Faber: Nations Will Print Money, Go Bust, Go to War…We Are Doomed

[Kassz007]

Quote from NumLock:

I think you and southbeach4me are shills that get paid to character assassinate anyone who says anything against internal/external policy.

Yes, ET pays me to be the resident character assassin.

You always show up not to debate facts using information but to call people morons, tin foil hat, crazy conspiracy.

Wrong. I debate facts all of the time. You do not provide facts. I don't insult people unless I'm insulted first. I could tolerate your stupidity and off-topic rants if you would stick to one alias instead of creating a new one every day and proceeding to post the same garbage about the Mossad/CIA/blah blah blah. Nobody gives a shit, give it up.

It's obvious you need to keep creating alias' to circumvent the undoubtedly long list of users that have you on their ignore list.

 

[Ed Breen]

The problem with Faber's analysis, and the austrian interpretation generally, regards the reliance on an obsolete interpretation of the quantity theory of money. The principle of the quantity theory, that an increase in the supply of base money above demand leads to inflation, is an 18th century principle that assumed that all base money was tangible and in circulation. It was a gold based theory. Faber like many fails to apply that principal to the modern reality of a post gold fractional reserve banking system where 'money' is no longer tangible or in circulation. Today there is really only about 1 Trillion actual U.S. dollars and coins that actually circulate. Today, there is no printing and there are no real dollars such that you could gather them all and touch them or look at them. Today, the dollar can only be understood as a unit of account in a master international digital ledger program. Accounts we call money are expanded and destroyed everyday and you cannot understand the quantity of money independent from the ledger system that by its nature also includes credit. The quantity of base money in a fractional reserve banking system cannot be seperated from private credit formation. This is what Faber doesn't fully understand.

The reason that this matters is that you cannot expand the money supply through government action alone. It requires an expansion of aggregate private credit. The driver for private credit expansion is not monetary, so it is not in the control of Central Banks. Where private credit is contracting the creation of base money by Central Banks cannot excape the interbank accounts to cause asset price increase in the private economy...the so called real economy. So. the Fed can create all the money it wants but if the conditions do not exist for private actors to leverage that predicate base money into expanding credit then the money will just sit trapped as excess reserves on the ledger of the interbank account...it won't drive asset prices, it won't decrease the cost of debt, it won't reflate.

What Faber also doesn't fully understand is that the 'gate valve' for money flow from the interbank account to the private account is the leverage ratio and not the interest rate. Where the private sector is deleveraging becuase it has a pessimistic view of the future prospect profit or asset appreciation, while the banks are reducing leverage ratios to preserve capital, and the political class is imposing lower leverage ratios for banks and asset transactions...the gate valve has been closing. Interest rates are not important if reduced leverage makes debt formation impossible. Interest rates are not very important if the private sector lacks the confidence that a net profit after tax is acheivable on a capital investment.

This does not mean that we don't have problems. All it means is that we are not going to rely on central banks to generate reflation by normal means. This actually complicates issues...what happens to Faber's parade of horribles if we can't reflate and the real cost of debt intensifies the sovereign debt situation must quicker than Faber expects?

 

[zdreg]

"This does not mean that we don't have problems. All it means is that we are not going to rely on central banks to generate reflation by normal means. This actually complicates issues...what happens to Faber's parade of horribles if we can't reflate and the real cost of debt intensifies the sovereign debt situation must quicker than Faber expects?"

can you give historical examples?

 

[NumLock]

Quote from Kassz007:

Yes, ET pays me to be the resident character assassin.

Not ET I think either government pays you or AIPAC

Israel's posting program by army of posters on msg boards is public knowledge

 

[morganist]

Quote from Ed Breen:

The problem with Faber's analysis, and the austrian interpretation generally, regards the reliance on an obsolete interpretation of the quantity theory of money. The principle of the quantity theory, that an increase in the supply of base money above demand leads to inflation, is an 18th century principle that assumed that all base money was tangible and in circulation. It was a gold based theory. Faber like many fails to apply that principal to the modern reality of a post gold fractional reserve banking system where 'money' is no longer tangible or in circulation. Today there is really only about 1 Trillion actual U.S. dollars and coins that actually circulate. Today, there is no printing and there are no real dollars such that you could gather them all and touch them or look at them. Today, the dollar can only be understood as a unit of account in a master international digital ledger program. Accounts we call money are expanded and destroyed everyday and you cannot understand the quantity of money independent from the ledger system that by its nature also includes credit. The quantity of base money in a fractional reserve banking system cannot be seperated from private credit formation. This is what Faber doesn't fully understand.

The reason that this matters is that you cannot expand the money supply through government action alone. It requires an expansion of aggregate private credit. The driver for private credit expansion is not monetary, so it is not in the control of Central Banks. Where private credit is contracting the creation of base money by Central Banks cannot excape the interbank accounts to cause asset price increase in the private economy...the so called real economy. So. the Fed can create all the money it wants but if the conditions do not exist for private actors to leverage that predicate base money into expanding credit then the money will just sit trapped as excess reserves on the ledger of the interbank account...it won't drive asset prices, it won't decrease the cost of debt, it won't reflate.

What Faber also doesn't fully understand is that the 'gate valve' for money flow from the interbank account to the private account is the leverage ratio and not the interest rate. Where the private sector is deleveraging becuase it has a pessimistic view of the future prospect profit or asset appreciation, while the banks are reducing leverage ratios to preserve capital, and the political class is imposing lower leverage ratios for banks and asset transactions...the gate valve has been closing. Interest rates are not important if reduced leverage makes debt formation impossible. Interest rates are not very important if the private sector lacks the confidence that a net profit after tax is acheivable on a capital investment.

This does not mean that we don't have problems. All it means is that we are not going to rely on central banks to generate reflation by normal means. This actually complicates issues...what happens to Faber's parade of horribles if we can't reflate and the real cost of debt intensifies the sovereign debt situation must quicker than Faber expects?

I don't know.

I think there are a couple of flaws in what you are saying too.

Just to make sure. I assume you mean the increase in printing money is not creating inflation because of the reduction in the private credit offsetting the excess?

This is not the only issue. You forget supply shock inflation and other factors too.

I think what Faber says will happen but in a different way. You will have a situation where people will have less real money, whether that is from inflation or loss of income from savings when sovereign debt collapse occurs, which it will. Either way people will either not have money or the money they do have will not be as valuable in real terms.

Fabers prognosis is in my opinion on the money. It is his diagnosis I disagree with.

Another point you miss is if the printed money replaces lost private credit pound for pound (dollar for dollar which ever you prefer) the people who have that money (hold it or use it to consume) change tastes, habits etc and this will affect the velocity of transactions. This is more related to inflation than the monetary base.

Good analysis though. If you wish to discuss I am here for the next couple of hours.

 

[trefoil]

Quote from Ed Breen:

The problem with Faber's analysis, and the austrian interpretation generally, regards the reliance on an obsolete interpretation of the quantity theory of money. The principle of the quantity theory, that an increase in the supply of base money above demand leads to inflation, is an 18th century principle that assumed that all base money was tangible and in circulation. It was a gold based theory. Faber like many fails to apply that principal to the modern reality of a post gold fractional reserve banking system where 'money' is no longer tangible or in circulation. Today there is really only about 1 Trillion actual U.S. dollars and coins... The quantity of base money in a fractional reserve banking system cannot be seperated from private credit formation. This is what Faber doesn't fully understand.

The reason that this matters is that you cannot expand the money supply through government action alone. It requires an expansion of aggregate private credit. The driver for private credit expansion is not monetary, so it is not in the control of Central Banks. Where private credit is contracting the creation of base money by Central Banks cannot excape the interbank accounts to cause asset price increase in the private economy...the so called real economy. So. the Fed can create all the money it wants but if the conditions do not exist for private actors to leverage that predicate base money into expanding credit then the money will just sit trapped as excess reserves on the ledger of the interbank account...it won't drive asset prices, it won't decrease the cost of debt, it won't reflate.

...
This does not mean that we don't have problems. All it means is that we are not going to rely on central banks to generate reflation by normal means. This actually complicates issues...what happens to Faber's parade of horribles if we can't reflate and the real cost of debt intensifies the sovereign debt situation must quicker than Faber expects?

Beeyooteeful.
Truly.
A pleasure to for once see intelligence applied to current events.

 

[canmo]

Quote from Ed Breen:

...The reason that this matters is that you cannot expand the money supply through government action alone. It requires an expansion of aggregate private credit. The driver for private credit expansion is not monetary, so it is not in the control of Central Banks. Where private credit is contracting the creation of base money by Central Banks cannot excape the interbank accounts to cause asset price increase in the private economy...the so called real economy. So. the Fed can create all the money it wants but if the conditions do not exist for private actors to leverage that predicate base money into expanding credit then the money will just sit trapped as excess reserves on the ledger of the interbank account...it won't drive asset prices, it won't decrease the cost of debt, it won't reflate. ...

Ed, thanks for posting , as usual. When you're stating that you can't expand the money supply through government action alone - I would disagree - don't forget about 'helicopter Ben' money - a few billions here for extended unemployment, a few billions there for local governments in CA and NY - that will be exactly expanding money supply , used for payments of goods, food, etc... - and there are a lot of consumers for these 'helicopter money' in real economy. Of course, it's not a 'printing' , Treasury borrows it in FED , fed sells bills, etc. But if there is no audit in FED, it might be that huge debts which are accumulated in FED's books are effectively written-off - Fannie and Freddi as well as AIG or GM are not going to pay back - that means the supply they got is circulating in real economy, but nobody's going to withdraw it for debt pay-off, and so on with the rest of 'preferrable' clients for 'helicopter money' . And FED is ok to write it off - because FED is actually not interested to bunkrupt US Treasury - first, by doing that they hurt themselves, second - they are rich enough already - no need to more assets for FED owners . Just to simplify all that, let's think about following example(AIG-style) - me and you wager - $1B - about Stanly cup final results - while none of us has this $1B. After the game is finished, one of us won $1B , second - in $1B debt. Everything is funny, in real life we drink a bear together and laugh at each other(by the way, effectively declaring BK of wager loser), but in AIG-style case one demands a pay, and the second asks GOV to help with payments. Then government 'creates' $1B , and expands it to the winner, who immediately spends it, thus effectively inflating real economy, while that $1B is hidden in books of FED, and there is no way to get it back from wager loser - which means money supply effectively inflated by $1B ... Which is pure inflation - if you avoid bankruptcy of the losers - and that's what is going on right now overall US.

 

[Daal]

Quote from Ed Breen:


The reason that this matters is that you cannot expand the money supply through government action alone

Actually you can, the US Treasury has the authority to mail physical checks to US citizens(like they did with the stimulus). The Fed can finance and the UST issue $10T of paper checks and have them delivered to all citizens in a few months, this would almost certainly lead to hyperinflation and end any deflationary trend(it would almost double the M2 money supply). They can do this via electronic bank transfers as well

 

[jem]

I appreciate all the good posts here. thanks.

 

[m22au]

Quote from Daal:

Actually you can, the US Treasury has the authority to mail physical checks to US citizens(like they did with the stimulus). The Fed can finance and the UST issue $10T of paper checks and have them delivered to all citizens in a few months, this would almost certainly lead to hyperinflation and end any deflationary trend(it would almost double the M2 money supply). They can do this via electronic bank transfers as well

There are some deflationists such as Mish Shedlock who believe that we can't get hyperinflation because the Federal Reserve / US Govt is impotent to stop deflation from happening.

I'm largely in agreement with Daal. All it takes to stop deflation is some imagination, eg., mailing $10 trillion to US citizens. Then hey presto you take care of a lot of debt. If $10 trillion isn't enough then try $100 trillion. If you have a printing press then you just need to turn it on and solve the debt problem.

Whether or not these extreme "solutions" are implemented is another thing. This is why Mish Shedlock (and others) could be proven right.