How do you stop deflation?

To the above poster: Please learn how to construct a paragraph. I won't even read your post because to me it says: non sequitor, non sequitor, etc before I even look...

2) We need to invest, not solely consume. To attract investment, lower corporate tax rates to 10%, then offset lost revenues by raising personal income taxes (especially on the wealthiest earners). Then create incentives to prevent asset hoarding (versus capital investment). Then print lots of money and pass fiscal stimulus, but with investment the goal, not merely consumption. We need to rebuild our infrastructure, and that should provide plenty of employment keeping tax revenues up.

Tax revenues need to stay up. Deflation is NOT good for the economy guys, sorry. There are too much debt and obligations (medicare/soc sec) to afford deflation without having government debt spiral out of control. We need employment high, steady inflation, and real economic growth not driven solely by consumption.

Cancelling out debt obligations will have a greater cost, since banks with losses will hoard and not lend. Their losses need to be entirely offset before they can even start to consider lending. I'd rather we just grow (and inflate) our way out.


Right now the fed needs to counteract contractionary money supply that results from decreasing credit with increased money printing. They need to put a few trillion directly into investor hands and bypass the banking system entirely a tad. This will create new jobs, a new tax base, and trend economic growth.

If you invest to keep supply of commodities up, the currency can still be viable even with increased monetary supply. Its when you have decreasing aggregrate supply paired with increasing money supply that things get dangerous.
 
I really don't think your solution fixes the root problem. Deciding somewhat arbitrarily to give Americans trillions of dollars in direct proportion to the amount of debt they owe would have the effect of encouraging everyone to take out as large of a mortgage as possible in the future.

So, when I said your idea was the worst idea ever, I did not mean literally. I concur that there are really bad ideas out there, and the current $3.5 trillion bailout probably will have just a deleterious effects as an across the board 30% haircut for all mortgages would have, but comparing the efficacy of your plan to the current one makes it only the second worst plan ever.

My question to you is why stop just at mortgages? How about a 30% haircut for all debt for all Americans? That platform would probably get you elected president, more voting Americans have debt than those who do not, but it a horrible, wasteful idea.

Here is my idea on how to use the $3,000,000,000,000. Rebuild the financial system. I'll try to add some details to this vague idea.

Spend the money to make every transaction of money, debt, property, commodity, equity, whatever more efficient. Create an uber market, where everything can be traded.

Become the world standard in efficiency for prediction markets.

Create national standards for mortgages where a transparent macro market determines price. Eliminate as many commission based jobs as possible.

Increase the number and diversity of banks which have access to the federal discount rate.

Recommence calculating the actual money supply, the spread between the discount rate and the rate of growth in the actual money supply is the true cost to the taxpayer.

I'm just getting started in what could be done with that money, but maybe you get my gist... Slumping housing prices are painful to some in the short run, but it is not the root problem and it definitely does not need to be fixed.

Quote from PAPA ROACH:

Really? That would have cost 3 trillion dollars, and stopped the housing value destruction. We have already spent in excess of this AND will spend more. Guess what, none of it is going to help the consumers out either. We are a consumer driven economy, therefor putting money into CONSUMER hands is a real solution for starters. Instead we are buying the bad debt which mostly is mortgage related, and the values are still falling and will continue.

People personal wealth have been destroyed, stocks, bonds and real estate. There will be no consumer spending for a long time to come now, the wealth effect loss will guarantee this.

If your going to be socialist (we are), you need to fix the root problem.

What is your solution?
More...
 
Quote from PAPA ROACH:

Really? That would have cost 3 trillion dollars, and stopped the housing value destruction. We have already spent in excess of this AND will spend more. Guess what, none of it is going to help the consumers out either. We are a consumer driven economy, therefor putting money into CONSUMER hands is a real solution for starters. Instead we are buying the bad debt which mostly is mortgage related, and the values are still falling and will continue.

People personal wealth have been destroyed, stocks, bonds and real estate. There will be no consumer spending for a long time to come now, the wealth effect loss will guarantee this.

If your going to be socialist (we are), you need to fix the root problem.

What is your solution?
More...


this is not a solution.
it will stop all first time buyers who could buy if prices would be lower

so you just conserve crisis and reward losers

do you think it's solution for long term prosperity

the solution is to allow market price discovery and not stop asset price deflation but force it as fast as possible
 
Let's think of deflation and reinflation this way : Bob has a $2000 a month mortgage because he was stupid. He isn't spending on a new car or TV, and he has sold his stock holdings to cover his expenses. So across the board Bob has a deflationary effect on the economy. His mortgage also runs the risk of increasing in size to his budget and that would make the deflation feed on itself and grow larger.

How do you tackle the problem? You give money straight in Bob's hand. If you gave him $50,000, he would use some of that money to pay for his mortgage. He would then get out of the crippling debt and contribute to the economy like everyone else.

Where does the $50,000 come from? The printing presses, borrowed from other countries.

However, do you think Bob would benefit from 0% interest rates? No, because no one would lend him money. Unless you give him money in his hand, you wont be able to fight the deflation.


Now say you're a bank. You hold a 1 million in bad worthless mortgages because you were stupid. Your bad loans prevent you from lending money into the economy, therefore reducing the money supply and contributing to the deflation. How do you get out of such a situation? You need money in your wallet to writedown the bad debt, and clean your balance sheet. Getting loans from the central bank won't help, because the majority of these loans are short term and you can't use them to writedown bad assets. You can only use them like a credit card, paying for the groceries and gas for your car while you hope the situation will miraculously get better.
But injecting banks with capital does allow them to pay off whatever bad debt they want to pay off and get them going again.
Where do you get that money?

Preferably you borrow it from someone, maybe a foreigner. Stealing it from the taxpayer isn't too smart, stealing it from future generations is smarter. I think the fact the taxpayer paid for the bailout showed no foreign lenders trusted the US with such a large amount of loans.
 
Quote from scriabinop23:

To the above poster: Please learn how to construct a paragraph. I won't even read your post because to me it says: non sequitor, non sequitor, etc before I even look...

2) We need to invest, not solely consume. To attract investment, lower corporate tax rates to 10%, then offset lost revenues by raising personal income taxes (especially on the wealthiest earners). Then create incentives to prevent asset hoarding (versus capital investment). Then print lots of money and pass fiscal stimulus, but with investment the goal, not merely consumption. We need to rebuild our infrastructure, and that should provide plenty of employment keeping tax revenues up.

Tax revenues need to stay up. Deflation is NOT good for the economy guys, sorry. There are too much debt and obligations (medicare/soc sec) to afford deflation without having government debt spiral out of control. We need employment high, steady inflation, and real economic growth not driven solely by consumption.

Cancelling out debt obligations will have a greater cost, since banks with losses will hoard and not lend. Their losses need to be entirely offset before they can even start to consider lending. I'd rather we just grow (and inflate) our way out.


Right now the fed needs to counteract contractionary money supply that results from decreasing credit with increased money printing. They need to put a few trillion directly into investor hands and bypass the banking system entirely a tad. This will create new jobs, a new tax base, and trend economic growth.

If you invest to keep supply of commodities up, the currency can still be viable even with increased monetary supply. Its when you have decreasing aggregrate supply paired with increasing money supply that things get dangerous.
More...

You're almost as irrelevant as Jpad.

Suggesting a mere re-industrialization of America to "encourage investment" goes against 20 years of pre-mediated WTO expansion, multi-lateral treaties, abolition of protectionist tariffs, preferential tax treatment for off-shorers. Not to mention the X TRILLIONS in US capital sunk into plant and equipment overseas...

You think slashing Corporate Tax to 10% will offset the labor, pension, medicare, insurance, litigation and pollution costs American producers realized by exporting manufacturing overseas??!? Until you deal with the POLITICAL Agenda for Western de-industrialization, your "suggestion" is a dumb one.

Second. New Deal Economics to stimulate jobs. Might work. Its definitely a better idea than handing out money to insolvent Banks!

Tax revenues need to stay up. Why? To fund a Trillion Dollar Defense Budget for an unnecessary War? To pay the bloated salaries of Public Teachers who can't educate students to read or write? Perhaps to fund the DEA to fight the Drug War that was lost before it started? Or fund the legions of prisons, cops and judges to incarcerate the millions of non-violent criminals who use it?? Maybe pour endless Billions in the Department of Homeland Security who can't even shut down the Fucking Border?

Or perhaps we "must keep tax revenues high", as you say, to pay the bloated pensions of all the listless fucks mentioned above who make a living sucking off Public Money?? Is that what you mean, by "keep taxes high"?

Otherwise, variable expenditures by Government come down as prices deflate. So its a wash if revenues decline. If homes get cheaper and CPI deflates, Social Security checks tied to CPI come down near-commensurate, don't they? Same for medicaid, drugs, surgeries, food stamps. Get it, Corky? Deflationary revenue shortfalls have no impact on Government Handouts tied to CPI.

As for Federal Debt Service. Another Red Herring.

The FED can monetize mature T-Bills if there's a revenue short fall. IOW, if the inflated debt is "too high" to service in deflationary revenue conditions, the FED can print and buy those Treasuries that come due. Whats the worst thats gonna happen?? INFLATION!?! :D

So no, the Country will not go Bankrupt, the World will not End, and the Sky will not Fall if and when deflation happens (newsflash: its already happening!!).

As for Banks hoarding cash if they're allowed to fail. Guess what, Genuis?! They're already hoarding cash!! LOL
Thats why the Country isn't awash in hyper-inflation! The Banks are sitting on it!

What needs to happen is simple: CUT SPENDING AND RETURN TO A STABLE CURRENCY.

Do you even know what stimulates economic growth? I don't think you do.

Cheap Prices relative to Wages or Income.

When prices stay artificially high, consumption and investment is held back. Shit is too expensive relative to income. IOW, the debt-to-income or cost-to-income ratio is too high. Prices need to deflate if wages stay stagnant.

There is no other way around it.

All you guys read the FED wiki, and think you've got a well-rounded purview of macroeconomics.

You've got no Supply-side understanding, and it shows. You've only got 1/3rd of the equation. Besides not knowing one thing about supply-side, you naively think all this shit plays out in a Bubble. Politics trumps economics. Thats why things keep "fucking up". Because they're not fuck ups. Its designed that way from a "political" perspective.
 
Quote from makloda:

Couldn't agree more. Japan is thriving! :cool:
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Growth can't happen until prices - relative to wages - come down.

Since Japan opted to prop inflated asset prices, the result was a drop in investment and consumption as new and existing debt was too expensive.

Supply side economics, Makey.
 
This is EXACTLY the point I am trying to make, a haircut off of mortgage debt is far more effective than bailing out banks. The consumer has to get relief or the spiral will continue. The banks should have never lended so much to begin with, it is not the lone fault of Bob, after all, Bob was doing what everyone else was doing.

Quote from Renegen:

Let's think of deflation and reinflation this way : Bob has a $2000 a month mortgage because he was stupid. He isn't spending on a new car or TV, and he has sold his stock holdings to cover his expenses. So across the board Bob has a deflationary effect on the economy. His mortgage also runs the risk of increasing in size to his budget and that would make the deflation feed on itself and grow larger.

How do you tackle the problem? You give money straight in Bob's hand. If you gave him $50,000, he would use some of that money to pay for his mortgage. He would then get out of the crippling debt and contribute to the economy like everyone else.

Where does the $50,000 come from? The printing presses, borrowed from other countries.

However, do you think Bob would benefit from 0% interest rates? No, because no one would lend him money. Unless you give him money in his hand, you wont be able to fight the deflation.


Now say you're a bank. You hold a 1 million in bad worthless mortgages because you were stupid. Your bad loans prevent you from lending money into the economy, therefore reducing the money supply and contributing to the deflation. How do you get out of such a situation? You need money in your wallet to writedown the bad debt, and clean your balance sheet. Getting loans from the central bank won't help, because the majority of these loans are short term and you can't use them to writedown bad assets. You can only use them like a credit card, paying for the groceries and gas for your car while you hope the situation will miraculously get better.
But injecting banks with capital does allow them to pay off whatever bad debt they want to pay off and get them going again.
Where do you get that money?

Preferably you borrow it from someone, maybe a foreigner. Stealing it from the taxpayer isn't too smart, stealing it from future generations is smarter. I think the fact the taxpayer paid for the bailout showed no foreign lenders trusted the US with such a large amount of loans.
More...
 
Quote from PAPA ROACH:

30% principle haircut off of all motgages would be a good step.
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Decent idea, if everyone's mortgage was still held by the local bank. Then again, if they did, we wouldn't be in this situation.

Anwyay, how do you pull that off when mortgages are packaged up and sold as fixed-income debt instruments to the UK, Germany, Japan, China, and so on?
 
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