Paradoxical Deflation coming?

See paper attached on 'transmission issues' relevant to this thread:
http://www.federalreserve.gov/pubs/feds/2010/201041/201041pap.pdf

Apart from the findings on the mythical 'money multiplier' which I have talked about in other threads...note the conclusion that the supply of money in reserves does not drive private loan formation, nor does interest rate reduction...the issue in loan formation is borrower demand which is independent of supposed 'money' creation; and without which there is no transmission mechanism to effect the general price indexes.

So, Piezoe...this proves there are smart guys at the Fed....too bad they are not the ones making monetary policy.
 
Quote from Ed Breen:

Only to the extent that bailing out a sinking boat succeeds...until they stop bailing.
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Ed I need to read more of your comments than I have time for right now. I am away for a while helping my mom out. I may be intermittent (much like my internet connection!) for a while. Thanks for your contributions.

To those who doubt the above comment, time the precise intervention times of the successive QEs. This is related to my comment about much more church time for gentle Ben. He is a smart man and will suffer the fate of all smart men.

To those with faith in government, my favorite comments is one I read about the great depression as I puzzled over why it ended many years ago. It was something to the effect of " .... and those that trusted the government lost the most of all ....."

Vanity, vanity, everything under the sun is vanity.
 
So everyone. Once we begin to understand the issue, I am more interested in the solutions. I do believe they exist. So,

What is the precise locus of the issue and what steps can they take to correct it?

For example, Greenspan noted a troubling issue for me as well (Ben is Greenspan's chosen one I think), even at these low interest rates there is crowding out of the 30 year paper. I think Greenspan is very worried as well.

The risk takers have left the building I think. They ultimately fund the government insanity. That is fatal ultimately I suspect, although I can agree with their consensus.

Here is a link I read when it was released

http://research.stlouisfed.org/publications/review/06/07/Kotlikoff.pdf

about can a government go bankrupt, what does that mean, and is the US bankrupt?

My proposed fix (Wild A** Guess) is to jump interest rates immediately very very slowly and force austerity on world governments. It has some rather nasty consequences of course.
 
Quote from Ed Breen:

Morganist, you know I like to speak directly and clearly about what I am talking about and I like to reduce things to process level. I don't have a lot of patience for talk about 'factors' and 'underpinning' of value when you never identify any factor, any underpinning or explain the process of how that effects 'value of a currency' or inflation or deflation.

Currency is just a form of sovereign credit. It is a zero interest demand note, usually in small denomination. It is part of a sovereign's spectrum of credit...it marks the bottom of a Sovereign's credit yield curve. The value of the currency is determined by the credit worthiness of the Sovereign that issues it. Currency is created by Sovereigns through the purchase back of their own interest bearing notes and bonds. If there is no private market for a Sovereign's notes and bonds then the value of their currency will drop. If a Sovereign does not have access to private credit markets, if it cannot sell its notes and bonds to third parties, then its currency will have no value. Fiat currency is backed by debt and the good faith of the Sovereign to honor that debt, there is no collateral.

So, you must see that currency is not an investment vehical. It is more like a yard stick, it is how we measure value of goods and service in trade. The goods and services have value and the money we price them in only has value because the Sovereign's credit is good and we accept that credit for the value of the goods and services in trade. We represent that value in currency. The best the monetrary authority can do is to maintain a stable measure of value over time. If the proper management of currency is to create a stable measure of value over time, it would hardly make a suitable investment.

When you think one currency will appreciate over another currency in time you saying too things...one, the depreciating currency is not as stable a measure of value; and you do not have good place to invest you money so you are leaving it in currency.

In a deflation, as I stated above, value is flowing out of tangible and enterprise assets, flowing out of longer term financial assets, and into currency; not as an investment but as a liquid holding place. The problem today is that the world is in search of good money as it deleverages and the CB's are not managing the currencies for stability; at the same time the Sovereigns continue to borrow to fund annual operations in deficit which brings thier creditworthiness and so their currency into question. As the CB's fight the deflation with their interest rate reductions, ZIRP policies, LTRO policies, QE's and Twists, they compress thier Sovereign Yeild curves so there is no material difference between the demand note zero interest currency and multi year Sovereign Bonds.

In this environment with assets bleeding down to demand note currency and the management of currency is to reduce its value the best that can be done is achieve liquidity and a slower loss of currency value than asset value. That is why the demand for the U.S. 10 year treasury, Japaneese Bonds and the Bund are so high. They are not being purchased as investment, they are currency substitutes and they are being purchased as a place of liquidity. It has nothing to do with investment.
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Read this article I wrote it might explain my point.

http://morganisteconomics.blogspot.co.uk/2012/01/investment-currency-mechanism-uk-and.html
 
Piezoe,

I don't think there is political power to close the budget deficit in the US (or economically feasible to reduce government spending in the current situation/with current policies). The total amount of debt held abroad will therefore grow and simply force their hands. Imagine US debt being at say...150+% of GDP. The game of cooperation will certainly be more dicey at that point. I personally think CBO's prediction of tax revenues are laughable, and consequently debt to GDP will go nowhere but north.

FED can initially pick up the slack, but when the picture gets clear to people, that FED is more or less the only buyer - shitstorm...
 
Stardust,

In economics you want to produce things cheaply, more efficiently so that people can consume more and enjoy more "economic benefits". In light of this, we still want more expensive housing? Something is amiss... My take is that there has been a long term wealth transfer to home-owners. Private spending has been boosted by a housing bubble. Housing has both a consumer property and a financial asset property.

This has masked the very real global wage arbitrage/convergence. Real income is higher in asia, lower in the industrialized world. Although, skilled labor has been left better off by this effect. I don't think you can stop the convergence without trade restrictions but this is another topic.

Solutions:
Intuitively I think that housing should be made cheaper. Tax housing much more, progressive income taxes with super-low taxes for the low income, high taxes for high income as their services now have a global market.

There are government investments that needs to be done to enable the US economy to produce more and more efficiently; dont just fix roads, make it so that the regular american is less dependent on using the car --> less oil imports. Here it is important to differentiate the kind of government spending that do not lead to efficiency: entrenched interest groups that leech on the government budgets. I just think of those as a form of corruption, and I understand why some republicans mistake all government spending as leechy welfare.

I recognize that there are real estate developers that take risks and that there should be rewards for those risks, but when housing is made expensive everywhere - thats just money going into the pockets of the finance industry and the already wealthy, adding to wealth concentration problems. However, if you tax housing heavily - the money goes to the government who can make investments. Housing would paradoxically be cheaper as people can't take on huge loans because they have to pay property taxes.


I think with these broad strokes you have sounder fiscal policies, saving the FED from an impossible situation. The solution is definately on the fiscal side.
 
Ed Breen is correct; the Fed has never, by their own admission, been able to increase credit if the demand for it isn't there. Folks who know finance know they deal mostly in hocus-pocus. History shows how powerless they are, yet over and over people hang on their every word like it makes some sort of difference what they think.
In reality, they have about as much power over the real world as the Pope, who can mess things up by standing in the way of, say, the prudent use of condoms, but who can't do much else. The Fed can screw up royally, as they did when they handled Bear Stearns with all the subtlety of a bear tearing into a salmon, but they can't do much that is constructive other than what their actual job is: supplying money in a bank run. Since the FDIC does a way better job at this than they do, they don't actually have a reason to exist.
This is actually standard Keynesianism: it's why he went for fiscal, not monetary, policy. The Fed was powerless, and rightly so, from the Depression right through until Eisenhower, when, because the right so thoroughly distrusts fiscal solutions, the Fed was finally allowed to begin to exercise some power over monetary policy again.
From there we have come full circle to today, where fiscal policy is, allegedly, powerless, but the Fed is all-powerful. This is claptrap, and it's a large part of the reason we keep taking longer and longer to get out of recessions.
It's a global problem of course: over in Europe, the ECB has to lecture the various eurozone governments and tell them that it is not, in fact, all-powerful, and that they have to actually start making some hard decisions on how to get the eurozone going again; this includes Germany as well as Greece; the Netherlands as well as Spain.
 
Quote from trefoil:

Ed Breen is correct; the Fed has never, by their own admission, been able to increase credit if the demand for it isn't there. Folks who know finance know they deal mostly in hocus-pocus. History shows how powerless they are, yet over and over people hang on their every word like it makes some sort of difference what they think.
In reality, they have about as much power over the real world as the Pope, who can mess things up by standing in the way of, say, the prudent use of condoms, but who can't do much else. The Fed can screw up royally, as they did when they handled Bear Stearns with all the subtlety of a bear tearing into a salmon, but they can't do much that is constructive other than what their actual job is: supplying money in a bank run. Since the FDIC does a way better job at this than they do, they don't actually have a reason to exist.
This is actually standard Keynesianism: it's why he went for fiscal, not monetary, policy. The Fed was powerless, and rightly so, from the Depression right through until Eisenhower, when, because the right so thoroughly distrusts fiscal solutions, the Fed was finally allowed to begin to exercise some power over monetary policy again.
From there we have come full circle to today, where fiscal policy is, allegedly, powerless, but the Fed is all-powerful. This is claptrap, and it's a large part of the reason we keep taking longer and longer to get out of recessions.
It's a global problem of course: over in Europe, the ECB has to lecture the various eurozone governments and tell them that it is not, in fact, all-powerful, and that they have to actually start making some hard decisions on how to get the eurozone going again; this includes Germany as well as Greece; the Netherlands as well as Spain.
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I don't know if I fully agree with this. Yes they cannot increase credit if the demand is not there in the private sector. That does not mean they cannot increase credit in the public sector. As we are appreciating there is always demand for it there and the governments have got everyone in to enormous debt. This is the more worrying thing you will pay for that debt through inflation so it is a central bank action that causes this problem.

Also in terms of private debt you are looking purely in the domestic market. Some foreign investors will buy US credit due to the strength of the dollar. The debt product is the secondary product of the investment the real investment is to have an asset priced and exchangable in US dollars.

So I can see your comments in regards to limitations in the expansion of private sector debt. However public sector debt is a whole new ball game.
 
Quote from morganist:

I don't know if I fully agree with this. Yes they cannot increase credit if the demand is not there in the private sector. That does not mean they cannot increase credit in the public sector. As we are appreciating there is always demand for it there and the governments have got everyone in to enormous debt. This is the more worrying thing you will pay for that debt through inflation so it is a central bank action that causes this problem.

Also in terms of private debt you are looking purely in the domestic market. Some foreign investors will buy US credit due to the strength of the dollar. The debt product is the secondary product of the investment the real investment is to have an asset priced and exchangable in US dollars.

So I can see your comments in regards to limitations in the expansion of private sector debt. However public sector debt is a whole new ball game.
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The question is whether public sector debt leads to inflation. If that were actually the case, there should have been a massive inflation immediately after WWII in the US.
But there wasn't.
Doesn't stop everyone from absolutely categorically stating that it will happen, though. Just another case of ideology triumphing over the actual way the real world works.
 
As a general rule there will be more demand for credit at 1% than there is at 10%. Not recognizing this is akin to not recognizing gravity.
 
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