Who is believing in the current monetary policy is still the right course and why?

[Sotnis]

Dear Gurus

So I have been pretty wrong for the last few years thinking the increasing leverage, stock buy backs and PrivateE, Tech valuations are going to bring a lot of trouble for financial institutions.

If the Fed doesn't increase rates, and even follows with another QE I feel like companies are just going to use it to buy more stocks back on leverage. It also looks like easy unsecured (or share backed) credit to companies like glencore are then going to continue.

With commodities at these levels and the strong dollar isn't deflation inevitable either way?

Wouldn't be increasing interest rates tame debt which otherwise domino fall and tighten credit and spending even more?

If you support near zero or negative interest rates, and further QE why do you feel it would benefit the economy more in the long term?

 

[sculptor66]

Any 'official' definition of inflation that does not include asset price inflation is flawed.

That is the biggest problem of them all. Until the Fed, other central banks and policy makers acknowledge this, we will move from one boom-bust to another.

Also, until then every discussion about the FED and its policy is futile, IMHO.

 

[Maverick74]

Dear Gurus

So I have been pretty wrong for the last few years thinking the increasing leverage, stock buy backs and PrivateE, Tech valuations are going to bring a lot of trouble for financial institutions.

If the Fed doesn't increase rates, and even follows with another QE I feel like companies are just going to use it to buy more stocks back on leverage. It also looks like easy unsecured (or share backed) credit to companies like glencore are then going to continue.

With commodities at these levels and the strong dollar isn't deflation inevitable either way?

Wouldn't be increasing interest rates tame debt which otherwise domino fall and tighten credit and spending even more?

If you support near zero or negative interest rates, and further QE why do you feel it would benefit the economy more in the long term?

What you are missing is interest rates are NOT near zero. The curve has been steepening big time. Over 98% of the market does not have access to zero rates. That is only the "discount rate". The other rates in the market are floating and they are floating higher! And no, asset inflation is NOT real inflation. Not even close. Assets by their definition are not liquid. And they are usually held as assets, not used for spending.

The Velocity of both M1 and M2 money is in a massive downward spiral. There is very little actual real spending in the economy in relation to the supply of money and THAT is why we are not seeing real inflation. Every aspect of the economy is in deflationary mode right now from raw materials to labor and also increases in technology.

Firms will borrow money if and only if their marginal product of capital is positive. They will not borrow simply to borrow. And the fact is, most firms are at this point facing diminishing returns on their existing capital therefore more capital will not be productive. One of the major deflationary pressures we have right now is the fact that are firms are actually paying down debt, not taking on more and that in effect is deflationary. Ultimately in order to get higher growth in the economy we need to see real spending tick up and we need to see real wage growth. I suspect the Fed will raise short term rates next meeting. But what most of ET is missing is what is happening on the yield curve. Pay attention to that and not the Fed.

 

[tandh]

The vocabulary has become distorted.

Inflation is the increase of the money supply with the result being higher prices.

Deflation is the reduction of the money supply with the results being lower prices.

Current dictionaries have changed the definition of inflation to mean rising prices and deflation to mean falling prices. This is because in general they were both so interchangeable that they were just used this way.

But using the original definitions, prices can fall without deflation. Increases in industrial efficiency, for example, lead to falling prices. This is a great thing, as we can then all buy more stuff with the same amount of money. Our standard of living has just increased in this example.

The idea of falling prices being a bad thing is brain washing of the 1st degree. I don't know about you but I would be happy to see my milk get cheaper rather than more expensive. Falling prices are a good thing, rising prices are a bad thing. It's common sense.

In regards to current monetary policy, the problem is that we have central planners trying to dictate the economy. This never works. Why not let the free market set the interest rate? Why not keep the government out of the private market?

 

[der_kommissar]

And no, asset inflation is NOT real inflation. Not even close. Assets by their definition are not liquid. And they are usually held as assets, not used for spending.

I don't think it's as simple and straightforward as this...In an economy without real wage growth (as you allude to in your post), asset inflation is the de facto mechanism for increased spending in the economy...No, it's not the influence it was in the late 1990's, but the Fed has clearly made mention of its targeting asset inflation as a means to increase the consumer wealth effect...

On the other hand, demographics play a big part in this equation. If the majority of asset holders are past peak spending, and/or they are in their own "risk off" life phase, then goosing asset prices higher will not have the same positive effect AND it puts at risk future generations ability to enter these overvalued asset markets...That same house that the 65 year old paid 1/5th of its current valuation is not going to be an attractive prospect for the 35 year old that is looking to settle down...the stock market that is trading at all time highs in a slowing economy is not a good investment for those not already fully invested...

And then we get to ZIRP...ZIRP has completely changed the conversation on asset inflation. You assert that assets are not used for spending...the facts are not on your side...the entire market rally higher from the 2009 lows has seen steady retail outflows...not because they were completely risk averse, but because these are people that are depleting their portfolios to meet their living expenses...

 

[Maverick74]

The vocabulary has become distorted.

Inflation is the increase of the money supply with the result being higher prices.

Deflation is the reduction of the money supply with the results being lower prices.

Current dictionaries have changed the definition of inflation to mean rising prices and deflation to mean falling prices. This is because in general they were both so interchangeable that they were just used this way.

But using the original definitions, prices can fall without deflation. Increases in industrial efficiency, for example, lead to falling prices. This is a great thing, as we can then all buy more stuff with the same amount of money. Our standard of living has just increased in this example.

The idea of falling prices being a bad thing is brain washing of the 1st degree. I don't know about you but I would be happy to see my milk get cheaper rather than more expensive. Falling prices are a good thing, rising prices are a bad thing. It's common sense.

In regards to current monetary policy, the problem is that we have central planners trying to dictate the economy. This never works. Why not let the free market set the interest rate? Why not keep the government out of the private market?

There are so many mistruths in this post, not sure where to start. Inflation is not an increase in the money supply and increasing money supply does not directly cause higher prices. Spend a few minutes and think through the logic on that if you can.

 

[Maverick74]

I don't think it's as simple and straightforward as this...In an economy without real wage growth (as you allude to in your post), asset inflation is the de facto mechanism for increased spending in the economy...No, it's not the influence it was in the late 1990's, but the Fed has clearly made mention of its targeting asset inflation as a means to increase the consumer wealth effect...

On the other hand, demographics play a big part in this equation. If the majority of asset holders are past peak spending, and/or they are in their own "risk off" life phase, then goosing asset prices higher will not have the same positive effect AND it puts at risk future generations ability to enter these overvalued asset markets...That same house that the 65 year old paid 1/5th of its current valuation is not going to be an attractive prospect for the 35 year old that is looking to settle down...the stock market that is trading at all time highs in a slowing economy is not a good investment for those not already fully invested...

And then we get to ZIRP...ZIRP has completely changed the conversation on asset inflation. You assert that assets are not used for spending...the facts are not on your side...the entire market rally higher from the 2009 lows has seen steady retail outflows...not because they were completely risk averse, but because these are people that are depleting their portfolios to meet their living expenses...

Good lord, this website. Asset inflation does NOT lead to higher spending. Come on guys, you are suppose to be traders. Think about this shit. If you hold an asset that is appreciating, why would you forgo that appreciation to acquire something that most likely is depreciating. People demand money to make purchases. People will hold an amount of money based on the opportunity cost of holding it. It's simple math.

And no, the steady outflows from portfolios is not going into discretionary spending, it's going into paying down debt. Do you want me to post the chart from the FRED database to show you that?

 

[der_kommissar]

Good lord, this website. Asset inflation does NOT lead to higher spending. Come on guys, you are suppose to be traders. Think about this shit. If you hold an asset that is appreciating, why would you forgo that appreciation to acquire something that most likely is depreciating. People demand money to make purchases. People will hold an amount of money based on the opportunity cost of holding it. It's simple math.

And no, the steady outflows from portfolios is not going into discretionary spending, it's going into paying down debt. Do you want me to post the chart from the FRED database to show you that?

Did you read my post? I said that PEOPLE ARE LIQUIDATING ASSETS TO MEET LIVING EXPENSES. There is one very salient reason why people will liquidate appreciating assets.

Once again, I did not say that outflows are going into discretionary spending in 2009-15, I said that asset inflation in 1999-00 had a markedly different affect on consumer sentiment at that time.

Now politely go fuck yourself.

 

[Maverick74]

Did you read my post? I said that PEOPLE ARE LIQUIDATING ASSETS TO MEET LIVING EXPENSES. There is one very salient reason why people will liquidate appreciating assets.

Once again, I did not say that outflows are going into discretionary spending in 2009-15, I said that asset inflation in 1999-00 had a markedly different affect on consumer sentiment at that time.

Now politely go fuck yourself.

Consumer sentiment does not cause inflation. You need to read more economic books. You are swinging at every pitch....and missing I might add.

 

[der_kommissar]

Consumer sentiment does not cause inflation. You need to read more economic books. You are swinging at every pitch....and missing I might add.

There are remarkably twisted arguments, some might even say "strawmen". Nowhere did I say that consumer sentiment is causing inflation (and we were discussing asset inflation, not general consumer inflation)...OTOH, I will stand by my assertion that sustained asset inflation does encourage consumers to borrow more and to spend more, whereas bear market phases will tamper that sentiment...Bernanke agrees, as he clearly made it a point to mention the positives of the rising small cap index during his ultra-dovish tenure...

Keep trollin' big guy.