from public expenditure (and public expenditure does have value). In any case, the period from 1933 to 1937 saw a rapid increase in private consumption as well as domestic product, as noted above.

    I responded by raising specific and compelling points about agriculture and industrial production. And you disappeared.

    I have not forgotten.

    So if you want to earn your way back onto this thread, return to that one, provide a substantive, insult-free answer, and then come back here and avoid the ad hominems and other forms of fallacious argumentation that you always resort to once you start to get shown up.

    I don’t expect you to do either, frankly. But hey, surprise me.

    Patterico (9c670f)

  96. I’m gonna need more popcorn.

    felipe (40f0f0)

  97. 72. Again is another example, rebutting a non-existent point, deliberately missing a telling argument.

    52. Here you either feign incredulity or manifest an incapacity to participate. Which is it?

    The impartial observer recognizes the unserious in each of these lame evasions.

    DNF (d52fb5)

  98. The host now adds a Maraschino cherry for our edification by informing us all that national income accounting is invalid, and you know it because the von Mises Institute tells you so.

    No. You know it because of the argument I made. Namely: voluntary transactions are the only way that one can tell that both parties are benefiting from a transaction. Mises showed in his critique of socialism that socialists cannot calculate profit and loss because they own the means of production and thus cannot assign a meaningful price to the means of production, and factor that price into a calculation of whether a transaction shows a profit or loss — in other words, whether it is providing goods or services to society at a price that benefits both sides. Analogously, when the government confiscates your money by calling it taxation, profit and loss cannot be calculated, and nobody can know whether the transaction adds to social welfare as a result. This is a fundamental flaw that renders GDP suspect as a measure of economic well being of citizens.

    The most obvious example of this was WWII, where GDP skyrocketed, and by that measure we were a prosperous society — even as our most productive citizens had been sent overseas, and those who remained had basic goods rationed and were unable to buy new cars or other big-ticket items. By any standard, life was miserable — except the silly GDP standard. Sure, GDP was high — because the government spent a ton of money, on tanks and armaments, and set whatever price they set. Then in 1946, when the private part of the economy had its largest expansion in all of U.S. history, GDP plummeted, and yet by your absurd GDP standards, we were in a recession.

    This sort of economic analysis is a joke. I don’t care how many mainstream economists fall for it. It’s nonsense.

    If you have an actual argument against what I have said, make it — after you have gone back to the other thread you abandoned and made your factual, non-fallacious and non-insulting arguments there.

    I await your insights — which no doubt will amount to “me hates Tom Woods, me hates Mises” claptrap that will never see the light of day.

    Patterico (9c670f)

  99. 44. ” it is still posisble to take care of [the debt].”

    Forty five days past, yes, today no, and not if facts on the ground persist. The 30-year has lost 900 basis points and the 3-month hovers at 2-300 hundred.

    70% of the debt is financed on bills that just a month and a half ago cost nothing, people were simply parking their money, money that could not earn anything buying and holding stock at 20 times earnings.

    No one does that today, they are only buying to sell tomorrow, or in an hour.

    The stock and bond markets used to travel in opposite directions, no more.

    Use your actuarial tables, and sum the cost of 120 3-month rollovers at 2% plus commissions.

    We are bankrupt.

    DNF (d52fb5)

  100. 102. Correction, that’s 0.02%, still unable to pay 2.7% after 30 years.

    DNF (d52fb5)

  101. 103. “the 3-month hovers at 2-300 hundred.

    DNF (d52fb5)

  102. It is pretty clear that if we base our arguments on gdp then we are doomed to continue to make the same mistakes that got us here in the first place. The simplest and most telling example of this is Patterico’s example of gdp during WWII. This was not a time of joy and happiness. My father delighted in telling the tale of his car’s tires. Tires were almost impossible to come by as they were one of the rationed items that were reserved for the war effort. From ’41 to ’45 he never went over 30 mph, and he managed to nurse his five tires, properly rotated, to the finish line. Following the surrender of Japan, he celebrated by upping his max speed to 45 mph … for about 5 miles when two of his tires burst, leaving him stranded, but not too far from home.

    The gdp fallacy is obvious when you consider that all that the Congress needs to do to double gdp in one year is to create a budget that spends borrowed funds in an amount that exactly equals this year’s gdp. This would have been far-fetched prior to 2009 because the Treasury wouldn’t have been able to sell this amount of debt in the market. But with the help of Uncle Ben and some Keynesian nonsense, the Federal Reserve has shown the way. It “buys” the notes and it then credits the Federal accounts with the needed funds. And since it is buying all the notes, it can set the interest rate a zero which would please the politicians as it would show how concerned they are with behaving responsibly. Even though the interest the Fed receives from such assets is customarily returned to the Treasury. There would be unintended consequences. Practically, most businesses would be extremely concerned by such a move, and so the production of completed products might slip. Further, if the government spent these borrowed funds on real goods they would displace valuable economic activity which would diminish their contribution to the gdp. However, if the funds were spent on something that had no bearing on any real activity, then there would be relatively little impact. And it’s not too hard coming up with one such expenditure … buying carbon credits. The problem here is that the sellers of the credits (who would receive this stupendous windfall) would need to be restrained from spending the money for at least a year, as they would upset many apple carts. Let alone the price of Gulf Stream G650s and jet fuel. But the idea was to double gdp in one year, so who cares what happens in the following year.

    bobathome (348c8a)

  103. Excellent comment, bobathome. You get it.

    Patterico (9c670f)

  104. When you say: “Inflation is the result of the actors in the economy holding too much currency in relation to the supply and demand for goods that can be purchased with that currency” — could you be more specific? Are you trying to blame inflation (using your looser modern definition of an increase in prices) on a shortage of goods? Because that is a fallacy; certainly a shortage in one particular good can occur and cause a price spike, but there are almost zero real-world examples of a general shortage of goods causing inflation; it is a monetary phenomenon, albeit complicated by the psychological and other factors I described above.

    How about the oil imbargo of 1973 as one real-world example of a general shortage in the availability of oil (a good) causing a rise in general prices (oil as an input effects many many goods prices through final demand)?

    What i am getting at is that simply increasing the money supply tells us nothing about prices. You need to understand that change in the supply of money (and yes, I totally agree with you regarding the fact that credit=money)in regards to how much goods and services are made available to purchase with that money. Increasing money supply=inflation only results in a static model. Why does a computer today that can perform trillions of calculations per second cost many orders of magnitude less than the guidance computer purchased by Nasa to run the appolo program? Because the supply of microchips today is orders of magnatude higher than it was during the time of the appolo program. By your logic prices today should be billions of times higher than they were in 1700 given that the US money supply is billions of times higher than what prevailed in 1700. Prices today are not billions of times higher than they were in 1700. They are only a few 1000 times higher. That difference is incredibly profound, and is the result of the fact that the amount of goods and services purchasable today are far in excess of what was available in 1700.

    Also, another point. If you go and actually study the known historical hyperinfationary events, you will see a pattern of causation (host country losses to an invading army, civil war, etc) from an exogenous event.

    Next:

    This bit right here:

    The size of the FRB balance sheet is pretty meaningless. When the Fed buys treasury’s it simply swaps assets from the private economy (bank reserves for treasuries). It has no effect whatsoever (other than a minor portfolio rebalancing effect – the psychological effects are much greater but that is a story for another day).

    makes no sense at all. The Fed expanding its balance sheet is a creation of trillions of dollars of new money from thin air. Calling it “pretty meaningless” is pretty bizarre.

    Its not bizarre. You have to understand the underlying accounting. If you are not a CPA, you might not get it.

    When the FRB purchases a treasury, it purchases that treasury from a bank – it tells its New York operations desk (from the SOMA account) to credit the reserve account for the bank and the bank transfer the treasury security to the FED. So when you say that the FRB is issuing cash, you are not correct. They credit the reserve account of the bank they purchase the Treasury from. Look at the amount of excess reserves bank reserves held at the FRB and look at the FRB change in balance sheet (UST and Agency Notes) from Jan 1, 2006 to today. You will note that the change is pretty much 1 for 1.

    Kind Regards

    Jeffrey (2eddb6)

  105. Yes, they press a button on a computer and create money which they exchange for a bond. But where did that money come from that they used to credit the account? Thin air. They pressed a computer button and voila! there it was.

    Patterico (9c670f)

  106. If you think dollars are worthless send them to me!

    money money money (ce4fc6)

  107. There was no money. Just an addition to their reserves held at the FRB. However, If you want to extend it further, you can make the case that the FRB is swapping the treasury for a bank deposit. Again, however, one thing that is very much true, UST’s are essentially money (they are used just in that way now). Its basically the same as swapping a checking account for a savings account in terms of the effect on the economy.

    Jeffrey (2eddb6)

  108. It’s like creating money in a checking account by pressing a button on a computer and then swapping the checking account for a savings account. I am not so focused on the transfer as I am on where the money comes from before the transfer. It’s not the “Treasury” as the Fed is not the Treasury. They create the money with the press of a computer key.

    Meaningless? Nope.

    Patterico (9c670f)

  109. By the way, hyperinflation is not the only outcome, just the one that seems most likely to me — because it’s the easiest way for the politicians to hide the fact that they are defaulting on the debt. Basically, there are three options when the debt is called:

    1. Fix the problem. (Ha!)
    2. Openly default/repudiate the debt.
    3. Inflate (hyperinflate).

    #1 will never happen. There will be lip service paid, but real spending cuts? REAL entitlement reform? Again: Ha.
    #2 seems too bold when #3 is easier.
    #3 is my prediction for what will happen. But it’s not completely inevitable.

    Patterico (9c670f)

  110. There is bankrupt and then there is IL:

    http://abc7chicago.com/politics/rauner-says-ill-budget-problems-worse-than-expected/439356/

    Dead a hundred times over.

    DNF (d52fb5)

  111. Also, another point. If you go and actually study the known historical hyperinfationary events, you will see a pattern of causation (host country losses to an invading army, civil war, etc) from an exogenous event.

    Tell me the stories.

    Tell me about Bolivia in the mid 1980s.

    Tell me about Zimbabwe.

    About Argentina in the late 1980s.

    Sure, war often is the reason that the government can’t pay its debts and begins to hyperinflate by printing money to satisfy its debts. But the money expansion is the mechanism.

    Your assignment, Jeffrey, is to please cite me a prolonged and serious inflation in history that occurred without a sharp expansion in the money supply.

    You will not be able to do so.

    Patterico (9c670f)

  112. “I have stated my points in plain language, to which you respond with odd tangents. I can explain my viewpoint to you. I cannot comprehend it for you.”

    Art Deco – It seems you cannot comprehend it for yourself, old chap, since it is a moving target.

    daleyrocks (bf33e9)

  113. Large-Scale Asset Purchase Programs

    The Federal Reserve’s approach to the implementation of monetary policy has evolved considerably since 2007, and particularly so since late 2008 when the FOMC established a near-zero target range for the federal funds rate. Since late 2008, the Federal Reserve has greatly expanded its holding of longer-term securities via a series of asset purchase programs with the goal of putting downward pressure on longer-term interest rates and thus supporting economic activity and job creation by making financial conditions more accommodative.

    From December 2008 to August 2010, to help reduce the cost and increase the availability of credit for the purchase of houses, the Federal Reserve purchased $175 billion in direct obligations of Fannie Mae, Freddie Mac, and the Federal Home Loan Banks. In addition, from January 2009 to August 2010, the Federal Reserve purchased $1.25 trillion in mortgage-backed securities (MBS) guaranteed by Fannie Mae, Freddie Mac, and Ginnie Mae. Detailed transaction level information for the MBS purchase program is available at the link below.
    Agency MBS Purchase Program, January 2009 – August 2010
    From March 2009 to October 2009, the Federal Reserve purchased $300 billion of longer-term Treasury securities to help improve conditions in private credit markets.
    From November 2010 to June 2011, the Federal Reserve further expanded its holdings by purchasing an additional $600 billion of longer-term Treasury securities.
    Starting in September 2012, the Federal Reserve further increased policy accommodation by purchasing additional MBS at a pace of $40 billion per month.
    Starting in January 2013, the Federal Reserve began purchasing longer-term Treasury securities at a pace of $45 billion per month, following the completion of the maturity extension program in December 2012.
    In December 2013, the Federal Reserve announced that it would modestly slow the pace of additional MBS and longer-term Treasury securities purchases and would likely further reduce the pace of asset purchases in measured steps if incoming information broadly shows ongoing improvement in labor market conditions and inflation moving back toward the FOMC’s 2 percent longer-run objective. Since December 2013, the Federal Reserve has announced further measured reductions in the pace of asset purchases.
    Currently, the Federal Reserve also purchases MBS under a policy announced on September 21, 2011, in which principal payments from its holdings of agency debt and agency MBS are reinvested
    in agency MBS.
    http://www.federalreserve.gov/monetarypolicy/bst_openmarketops.htm

    daleyrocks (bf33e9)

  114. icarus flew up to the sky but his wings were made of tasty peabnut bubber and he ate them and he fell into the sea and got eated by an orca

    so it is with putin

    just with ten times more gay

    happyfeet (831175)

  115. Permanent OMOs: Treasury
    The purchase or sale of Treasury securities on an outright basis adds or drains reserves available in the banking system. Such transactions are arranged on a routine basis to offset other changes in the Federal Reserve’s balance sheet in conjunction with efforts to maintain conditions in the market for reserves consistent with the federal funds target rate set by the Federal Open Market Committee (FOMC).

    On March 18, 2009, the FOMC announced a longer-dated Treasury purchase program with a different operating goal, to help improve conditions in private credit markets.

    On August 10, 2010, the FOMC directed the Open Market Trading Desk at the Federal Reserve Bank of New York to keep constant the Federal Reserve’s holdings of securities at their current level by reinvesting principal payments from agency debt and agency mortgage-backed securities in longer-term Treasury securities.

    On November 3, 2010, the FOMC decided to expand the Federal Reserve’s holdings of securities in the SOMA to promote a stronger pace of economic recovery and to help ensure that inflation, over time, is at levels consistent with its mandate.

    On June 22, 2011, the FOMC directed the Desk to continue reinvesting principal payments on all domestic securities in Treasury securities to maintain the Federal Reserve’s holdings of domestic securities at approximately $2.6 trillion.

    http://www.newyorkfed.org/markets/pomo/operations/index.html

    daleyrocks (bf33e9)

  116. What i am getting at is that simply increasing the money supply tells us nothing about prices. You need to understand that change in the supply of money (and yes, I totally agree with you regarding the fact that credit=money)in regards to how much goods and services are made available to purchase with that money. Increasing money supply=inflation only results in a static model. Why does a computer today that can perform trillions of calculations per second cost many orders of magnitude less than the guidance computer purchased by Nasa to run the appolo program? Because the supply of microchips today is orders of magnatude higher than it was during the time of the appolo program. By your logic prices today should be billions of times higher than they were in 1700 given that the US money supply is billions of times higher than what prevailed in 1700. Prices today are not billions of times higher than they were in 1700. They are only a few 1000 times higher. That difference is incredibly profound, and is the result of the fact that the amount of goods and services purchasable today are far in excess of what was available in 1700.

    I agree with you. If we use your inaccurate definition of inflation as price increases (I would prefer that we stick to the actual meaning which is an inflation of the money supply), then yes, price increases come when the supply of money increases and the supply of goods does not proportionately increase.

    If we are talking about a large increase over hundreds of years, spanning the Industrial Revolution, then yes, of course, a great expansion of the money supply does not by itself cause prices to raise. It’s still inflation, under the traditional understanding of the word. But your point (with which I agree) is that prices don’t necessarily increase simply because the money supply increases over time, if there is also a corresponding explosion in the supply of goods available.

    What I think you are missing here is that we are talking about a sudden expansion by the central bank over a very short period of time, where there cannot possibly be an expansion of supply that will keep up. The reason we are not seeing an explosion in consumer prices from QE is that banks are sitting on the excess reserves, for which the Fed is paying them interest, I believe. If the Fed actually charged the banks interest on those excess reserves, then that money would be converted into reserves backing up loans with the banks’ usual giant multiplier resulting from the fraud of fractional reserve banking, and yes, prices should then skyrocket. Because supply can’t possibly keep up, and the explosion in the money supply will be sudden.

    Opinions vary on whether the central bank would allow such a scenario to unfold. Some say if the government’s back is against the wall, it will simply repudiate its debt, as I mentioned above. That’s not my opinion, but I can imagine it happening.

    Patterico (9c670f)

  117. “We’re dead meat!”

    The US Federal Reserve has pulled the trigger. Emerging markets must now brace for their ordeal by fire. They have collectively borrowed $5.7 trillion in US dollars, a currency they cannot print and do not control. This hard-currency debt has tripled in a decade, split between $3.1 trillion in bank loans and $2.6 trillion in bonds. It is comparable in scale and ratio-terms to any of the biggest cross-border lending sprees of the past two centuries.

    Much of the debt was taken out at real interest rates of 1% on the implicit assumption that the Fed would continue to flood the world with liquidity for years to come. The borrowers are “short dollars”, in trading parlance. They now face the margin call from Hell as the global monetary hegemon pivots. The Fed dashed all lingering hopes for leniency on Wednesday. The pledge to keep uber-stimulus for a “considerable time” has gone, and so has the market’s security blanket, or the Fed Put as it is called. Such tweaks of language have multiplied potency in a world of zero rates.

    Officials from the BIS say privately that developing countries may be just as vulnerable to a dollar shock as they were in the Fed tightening cycle of the late 1990s, which culminated in Russia’s default and the East Asia Crisis. The difference this time is that emerging markets have grown to be half the world economy. Their aggregate debt levels have reached a record 175% of GDP, up 30 percentage points since 2009.

    Most have already picked the low-hanging fruit of catch-up growth, and hit structural buffers. The second assumption was that China would continue to drive a commodity supercycle even after Premier Li Keqiang vowed to overthrow his country’s obsolete, 30-year model of industrial hyper-growth, and wean the economy off $26 trillion of credit leverage before it is too late. [..]

    Stress is spreading beyond Russia, Nigeria, Venezuela and other petro-states to the rest of the emerging market nexus, as might be expected since this is a story of evaporating dollar liquidity as well as a US shale supply-glut.

    [..[ the Turkish lira has fallen 12% since the end of November. The Borsa Istanbul 100 index is down 20% in dollar terms. Indonesia had to intervene on Wednesday to defend the rupiah. Brazil’s real has fallen to a 10-year low against the dollar, as has the index of emerging market currencies. Sao Paolo’s Bovespa index is down 23% in dollars in 3 weeks

    DNF (d52fb5)

  118. there’s less a glut of shale oil than a glut of unemployed failmerican foodstampers what don’t need to fuel up their car and drive to work no mores

    happyfeet (831175)

  119. #108: Jeffrey,

    “When the FRB purchases a treasury, it purchases that treasury from a bank – it tells its New York operations desk (from the SOMA account) to credit the reserve account for the bank and the bank transfer the treasury security to the FED. So when you say that the FRB is issuing cash, you are not correct. They credit the reserve account of the bank they purchase the Treasury from.”

    The key is “to credit the reserve account for the bank”, because with these new credits, the bank can then pay the checks that the Treasury intends to issue. You can add any number of intermediaries, but the result is the same. Dollars are created from nothing.

    It would be very different if treasury securities were auctioned to the public at large. Then real dollars would be pledged for the purchase, and those dollars would disappear from the buyer’s account. Prior to Uncle Ben, FRB purchases were in the $50B to $100B range, and they were intended to tweak interest rates. This is no longer the case. The FRB is almost always the dominate player in auctions, and those bonds that they don’t purchase are purchased by bidders who agree to go with the winning bid. It’s a racket.

    The real problem is that the value of the treasury security will collapse if the market rate for money (interest) rises significantly above the coupon paid by the security. In this case, the mark to market value of the reserves held as collateral/assets by the bank will plunge, and the ability of the bank to continue operations will be drawn into question.

    William Tecumseh Sherman had an interesting experience with problems similar to this in San Francisco during the gold rush. But public discussions were transacted in English in those days, and the mumbo-jumbo that is used today to mislead and misdirect the public hadn’t really been discovered. Orwell is crying in his grave. Sherman ended up riding thru the night armed and ready to resolve the crisis. You can download Sherman’s autobiography and it is almost as good as U. S. Grant’s. This will no doubt come as a surprise to you if you matriculated sometime after 1960. It certainly was for me.

    bobathome (348c8a)

  120. I have clearly been on Facebook too much lately. I just looked for a way to “like” bobathome’s post.

    Too lazy to type out a comment that says: “Hey, good comment!”

    Patterico (9c670f)

  121. Art Deco ran away again.

    Patterico (9c670f)

  122. Shocking!

    Patterico (9c670f)

  123. I don’t mean to be cryptic, but all economies are based on value and labor. Government intrusion on both matter, but we’re just arguing about the ultimate risk of the intrusion. It can be beneficial to the greater good. It is often beneficial for providing goods and services in a safe manner. It is a detriment when it restricts the flow of money for capital improvements that provide goods and services for most people simply because the flow of wealth violates the popular politics of the day.

    Ag80 (eb6ffa)

  124. It is often beneficial for providing goods and services in a safe manner.

    I would dispute “often.” Rarely? Almost never? Never?

    Patterico (9c670f)

  125. Sony, Hollywood and a little over half of the voters made that same mistake in November of 2012.

    Colonel Haiku (2601c0)

  126. 130. We has an anecdotal Not, this time, anyway.

    http://research.stlouisfed.org/fred2/series/M2V/

    is the present economic activity following from an historical tsunami of green,

    http://research.stlouisfed.org/fred2/series/M2

    DNF (d52fb5)

  127. 125. bobathome has come a long way since that bout of drunken bicycling.

    DNF (d52fb5)

  128. 132. I guess a flurry of changes in ownership does not amount to economic activity necessarily involving value added.

    DNF (d52fb5)

  129. Watch out for falling investors:

    Bonds issued by individual energy developers have gotten hammered. For instance, Energy XXI, an oil and gas producer, issued more than $2 billion in bonds just in the last four years and, up until a couple of weeks ago, they were selling at 100 cents on the dollar. On Friday buyers were offering just 64 cents. Midstates Petroleum’s $700 million in bonds — rated “junk” by both Moody’s and Standard and Poor’s — are selling at 54 cents on the dollar, if buyers can be found.

    DNF (d52fb5)

  130. Be vewwwy afwaid(chart):

    http://www.zerohedge.com/sites/default/files/images/user3303/imageroot/2014/12/20141219_vvol.jpg

    Peoples are notably skittish just now, like the Tasmanian Devil on espresso.

    DNF (d52fb5)

  131. 10. It is time.

    DNF (d52fb5)

  132. There seem to be only two camps of lay opinion on economics. There are those who know they know nothing, and regard any discussion with fear and awe, and those who think they know everything.

    In the first group are found a large proportion who know more than they think they know, only in different terms than used by economists, while the second group invariably knows far less.

    Estragon (ada867)

  133. It is often beneficial for providing goods and services in a safe manner.

    I would dispute “often.” Rarely? Almost never? Never?

    Wow! “The elves will provide a fighter escort for Santa Claus.” Local 731 of the Brotherhood of Road Agents, Highwaymen, Wreckers and Buccaneers endorses Patterico for President.

    It is a detriment when it restricts the flow of money for capital improvements that provide goods and services for most people simply because the flow of wealth violates the popular politics of the day.

    It is also a detriment when it debases the currency by providing cheap/free money to be re-loaned, creating the illusion of economic growth, but in reality feeding corporate greed and short-sightedness, creating only quarterly paper wealth for its Wall Street cronies, and increasing the private and public debt. It really, really, really should not care whether investors have enough money, too little money, or too much money. It should just make sure that the dollar continues to be worth a dollar, or at least 15 cents. And jail currency, stock, and commodity manipulators once in a while, just on general principles.

    nk (dbc370)

  134. 140. So which group you in?

    DNF (d52fb5)

  135. #135: DNF, I resemble that assertion! But when in my cups I would never have dared ride my bike. Walking was the preferred mode of locomotion. And the world has come a remarkably long way since those days. LBJ managed to fracture the Democrat Party leading to the stumblebums who now run that side of the aisle, and opposing them we have a bunch of managers who paint themselves in tanning lotion and cry a lot. We really need another Reagan!

    bobathome (348c8a)

  136. nk (dbc370) — 12/20/2014 @ 8:19 am

    LOL!

    felipe (40f0f0)

  137. DNF – Thanks for the St. Louis Fed links. I was looking for similar data on the home fed page and did not see it. The unusual thing about the current environment is the continued expansion of money supply in excess of economic growth rates, masked by concomitant decline in monetary velocity which your charts clearly show.

    For other nonbelievers out there, the St. Louis Fed also has useful charts of Fed Funds rates showing the management of rates downward at the beginning of last decade, helping to fuel a housing and mortgage lending bonanza:

    http://research.stlouisfed.org/fred2/series/FEDFUNDS

    A chart of the 10 Year constant maturity treasury shows a similar, but less dramatic pattern:

    http://research.stlouisfed.org/fred2/series/GS10

    daleyrocks (bf33e9)

  138. A chart of rates on conventional 30 year mortgages follows the pattern but ignores the significant portion of home borrowers electing to finance through various ARM products with low two to seven year teaser rates or even with negative loan amortization.

    http://research.stlouisfed.org/fred2/series/MORTG

    daleyrocks (bf33e9)

  139. The collapsing ruble is all downside, as it will push Putin further into a warmonger stance. If I understand correctly, he printed trillions of rubles which then collapsed when the price of their one asset, oil, collapsed.

    A friend of mine from Ukraine, rabidly anti-collectivist, says Obama pushed Putin into this stance with his attack on Libya. The world expected something of the sort when Cowboy Bush invaded Iraq, but now Libya, from a liberal? All bets are off; even the pacifists make war when they can win, and it’s best to rattle your saber in self-protection.

    Patricia (5fc097)

  140. moar #rapeculture?

    ohnoes!

    I do not view this as appropriately data-dependent policy,” he said. Each of the regional presidents who dissented – Narayana Kocherlakota, Richard Fisher, and Plosser – have plans to step down that make the December vote their last.*

    happyfeet (831175)

  141. Our very concerned host wrote:

    I agree with you that there were bubbles in stocks and then housing. I believe both were caused by the Fed. I agree with you that stocks have appreciated too much. I believe that is also caused by the Fed’s expanding balance sheet and refusal to let interest rates rise to market levels. And that there will be another crash.

    Caused by the Fed in what way? If you are saying that the Fed has done so by working to keep interest rates low, I’d agree, at least in part, but the Fed really had little choice in this: the Fed was attempting to help economic growth following the downturns in 1991 and 2001, and there would have been no support at all for raising interest rates at those times. Since economic growth wasn’t as strong as people would have liked, especially following the 2001 recession, all of the pressure was for keeping rates low. Add to that the government wanting lower rates, since we were borrowing hundreds of billions of dollars ever year, and you had a perfect storm: in an economy which was used to spending more than our production supported, we made it easier to keep spending more than our production justified. The Fed acted in the only manner practically available to it.

    I see the problem differently: I see the problem as being based upon too-easy credit, allowing people who didn’t really have the means to pay back loans to borrow money, combine with innovative financing, primarily adjustable rate mortgages. Since lenders were continually second-selling their mortgage loans, we had a system in which the loan originators were dumping the loans to secondary buyers, so that they didn’t really care if the borrowers could repay beyond the first few months.

    One absolutely solid regulation, which I have not seen proposed elsewhere, which could stop the problem mortgages cold is one which would not allow secondary sale of the loan for at least a third of the life of the loan; if a mortgage company realized that they would have to hold on to a thirty-year mortgage for at least ten years, they’d have to be more careful in qualifying borrowers.

    Of course, then the Obama Administration would be claiming that they were discriminating based on race!

    The Dana holed up in his computer room (1b79fa)

  142. I just posted a probably too-long response to our host, which disapeared into either moderation or the spam queue.

    The Dana in the spam queue (1b79fa)

  143. I’ve noted previously that homebuilding pretty much just skipped the 2001 recession, and I personally benefited from that. But what I have seen since the 2008 crash is a change in the conditions for a mortgage loan. The property itself used to be both the necessary and sufficient collateral for a mortgage loan, because if there was the need to foreclose, the lender could recoup most of his loss through the resale of the home in foreclosure.

    Now, while the property is still a necessary part of the collateral, it is no longer sufficient, making mortgages harder for which to qualify; borrowers need to have reasonable prospects for repaying the loan. Banks and other lenders are sitting on way too many properties and bad loans than they know how to handle, and even six years since the crash, they still haven’t figured out how to bring in the right people to handle the problems.

    The Dana who sells concrete for a living (1b79fa)

  144. I’d say Syria was the last straw for Volodya,

    narciso (ee1f88)

  145. Our sagely wise host wrote:

    By the way, hyperinflation is not the only outcome, just the one that seems most likely to me — because it’s the easiest way for the politicians to hide the fact that they are defaulting on the debt. Basically, there are three options when the debt is called:

    1. Fix the problem. (Ha!)
    2. Openly default/repudiate the debt.
    3. Inflate (hyperinflate).

    #1 will never happen. There will be lip service paid, but real spending cuts? REAL entitlement reform? Again: Ha.
    #2 seems too bold when #3 is easier.
    #3 is my prediction for what will happen. But it’s not completely inevitable.

    I’ve said many times before that I expected the government to try to inflate our way out of the debt, and I’m still surprised that that hasn’t happened. But the problem is that inflating our way out of the debt means that we have to cut our deficit spending, because inflation means higher interest rates on the money we want to borrow. To inflate our way out of the debt, anyone thinking long-term — a qualification which would normally exclude politicians — would realize that we also had to bring down deficits dramatically, or the inflation technique won’t really work. To make Option 3 work, Option 1 has to be part of the mix.

    The Dana who agrees with Patterico on this one (1b79fa)

  146. Our gracious host wrote:

    (Government) is often beneficial for providing goods and services in a safe manner.

    I would dispute “often.” Rarely? Almost never? Never?

    Depends upon the goods and services in question; I’d say that government has been very beneficial in providing roads and bridges, in providing police and fire departments and courts and parks and libraries and a whole host of other things we take for granted.

    Virtually every one of us uses the public roads to get to and from work. We all depend upon the monetary system, and a regulated banking system, for converting our labor into something we can trade for gasoline and groceries.

    Government does a lot of stupid things, but it also does a lot of good ones. The problem is that we pay more attention to the stupid stuff, and don’t sufficiently appreciate the commonly-used good things.

    The Dana who disagrees with Patterico on this one (1b79fa)

  147. And it’s almost time to watch UK play UCLA! Go Cats!

    The University of Kentucky alumnus Dana (1b79fa)

  148. Dana,

    The answer to your question, which I have taken out of moderation/spam, requires an entire post. Which I am writing now.

    It’s a post I have been meaning to do for a while anyway, on the Austrian theory of the business cycle, and why the Fed should not be involved in manipulating interest rates.

    Patterico (9c670f)


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