RoR: Forum

I just paid off a credit card and asked to cancel it and of course was offered a new, lower interest rate. I took the variable rate option, prime plus 2% and the sales agent was pleased as punch... made me wonder why ... So, I'm going to find out about going with the fixed rate, higher, of course, right now, but in 12 months, it could be a bargain.

Post 1

Wednesday, October 8, 2008 - 9:10pm

offhand would go with fixed - am sure ye be seeing double digit in 12...
[inflation]
(Edited by robert malcom on 10/08, 9:12pm)

Post 2

Thursday, October 9, 2008 - 2:15am

Robert might be right. It could be another run of heavy-duty inflation like we had in the eighties. The reasoning would be that we have a massive deficit, no one wants to raise taxes with such a weak economy, we need to get the money to pay for the bailout, the war, the entitlements, all the other bills, and the credit markets are going to be slow to come back - so that leaves printing money and opening the credit windows to more customers and lowering rates - all of which the fed has been doing. The fed has even been bailing out foreign banks and buying commercial paper from corporations. Lots of pressure to inflate.

But there is a problem. The credit markets aren't reacting - at least not yet. Just today the fed dropped interest rates by 1/2 of a point. We have had a massive credit contraction and the crisis right now is that no one wants to make loans - at least not like they did before. This is a massive deflation. If it continues, we go into a deep recession or even a depression.

Money is complicated. We should be able to just look at the average price of goods and state if it is going up or down and declare that we are in an inflationary or deflationary period. But money not only has that price of goods relation, it also has a supply, and it also has a demand. I used to think that since supply, demand and price were locked in this simple mathematical formula, knowing any two and we could calculate the third and that we know the supply figures and we an calculate prices... so what's the problem? Well, I don't trust the figures anymore. We are a global economy and there are windows where foreign purchasing power chases our goods and services and dollar denominated money chases foreign goods and services. Also credit cards are purchasing power and corporations issue commercial paper, people open home-equity lines of credit, seniors take out reverse mortgages, and we don't know how much counterfeit purchasing power is out there chasing those goods and services. It has gotten very complicated.

There are other economic issues... what about when OPEC cuts production? The supply of dollars circulating in America declines. In the seventies we had stagflation - the sudden increase in the price of oil over a period of time and a minor credit crunch created a recession, but the continued pumping of money and the restarting of lending kicked up the inflation. We had recession and inflation at the same time.

This time there is a massive pressure to inflate, but the biggest credit contraction in history. If the deflationary spiral takes hold (job layoffs, less consumer spending, less consumer confidence, more business go belly up, more layoffs, etc.) then we could find the economy under control by the demand side of money and no increase in money supply will be fast enough. Right now I'm seeing lots of deflationary evidence - great masses of credit gone, no one wants to loan, interest rates dropping, stock market collapse, and rising unemployment.

Post 3

Thursday, October 9, 2008 - 3:59am

Steve Wolfer,

All this talk about price of goods etc, "inflation" and "deflation"... All I care about is the extent at which the Fed increases the number of USD in existence, which instantly gives value to someone (not me) and reduces the value of everyone else's USD. This is the only inflation I care about, its the only one where people are actually being cheated. All other talk of inflation and deflation when talking about prices of things is simply free market forces which are non-detrimental (changes in prices for these things is the wonderful invisible hand in effect).

And the discount window rate at 1.75% is definitely a terrible source of inflation. I bet you every USD the Fed loans out at 1.75% did not exist until they loaned it out. And at 1.75%, the Fed will practically never get the USD back, effectively giving money away. In 20 years, its only a 16% return on investment.
(Edited by Dean Michael Gores on 10/09, 4:05am)

Post 4

Thursday, October 9, 2008 - 6:53am

Dean - I actually don't think it works quite that way, and want as we wish it really does not simplify to that. Steve is right.

Post 5

Thursday, October 9, 2008 - 12:31pm

Dean,

You seem to have a firm grasp on what is a much simpler view of inflation. But I think it has some real holes in it. You and I both agree that adding USD from a printing press to the market is a form of theft. We both agree on the mechanism, which is that more dollars chase after the same quantity of goods and services thus chasing prices higher. Only the very first to receive these new dollars purchase at, or close to, the old prices, everyone else purchases at higher prices. And those with savings and fixed return investments get robbed the most. But you are ignoring the fact that people also make purchases with credit and that government makes credit out of thin air just like it makes dollars out of paper and ink. That means that government expansion of credit must also increase prices and at the same pain and loss of those who attempt to engage in long term savings. You also seem to be ignoring the complications of being in a global economy. There are some goods and services that exist in America that have foreign currency and foreign currency denominated instruments that are in there, right along with USD and USD denominated instruments competing to make a purchase and that has an inflationary effect on our prices where that foreign government has created new purchasing power. I can understand attempting to discern what part of price inflation is a product of the increase in American printed dollars, but to not look at other forms of government generated purchasing power increases - fiat money seems to be a form of self-made blindness to the problem's complexity. What is the benefit that I'm not seeing?

And there are still other factors, like government interference by setting interest rates - instead of allowing a market place to be the sole determiner of the price for money based upon supply (which they constantly mess with) and demand, which almost no one understands.

And there is the psychology involved in a large national bubble like we've seen in the housing market and its partner in crime, the bubble in the mortgage derivatives in the financial markets. This psychology speaks to the demand for money which is a major factor. It is more than possible for the government to print money by the ton and push it out into the economy with forklifts, pallets, and fly it to major regional banks as fast as they can charter planes and still see prices decline and the economy slump. Right now, housing prices, commodity prices, stock prices, and even oil prices are declining despite a massive infusion of new currency. If a person doesn't look at things like credit and like the demand for money then a deflationary slump at a time of increasing M1, M2, M3... etc. would be impossible to explain.

Post 6

Thursday, October 9, 2008 - 8:41pm

Steve,

When the Federal Government borrows money, it doesn't create it out of thin air. It borrows it from somebody, and then it owes money to someone. Same with individuals when they buy something with credit, they borrow from somebody... they owe somebody something. The difference with the Federal Reserve is that when it creates credit by handing money out to others, it doesn't owe anyone anything.

Since individuals and the government owe what they borrow, it is not an increase in the money supply.

Lets say I create a new currency and I peg it to the USD at 1:1. And then I openly trade it in the free market. Even if someone trades a USD for one of my notes, the same number of USD exists. Isn't this how treasury securities work?

================

Now you might argue that people simply valuing USD less is a big deal (a different kind of inflation), but I'd argue that this is more of an effect then a cause. The cause is an increase in the total number of USD in existence.

Post 7

Thursday, October 9, 2008 - 11:37pm

Dean,

Prices react to increases in the printed dollars, not because they are printed, or paper, but because they are purchasing power. When the Fed increases credit, it is the same - the increase in purchasing power chasing the same goods and services causes higher prices. And when someone opens a line of credit it is a net increase in purchasing power over what existed before they did. Yes, most of those credit expenditures will be paid back and that will decrease purchasing power, but the net change in credit outstanding has been on a steady increase. Even when you don't look at the effect on purchasing power during the expansion of credit, you have to consider the effect of a credit collapse - it's deflationary.

During a time of easy credit a guy goes to a car lot and gets a car on credit and makes payments - and he still has his money to spend on clothes or whatever and the car lot has an accounts receivable on the books. During a time of tough credit he has to spend his money to get the car and doesn't have the money to spend on clothes or whatever - the car lot has the cash instead of the accounts receivable, but the clothes don't get purchased.

I understand the difference between created out of thin air and not created out of thin air, but I also understand that prices don't care or know what chased them up. Also, what we need to look at is the cycle and where we are in it - not just a static ratio of printed dollars to goods and services.

Post 8

Friday, October 10, 2008 - 4:32am

It seems Dean's problem is an inability to see U.S. Treasury debt, T-bills especially, as the equivalent of money. Banks happily accept T-bills as the equivalent of money. To paraphrase Yogi Berra, "The Fed gives T-bills, which is just as good as money." When the Fed issues new T-bills, it doesn't have to receive money for the entire amount. If a bank gets new T-bills and pays money for them, then it is not inflation. On the asset side of its balance sheet, it's an exchange of one asset for another. The total does not change, just its composition. The liability side is unaffected. However, if instead a bank gets new T-bills it doesn't pay for, but simply adds an IOU to the Fed on the liability side of its balance sheet, that's inflation. Both the asset side and liability side of the bank's balance sheet increase (by the same amount).

Like I tried to explain in the last paragraph here, a bank can inflate by making a loan with the amount simply added to the borrower's checking account. Again, both sides of the bank's balance sheet is increased. On the other hand, if the loan amount leaves the bank, then the balance sheet doesn't expand. It is an asset substitution.

Post 9

Saturday, October 11, 2008 - 8:40pm

=== Too Scary for Words ===

Post 10

Monday, October 13, 2008 - 4:23pm

Communism makes more sense.

Today Obama was on television giving another speech somewhere and explained his latest proposals for fixing the financial crisis. He says we must rescue the middle class, not just the banks and financial houses. After he spoke for a while, it became clear he was including the poor as well. It actually might only be the poor - or let's say the most financially challenged, be they poor or middle class.

He also called for a stimulus package, and funding for energy independence, and starting a program to rebuild American infrastructure to create new jobs, and some other stuff I didn't hear because I went numb for a moment as I tried to process the severe unreality of all of this.

But getting back to the rescue part, he said we must rescue all of those suffering the burdens of student loans, all of those in trouble with their auto loans, all of those who are buried in credit card debt as well as all of those who can not make their mortgage payments. I had to turn the TV off - I suddenly felt unwell - so I don't know if he's still proposing that 95% of all households get a tax cut, raising taxes on businesses during recession, raising capital gains taxes during a liquidity crisis, ending genocide, famine and starvation in Africa, opening up the war in Afganistan, and taking it into Pakistan. Why not? He has already cut all ties to planet earth.

Can't the populace hear what he is proposing? This is just a dismantling of the economy - right away - all in one go - taking out what is there before the final, resounding crash where it all disappears, and giving it to those who jumped into the deep end of consumer debt before remembering that they couldn't swim. If I were an anarchist, I'd vote for him. If I were Hugo Chavez, I'd idolize him. If I were Olmert, I'd launch a war with Iran before America becomes so poor we can't help Israel.

Oh, I forgot to mention, to ensure that the market places would completely lock-up and die, Obama proposed a freeze on all foreclosures "till we can get things straightened out." That ought to thrill the banks - they are forced into foreclosing because the purchaser refuses to pay and can't or won't negotiate a reasonable alternative, so Obama, the lawyer, the teacher of constitutional law, will just step in violate the mortgage contract's terms and deny the lender any relief whatsoever. That'll do a lot to free up credit!

I can't wait to see the debate - that will be the event where McCain gets to say, that he too will propose almost identical programs as his dear friend Senator Obama, but they will be based upon his years of experience, his maverickness, and his proven track record of reaching across the aisle. And he won't freeze no stinking foreclosures, because under his presidency there won't be any, he will just buy all the mortgages as they turn bad.

Post 11

Monday, October 13, 2008 - 5:43pm

Steve wrote:

Can't the populace hear what he is proposing?

Steve, I see you are still too good-hearted in your belief in the innate intelligence and well-meaning of the general populace. I honestly wish I could have found a way to hang onto a similar viewpoint, but I began loosing it sometime in my 40s. From my current vantage point, I believe that in my youth I was very naive about the nature of others, but I was also much happier in that naivety. This is not a criticism - just some wistful nostalgia.

Regards
--
Jeff

Post 12

Monday, October 13, 2008 - 8:54pm