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

Quote from Ed Breen:


Daal - as above, spending has no lasting power without an expanding private credit market. Where the private sector contracts as the publich sector continues to borrow and increase accrued debt, despite decreased revenues...and where deflation persists, making the real cost of debt increase...the risk is not inflaiton but it is 'hyperinflation.' Hyperinflation is a misnomer becuase it does not result from accelerating inflation, it results instead from a currency collapse that occurs when insolvency makes it impossible to continue to service existing debt or to roll it over. Continued money creation in a condition of credit market insolvency will lead to a currency collapse. In contrast, inflation requires an expanding private credit context...otherwise there will not be too much money chasing too few goods. Its a completely different process from 'hyperinflaiton.
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I'm not sure I understand what you mean but it doesnt seem something that I would agree with. The Fed has printed $1T and only part of it has become money supply(all the MBS and USTs holders who were non-banks were credited with M1/M2 components as a result of their sales to the Fed). M2 is negative yoy, so its likely they will have to print more(QE round 2) this doesn't have to end in hyperinflation, all they have to do is to send QE up to a level where M2 is growing in a healthy level(as I said, that happens when the sellers are non-banks). What could happen is that the balance sheet gets so huge that people just dont believe the Fed can exit and money velocity soars, hyperinflation starts but that doesnt seem to be the argument you are making.

If people keep believing the Fed can exit then it could all end up with just higher than normal inflation for some years
 
Quote from Ed Breen:

Morganist - You asked if I meant that the increase in the amount of base money was not inflationary becuase it was offset by private credit contraction? The questions shows me that you really don't understand what I am trying to say...and I appologize for that. I am trying to say that old notions of base money supply need to be understood as of one piece with private credit formation. In a fractional reserve banking system you really can't seperate the two. Traditionally understood base money operates as predicate for credit formation in the modern system. Regulation of banks capital requirements and liability reserve requirements involves a threshold degree of traditional base money (really a minimum amount of shareholder's equity in the banking system). I say that base money is required in the banking system as a predicate becuase without minimum required base money a bank cannot lend, it cannot continue in business. However, if we are concerned about inflation, inflation in the real economy that manifests itself by a rising price of assets, that inflation occurs only when base money is leveraged in the private sector through the expansion of credit. In a fractional reserve banking system this is what the money multiplier actually is...its the leveraging of base money with the addition of credit to purchase assets. The greater the leverage the greater the expansion of the money supply is and the greater potential for inflation there is. This process is one of leveraging base money to purchase assets...the limit of the velocity is in the leverage ratio and not in the interest rate. Do you see how this can only be understood as of one piece...not through some duelism where part A is offset by part B? Where there is reduced leverage and no appettite for credit, where credit is contracting, any expansion of money supply A will have no place to go...Fed gives new money to banks by purchasing bad assets of banks and banks put new money back in Fed as excess reserves. This new money must be loaned back to the government as is not being leveraged out into the private economy...it does not result in too much money chasing too few assets.

Of course deleveraging in the sense that I am explaining means less money in people's pockets...it also means less credit. Consider what it was like in the 1950's when people had to save before they purchased a home....had to put 40% down...had to pay cash for a TV....you are right there will be less transactions and the price of things that used to be leveraged will decline. We really are, through this crises, and the sovereign debt crises that is now beginning, to transition from the greatest era of leverage in history, to an era of profoundly reduced leverage. I do not think you can manage this transition well with old models of inflation that will not function during the transition.

Finally, morganist, you last paragraph reads as nonsense to me, maybe you can express your thought differently.

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I think I understand you now. Correct me if not. You are saying the level of prices cannot rise because they are driven by the leverage of bank lending to the private consumers, which is not maintained due to the lack of interest to borrow money.

In addition the printed stuff is going on reserves not the private consumer. Ok this makes sense the private consumption is no longer there so less inflationary pressure. However if the printed money is used to buy bank assets there is inflationary pressure there, they are purchasing assets that were not in demand and as a result likely overpriced. Even if the bank then puts the money into reserves (less leverage the so less private consumption, not that there is the demand for it) unless the assets sell for the same price when they are sold than when they were bought there is inflation. reverse quantitative easing would produce low asset sales because large numbers have to be sold quickly and quantitative easing is expensive because the price is exaggerated from the lack of demand which was why it was needed.

In short the government created inflation the minute they quantitatively eased as a result of buying assets no one else wanted. They bought a lot of assets very quickly creating inflationary pressure. They will never be able to sell those assets for the same price and therefore same amount of money cannot be taken out of the system when the process is reversed. This means the assets are overpriced creating inflation in itself.

You are also not taking into consideration the supply shock inflation that will hit when the reduced borrowing affect production, employment and demand. This will fall faster than the money supply with deflation because of the rise in external prices in addition to the above consequences of domestic issues.

I think the point of the last paragraph was that money never stops existing. Even when it is in a bank it is lent out. But if they are building reserves then I am not sure. Usually there is a reason they are building reserves as a result of higher depositor withdrawal rates which means the money would be in transactions again. My point being who uses the money is the only thing that changes. So unless the money is not being used in something else then all that changes is the speed it is used dependent on tastes and habits. You said they were just giving the money back to the fed in investments. In my country England the printed money was mainly used to buy government debt that was used to invest in the economy. Like I said money never stops existing it just changes who makes transactions.

Is is this a wrong assumption in this case?
 
Its not necessary to have credit creation to have inflation, credit turns bank reserves into M1/M2. The Fed can turn its own 'bank reserves' into M1/M2(which will chase goods) by buying assets from the non-bank sector
 
This is a bit rich coming from someone who chose to build a house in Thailand, which is now a de facto military dictatorship on the brink of civil war! Some safe haven he has there :D

Also I notice that - yet again - he fails to mention his gigantic losses on his short US Treasuries position and short US dollar position. A bit like Rogers, Taleb, Schiff and all the other vocal bears who have been flat out wrong. Or maybe they didn't actually have those positions at all?

Last autumn - "Dollar to become worthless, says Faber"

Last November - "Dollar oversold, may rally before going lower"

This February/March - "Euro oversold at 1.32, expect a bounce"

Just a total joke I'm afraid.
 
Quote from pspr:

Ha ha ha ha ha!

I had no idea that we have so many junior economists on ET.
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what do you mean by that?
 
Daal, you and I are worlds apart in understanding. I don't think I have time to explain it all again in your M's dependent system. I'm sorry. I will just say that you should look at the Fed Balance sheet, you can find it at the St. Louis Fed, its updated every thursday...you probably know that, I state it for others and just incase you don't. If you go back to TARP when the money supply was material expanded, you will see that the Fed balance sheet went from somethink like 40 Billion to about 1 Trillion. Then you will notice as the Fed purchased illiquid assets from the banks, and engaged in quantitative easing and the purchase of illiquid securities from the service agencies (FNMA, FDMC, FHLB, etc), the balance grew to about 2 Trillion. That was the original infusion of 1 Trillion from the treasury funded by the sale of treasuries, used to buy all the illiquid stuff and operate quantitative easing, which had the effect of putting the 1 Trillion back into the banking system (exchanged for securities that could not be sold), which the banks in turn did not lend to the private sector, becuase the private sector was writing off and paying back more debt than it was creating, and becuase they could not lend it out they placed it back on reserve at the Fed as excess reserves. So, the Fed has the same money on its balance sheet that it go from Treasury under TARP times 2. All becuase of private sectore aggregate credit contraction. You are right, since then the Fed has not expanded its balance sheet....whith EU trouble and the need for dollars to create liquidity in the EU banking system, the start of a new swap program, that may change and you will see the swap account grow.

You can also look at the private banking institutions aggregate assets and liabilities at the St. Louis Fed sight. Note how much is in required reserves and how much is in excess reserves and how it changes month to month. The total reserves have remained constant as excess reserves decline and required reserves increase...this happens becuase in the aggregate banks are taking on more short term deposits (required reserve for liabilities) as they loose aggregate assets (loans). Another picture of the credit contraction.

Morganist - it is good to be understood. I agree with you first paragraph with the clarification that credit contraction is due to lack of interes...and ability to meet the decreased leverage requirements.

With regard to paragraph two, I see we need to agree on a working definition of 'inflation.' I want to define it for the purpose of this paradigm the way Friedman defined it....always and only a monetary event....a change in the money supply (defined by me to include credit formation) that causes all goods and services in the real economy to increase in price apart from any consideration of supply and demand. Without justifying the inflation indexes that are in current use...the CPI's and the PCE's, I choose to use the YOY Core PCE as my inflation indicator becuase that is what the Fed pays most attention to. So, I am looking to find inflaton measured in the Core PCE that effects all goods and service without regard for supply and demand.

So, when you talk about the value or inflation of the assets that the Fed is buying, I would say that is quite beside the point. The Fed bought illiquid assets that were eroding bank capital adequacy and so destroying liquidity in the interbank system. THey had no value. There was no market. That is why the Fed bought them. The Fed has no capital adequacy. It just got them off the banks books. That act and the 1.2 T of FNMA paper they bought has propped up the U.S. housing values, kept them from declining sharply.

You can see from above that I don't include supply shock in my definition of inflation.
 
Quote from Ed Breen:

Daal, you and I are worlds apart in understanding. I don't think I have time to explain it all again in your M's dependent system. I'm sorry. I will just say that you should look at the Fed Balance sheet, you can find it at the St. Louis Fed, its updated every thursday...you probably know that, I state it for others and just incase you don't. If you go back to TARP when the money supply was material expanded, you will see that the Fed balance sheet went from somethink like 40 Billion to about 1 Trillion. Then you will notice as the Fed purchased illiquid assets from the banks, and engaged in quantitative easing and the purchase of illiquid securities from the service agencies (FNMA, FDMC, FHLB, etc), the balance grew to about 2 Trillion. That was the original infusion of 1 Trillion from the treasury funded by the sale of treasuries, used to buy all the illiquid stuff and operate quantitative easing, which had the effect of putting the 1 Trillion back into the banking system (exchanged for securities that could not be sold), which the banks in turn did not lend to the private sector, becuase the private sector was writing off and paying back more debt than it was creating, and becuase they could not lend it out they placed it back on reserve at the Fed as excess reserves. So, the Fed has the same money on its balance sheet that it go from Treasury under TARP times 2. All becuase of private sectore aggregate credit contraction. You are right, since then the Fed has not expanded its balance sheet....whith EU trouble and the need for dollars to create liquidity in the EU banking system, the start of a new swap program, that may change and you will see the swap account grow.

You can also look at the private banking institutions aggregate assets and liabilities at the St. Louis Fed sight. Note how much is in required reserves and how much is in excess reserves and how it changes month to month. The total reserves have remained constant as excess reserves decline and required reserves increase...this happens becuase in the aggregate banks are taking on more short term deposits (required reserve for liabilities) as they loose aggregate assets (loans). Another picture of the credit contraction.

Morganist - it is good to be understood. I agree with you first paragraph with the clarification that credit contraction is due to lack of interes...and ability to meet the decreased leverage requirements.

With regard to paragraph two, I see we need to agree on a working definition of 'inflation.' I want to define it for the purpose of this paradigm the way Friedman defined it....always and only a monetary event....a change in the money supply (defined by me to include credit formation) that causes all goods and services in the real economy to increase in price apart from any consideration of supply and demand. Without justifying the inflation indexes that are in current use...the CPI's and the PCE's, I choose to use the YOY Core PCE as my inflation indicator becuase that is what the Fed pays most attention to. So, I am looking to find inflaton measured in the Core PCE that effects all goods and service without regard for supply and demand.

So, when you talk about the value or inflation of the assets that the Fed is buying, I would say that is quite beside the point. The Fed bought illiquid assets that were eroding bank capital adequacy and so destroying liquidity in the interbank system. THey had no value. There was no market. That is why the Fed bought them. The Fed has no capital adequacy. It just got them off the banks books. That act and the 1.2 T of FNMA paper they bought has propped up the U.S. housing values, kept them from declining sharply.

You can see from above that I don't include supply shock in my definition of inflation.
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With respect there are other aspects that affect inflation. Credit is just one aspect of monetary policy. The is also fiscal policy and exports among others. Friedman said inflation was a monetary phenomenon. Even if this is true and supply shock is not real there is inflationary pressure from the other aspects of monetary and and fiscal policy.

Remember C + I + G + E. So regardless of whether output has any impact other factors will affect money supply. They could cut taxes which would compensate for the lost demand that arose from tightening of credit conditions. Effectively loosen fiscal policy.
 
Quote from Ed Breen:

Daal, you and I are worlds apart in understanding. I don't think I have time to explain it all again in your M's dependent system. I'm sorry. I will just say that you should look at the Fed Balance sheet, you can find it at the St. Louis Fed, its updated every thursday...you probably know that, I state it for others and just incase you don't. If you go back to TARP when the money supply was material expanded, you will see that the Fed balance sheet went from somethink like 40 Billion to about 1 Trillion. Then you will notice as the Fed purchased illiquid assets from the banks, and engaged in quantitative easing and the purchase of illiquid securities from the service agencies (FNMA, FDMC, FHLB, etc), the balance grew to about 2 Trillion. That was the original infusion of 1 Trillion from the treasury funded by the sale of treasuries, used to buy all the illiquid stuff and operate quantitative easing, which had the effect of putting the 1 Trillion back into the banking system (exchanged for securities that could not be sold), which the banks in turn did not lend to the private sector, becuase the private sector was writing off and paying back more debt than it was creating, and becuase they could not lend it out they placed it back on reserve at the Fed as excess reserves. So, the Fed has the same money on its balance sheet that it go from Treasury under TARP times 2. All becuase of private sectore aggregate credit contraction. You are right, since then the Fed has not expanded its balance sheet....whith EU trouble and the need for dollars to create liquidity in the EU banking system, the start of a new swap program, that may change and you will see the swap account grow.

You can also look at the private banking institutions aggregate assets and liabilities at the St. Louis Fed sight. Note how much is in required reserves and how much is in excess reserves and how it changes month to month. The total reserves have remained constant as excess reserves decline and required reserves increase...this happens becuase in the aggregate banks are taking on more short term deposits (required reserve for liabilities) as they loose aggregate assets (loans). Another picture of the credit contraction.

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You seem a little confused mixing up TARP and the Fed monetary measures. The Fed purchased $1.7T in securities, only $1T showed up as reserves, where is the rest?I tell you where it is, its in the M2 money supply. Debt paydown by private agents offset some of that increase, which is why M2 is negative yoy. The TARP monetary impact was quite limited, because the amounts that were put in the banks was far less than $700b, IIRC it was $125B in the top 9 banks then later they added something like $100b(after the stress tests when QE was well under way). Lots of TARP 'money' where just guarantees which did not drain reserves from non-bank players to give them to banks
 
The fact is that the Fed can print any quantity of money it likes and thus achieve (roughly) the inflation level it likes. If they quadrupled the money supply tomorrow and mail it to every US household then the price level will roughly quadruple in the next year or so.
 
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