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Guest Post: Why QE Won't Create Inflation Quite As Expected

Tyler Durden's picture


Submitted by Charles Hugh-Smith of OfTwoMinds blog,

The Fed can create money but if it doesn't end up as household income it is "dead money."

In the consensus view, the Federal Reserve's unlimited quantitative easing (QE3) programs will do two things: 1) boost stocks and other "risk on" assets and 2) generate inflation. The two follow-on effects are related, of course; gold and other hard assets are rising in anticipation of higher inflation.

But all is not quite as it seems when it comes to the inflationary effect of creating money. I'm going to cover a lot of ground here so buckle up and grab your favorite stimulating beverage.

Let's use some examples to illustrate key features of the relationship between money creation and inflation. Let's say a central bank prints $1 trillion in cash currency, digs a big hole and buries it. Does that $1 trillion in new money cause inflation? No, because it never got into the hands of people who might trade it for goods and services in the real world.

Recall that the premise of monetary inflation is straightforward supply and demand: when money is abundant and goods are scarce, the price of goods rises as abundant demand (everybody has lots of cash or credit) meets limited supply (limited oil, gold, grain, etc.) in an open marketplace.

Let's say the Fed electronically creates $1 trillion and metaphorically buries it in some account where it sits as "dead money." It cannot trigger inflation because it isn't reaching the hands of people who might use it to buy scarce goods and services.

Let's also recall that money is destroyed, not just created, when assets fall in value and bad debt is written down. Consider a house purchased for $350,000 at the top of the real estate bubble with a $50,000 cash down payment and a $300,000 mortgage. The owner defaults and the house is sold for $150,000. The $50,000 down payment was cash; it was not “on paper.” It has not been transferred to someone else; it has vanished.

The same can be said of the $150,000 the bank lost on the mortgage. The bank’s cash reserves (capital) take a $150,000 hit. That was real money, too, and it wasn’t transferred to someone else; it disappeared. Thus $200,000 of real money has been destroyed.

To the degree that immense overhangs of bad debt are slowly being written off, money is being destroyed. If the Fed “prints” $500 billion a year, and write-downs erase $500 billion, the money supply hasn’t expanded at all.

The Fed bought $1.1 trillion in mortgage-backed securities as part of its earlier QE interventions in 2009-10. Notice that the $1.1 trillion has already fallen to $850 billion--a decline of $250 billion in just a few years. The loans were paid down, paid off or written off.



According to the Balance Sheet of Households (, home mortgages have declined from $10.3 trillion in 2009 to $9.7 trillion in 2012. Credit is being destroyed in the primary asset of the American household, their home: one-third have zero equity (underwater), millions more have insufficient equity to borrow against/extract, and millions more are not creditworthy enough to borrow more, even though they have equity in their house.

The decline in asset values has destroyed money and credit.

The general assumption is that the Fed buys dodgy MBS from banks which then take the money and dump it into the stock market, pushing stocks higher. This assumption fails to consider the weak balance sheets of banks, which will soon be required to post some collateral behind their trillions of dollars of outstanding derivatives.

The favored collateral is U.S. Treasury bonds, and so banks may be constrained by their need to build reserves against future writedowns. They may end up buying Treasuries as collateral rather than gambling in the equities market. The newly created money may end up as "dead money" in reserves, not cash propping up equities.

A number of indicators suggest money is not flowing into hands which might actually trade it for goods and services. Consider money velocity, courtesy of Chartist Friend from Pittsburgh:



The velocity of money buried in a hole is zero. The velocity of hoarded money is also zero. The velocity of credit that is never used (i.e. no money is actually borrowed and spent) is also zero. Money that is created but which has zero velocity cannot spark inflation.

If money were flowing into real-world households, we'd expect to see household incomes rise. Instead we see falling incomes. Here is the real (adjusted) income for the 45-54 year old age bracket, when lifetime earning tend to peak (courtesy of



Ouch. Income, Poverty and Health Insurance Coverage in the United States: 2011 According to the Census Bureau, "In 2011, real median household income was 8.1 percent lower than in 2007."

If there is net expansion of the base money supply, it isn't finding its way into household incomes where it could be spent on real goods and services.

As for the "wealth effect," it only affects the 5% who own enough equities to make a difference. That narrows the whole "wealth effect" to 7 million people out of 142 million workers.




Interestingly, the top 5% is the only demographic that is actively deleveraging, i.e. reducing debt rather than borrowing more:


Add all this up and here's what we get: money is not just being created by the Fed, it's being destroyed by declines in asset valuations and writedowns of impaired debt. Credit may be expanding but the top rung of households is paying down debt, not borrowing more, and the bottom 95% are unable to add much to their already staggering debt load.

Incomes are declining, providing a smaller base for both spending and borrowing. The top 5% may be experiencing a "wealth effect" as stocks soar but 7 million people cannot levitate the entire $15 trillion U.S. economy much while the incomes of the 137 million other workers are stagnant or down.

Money velocity is plummeting and banks are hoarding Treasuries as much-needed collateral.

It's difficult to see how these forces could generate inflation. There may be new money and credit being created, but very little of it is flowing to households whose spending in the real economy drives inflation.

New video program: The Federal Reserve: Flawed Premise, Mistaken Role:



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Thu, 09/27/2012 - 12:15 | 2835669 Mr Lennon Hendrix
Mr Lennon Hendrix's picture

lol k

Thu, 09/27/2012 - 12:19 | 2835684 Stackers
Stackers's picture

Mr.Smith, what happens when the international market dumps their trillions in "dollar reserves" into the market due to a lack of faith in the Federal Reserve Note due to excessively loose monetary policy ? Money volecity could explode in the blink of an eye if the world decides to dump it's dollar "reserves". And there is not a single thing the Fed could do to stop it.

Thu, 09/27/2012 - 12:19 | 2835694 Jean Valjean
Jean Valjean's picture

Bingo Stackers, you beat me to it.

Thu, 09/27/2012 - 12:22 | 2835706 Mr Lennon Hendrix
Mr Lennon Hendrix's picture

Yet we don't need to go that far.  Keep it simple.  An increase in supply and a decrease in demand will find the equilibrium of the dollar's price (P*) lower.

This is inflation, as everything denominated in dollars will have increased in value vs the dollar.

Thu, 09/27/2012 - 12:25 | 2835715 Mark Carney
Mark Carney's picture

FedEx made i nice delivery to my office today.....happy day if you catch my drift?? ;)

Thu, 09/27/2012 - 12:26 | 2835727 Newsboy
Newsboy's picture

Hunker-Down, It's what's for dinner.

Thu, 09/27/2012 - 12:38 | 2835771 El Viejo
El Viejo's picture

Smith sounds like a closet MMTer here.  Please elaborate Mr. Smith.

Thu, 09/27/2012 - 12:44 | 2835791 ParkAveFlasher
ParkAveFlasher's picture

Does FedEx make boat-to-boat deliveries?  Really don't want to pull 'er in, the fishing's really sweet right now.

--sent from my iPhone5

Thu, 09/27/2012 - 12:53 | 2835833 El Viejo
El Viejo's picture

Love the article BTW.  Have been crying "QE for the common man" for some time now, but they will not do it because of the moral hazzard.  Funny, they had no problem with moral hazzard when it was beneficial to them.

Thu, 09/27/2012 - 12:58 | 2835847 foodstampbarry
foodstampbarry's picture

--sent from imanidiot5.

Have you got your obama sign up on your front lawn yet?

Thu, 09/27/2012 - 13:10 | 2835905 El Viejo
El Viejo's picture

Mechanics trumps idiotology every time.

Thu, 09/27/2012 - 13:10 | 2835912 LULZBank
LULZBank's picture


Submitted by Charles Hugh-Smith of OfTwoMinds blog,

You guys missed the clue in the intro... of TWO minds i.e. confused.


- Sent from my stolen Nokia 3210

Thu, 09/27/2012 - 14:14 | 2836033 El Viejo
El Viejo's picture

Two ears = 3D hearing.

Two eyes  = 3D vision.

Man and Woman join and a Child is born.

As long as they don't face in totally opposite directions.


Thu, 09/27/2012 - 13:24 | 2835969 silverserfer
silverserfer's picture

 why ya hatin? wife leave you for someone who can still get it up?

Thu, 09/27/2012 - 12:28 | 2835736 Mr Lennon Hendrix
Mr Lennon Hendrix's picture

New Playboy's College Party School Rankings is out??

Pam Anderson made her first cover on that issue.

Happy anniversary Pam!

Thu, 09/27/2012 - 12:55 | 2835837 Canadian Dirtlump
Canadian Dirtlump's picture

It wasn't some of that maple syrup we had stolen from the strategic reserve last month was it? Probably shiny maples?


The inflation bomb may be delayed in the afoermentioned fashion but the crash will be the crash. This being said, would it be fair to say that banks can now gamble with the free fed money instead of what formerly would have been customers deposits? This must be why some banks are sending lower end retail banking customers to the wood shed. Motherfuckers.

Thu, 09/27/2012 - 13:04 | 2835871 walküre
walküre's picture

Good timing. The lakes are stacked with trout. It's a good day to go fishing with the dingy.

Thu, 09/27/2012 - 13:13 | 2835923 Canadian Dirtlump
Canadian Dirtlump's picture

tomorrow I had planned to go on a canoe trip with some buffalos.

Thu, 09/27/2012 - 17:55 | 2836903 Mr.Bigfoot
Mr.Bigfoot's picture

Fools! place your gold and silver in SECURE safe deposit boxes at your local bank. Boating is unsafe

Thu, 09/27/2012 - 18:10 | 2836938 JeffB
JeffB's picture

Safe deposit boxes at your local bank aren't necessarily safe either, as some have learned to their dismay.


Thu, 09/27/2012 - 16:19 | 2836173 SafelyGraze
SafelyGraze's picture

".. the Fed buys dodgy MBS from banks which then take the money and dump it into the stock market .. [banks]  end up buying Treasuries."

which all looks like a super fun game

it's easy to play. according to wikipedia:

[keep away] One person stands in the center (and is called the consumer or citizen or wage-earner or home-owner) and the rest stand outside the circle.

A monetary authority outside the circle must then exchange the bank medium through the circle to another corporate person outside the circle with the goal being to prevent the natural person who is "it" from getting to the bank medium.

Thu, 09/27/2012 - 16:12 | 2836611 sessinpo
sessinpo's picture

And why inflationist have been wrong at this point (not really wrong but at least early) is the concept that not only is money created and destroyed, but that servicing debt is also the destruction on money. In other words, instead of that money serving a productive useful purpose of generating more wealth, it is being spent, destroyed on products and services already consumed.


After the trillions already created, and would be $16T + in US debt, $16T plus in US central banking funding around the world and that doesn't include any off book rehypothecation and printing, we should have had massive hyperinflation already. But we haven't. Reason why - all that money created isn't circulating throughout the economy which would be required for such inflation.

Thu, 09/27/2012 - 12:35 | 2835760 disabledvet
disabledvet's picture

Bingo yes...Poker no. The fact is the dollar weakens so yes, there is a repatriation "effect" of sorts. But the dollar is the world's reserve the inflationary effect is obviated. In the interests of intellectual integrity I was the biggest card carrying member of the Inflationista Class out there...and I was DEAD WRONG. Unlike the so called experts I do not argue with the this case the totality of the Treasury Complex...which is SCREAMING deflation. Given the amount of monies....meaning credit's hard for me to argue against "the Defense Spending Effect." And I don't. Our current Sec Def is a very good one...not that he needs me to say that...and should his boss win as is predicted will be a VERY powerful one indeed. Backing him up is no less than General Petraeus himself. As Colin Powell famously said "we have a lot of tools in our tool box."

Thu, 09/27/2012 - 13:31 | 2836000 blunderdog
blunderdog's picture

Folks here ain't tryin to hear 'bout no deflation. 

The "average" Hedge-poster wants hyperinflation tomorrow so their gold skyrockets in value, but that's just not going to be the way it happens.

Thu, 09/27/2012 - 12:20 | 2835699 Mr Lennon Hendrix
Mr Lennon Hendrix's picture

Stack, although this is a fair point, we don't need to ask any "if/then" questions.  We can use strict math to show what will happen.

Mr Smith states coreectly that the Fed is increasing the supply of dollars while there is little demand for them.  This will decrease the value a la price (P*) of the dollar and that will increase all asets valued in dollar terms.  This is inflation in a nutshell.

Way to suck Mr Smith.

Thu, 09/27/2012 - 12:24 | 2835712 otto skorzeny
otto skorzeny's picture

gold will drop w/equity deflation they quickly soar.

Thu, 09/27/2012 - 12:27 | 2835733 ATM
ATM's picture

Perhaps in a static world but the world is not static.

I prefer to view the Feds actions as akin to placing a gasoline pump in ones basement and turning it on. The basement floods with gasoline but it takes a spark to ignite the coming explosion.

Same thing with inflation. We all know that printing will cause inflation but it is not a linear event. A triggering event sets it off. Have no idea what that will be or when that will be but I do know we are living in a house whose basement is being filled with gas. It's only a matter of time.

Thu, 09/27/2012 - 12:30 | 2835740 Mr Lennon Hendrix
Mr Lennon Hendrix's picture

Flooding the basement with a standard of currency that holds no intrinsic value (the fiat dollar) is more like trying to swim in a shark tank.

Thu, 09/27/2012 - 13:46 | 2836054 WakeUpPeeeeeople
WakeUpPeeeeeople's picture

Didn't the Bearded Ben claim a few months back that he can remove the printed money fron the economy in 15 min if he saw the need for it. 

Thu, 09/27/2012 - 13:11 | 2835802 BlandJoe24
BlandJoe24's picture

What's missing in your point is: 1. global context  2. the size and pace of credit destruction.  and 3. the obviousness of following the money

1. if you  only look at the US as an isolated unit, then yes, value of the dollar goes down.  but in a global context, the dollar is the "least weak".  other currencies will out control-P and out disintegrate the dollar, so on a relative basis (at least in the short-medium term) the dollar value will increase.


2.  the size and pace of multi trillion dollar credit destruction and price-discovery driven collapse is exponentially larger than printing can keep up with.   so again, on a relative basis the dollar will strengthen.  and not just markets will purposefully prevent a dollar collapse because the super-rich need a reserve currency to hold value through a collapse, and for at least a while, the dollar is their choice.


3.  where are the big banks and trans-nationals - who could do anything with their money and have actual control over monetary policy  - putting it? Yes, they are putting some in gold, but for the most part they are hoarding it in USD cash and cash equivalents (treasuries).  They are anticipating a rise in the value of cash.  They are anticipating deflation,  not inflation.  If/when deflation hits and the value of each dollar soars, guess who "wins" big?  Guess who will be able to suck up hard assets at pennies on the dollar?  Guess who will have even more power over those in debt to them?  Guess who's "king" in a deflation?

Thu, 09/27/2012 - 13:16 | 2835924 akak
akak's picture

You may put faith in your unsubstantiated theories, but I will go with historical evidence, and history has yet to witness the first example of the exponentially-increasing IOUs of an exponentially-indebted person or entity becoming MORE valuable in direct proportion to that person or entity's bankruptcy.

Thu, 09/27/2012 - 13:39 | 2835997 BlandJoe24
BlandJoe24's picture

uh...except the history of the last....xxxx years?

IOU's, bankruptcies, and value involve (at least) two parties, so relativity matters.  as long as you have something left , bankrupt is more valuable (has more power and choice) than bankrupter.... so yes, the us is exponentially bankrupt, but the rest of the world is exponentially bankrupter

of course fiat currency is an illusion, and will eventually evaporate... but it's a mutually agreed upon illusion, and thus functions....and for now (and probably a while, even though "akak" says otherwise)... the players (ie the super-rich)  have chosen the US dollar as their reserve illusion, and they will defend it with all the force they can muster.  and sure, some of them will fall, but some will claw further up the pyramid of greed



Thu, 09/27/2012 - 13:44 | 2836023 akak
akak's picture


uh ... except the history of the last ....xxxx years?

Well, I have no idea what parallel universe you have been inhabiting for the last xxxx years, but in the universe in which I live, the dollar has been steadily depreciating, as general prices and the cost of living continue to increase.  There has NEVER been one SINGLE year where this has not been the case under our purely fiat monetary system.

Deflationary flat-earthers: gotta love 'em!

Thu, 09/27/2012 - 16:24 | 2836640 sessinpo
sessinpo's picture

Of course prices tend to increase over time. You are only looking at things domestically. When you make a comparison globally, the US dollar buys more then most currencies. Gasoline is just one example.

Inflationist flat-earthers: gotta love 'em!

Thu, 09/27/2012 - 18:42 | 2837005 NidStyles
NidStyles's picture

That's not even close to being accurate.

Thu, 09/27/2012 - 16:41 | 2836707 Panafrican Funk...
Panafrican Funktron Robot's picture

There is a subset that buy into the "balance sheet recession" / Japan 2.0 scenario.  It's possible, we seem to be largely following the script to a T thusfar.  

Thu, 09/27/2012 - 16:21 | 2836632 sessinpo
sessinpo's picture

I will assume you miscommunicated your message.

For example, my IOUs would not become more valuable if I went bankrupt. But that is dealing with one person or entity using the same commodity for transactions or transfer of wealth.

In the global atmosphere, we are talking about competing currencies which is different, not the same commodity for transactions.

The US dollar is competing with the Euro. Each of them is competing with other currencies. That is why I keep on pointing out currency war. The US wants the Euro to be weaker because it makes it easier for the FRB to print.

I find it hilarious the back and forth claims of currency manipulation because that is what central banks do. They are in competition with each other. It cracks me up.

Thu, 09/27/2012 - 16:53 | 2836739 Panafrican Funk...
Panafrican Funktron Robot's picture

"The US dollar is competing with the Euro."

You're describing the surface level.  What else is going on?  USD vs. EUR is like Obama vs. Romney, same controllers at the top.  They couldn't give a rats ass as long as USD or EUR is dominant.  The actual fight:

Russia and China have been pushed into becoming frenemies.  This is extremely dangerous to the UK/US team.   

Thu, 09/27/2012 - 13:40 | 2836019 diesheepledie
diesheepledie's picture

Exactly correct. The hyperinflationists don't consider the global picture. There cannot be hyperinflation in a reserve currency. Protection of that status is key, and fortunately the USA still has a strong enough military to undermine any other up and coming challengers. That is why Bush(s), Cheney, Rumsfeld, Kissinger, McNamara, etc were so great. They understood the wisdom of maintaining an unstable feudal world. The whole world needs to be be falling apart and looking like shit in order to maintain a stable dollar. We need war lusting neo-cons and economy destroying international mega-banksters to keep lighting brush fires around the world, fucking things up, so the the USA looks good. God Bless America!

Thu, 09/27/2012 - 13:41 | 2836034 akak
akak's picture

This was worthy of MillionDollarBonus himself!

Thu, 09/27/2012 - 16:48 | 2836727 VonSalza
VonSalza's picture

Sir, i tip my hat to you

Mon, 12/31/2012 - 01:24 | 3108268 ich1baN
ich1baN's picture

"When new money is created on a grand scale, it must go somewhere and have some major consequences. One of these will be greatly increased volatility and instability in the economy and financial system." -- J. Anthony Boeckh, Ph.D (Chairman, Bank Credit Analyst 1968-2002,The Great Reflation, Boeckh Investment Letter)

Thu, 09/27/2012 - 13:51 | 2836074 aerojet
aerojet's picture

They aren't increasing the supply of dollars in any way that people can make use of them.  I have long contended that the inflation hypothesis is wrong.  What the Fed is engaging in is a giant accounting fix--they are essentially making it possible for the big banks to remain solvent in terms of accounting.  If you look at it in propeller head terms, you begin to understand what the hell they think they're doing.  They are keeping the big banks from having to declare bankruptcy by siphoning off all of their bad debts and nationalizing them through monetization. This activity also allows oustanding credit (credit is money) to continue increasing so that the government can continue to kick the can with deficit spending.  That's it--you get no net inflation, only the typicaly inflation that credit growth (because credit is money) produces.  Instead of organic credit growth, it is a forced variety, which is quite inferior.  But again, you aren't thinking like an accountant. 

All of it is designed to keep the status quo alive as long as possible.  They don't want deflation because deflation (oustanding credit collapsing, dollar re-valuing) means the saver wins, and if savers win, debtors are going to lose their asses.  Debtors like the federal government, every municipality in the country, every pension plan, every big financial firm gambling using margin, etc.  So it's also never been about rescuing underwater home owners, they don't care about those people or the widows and orphans with pensions and CDs.

Thu, 09/27/2012 - 14:35 | 2836149 BlandJoe24
BlandJoe24's picture

I agree with the points in your first paragraph.  i would add that another reason for the fed to buy up MBS is to make the liability of all the fraud endemic to mortgage paper over the last years "disappear" (into the basement of the fed).

As far as your second paragraph, it depends on who you mean by "they".  if the "they" is "who's in control", than it seems to me it's the super-rich (via the banks and multi-national corporations they run).  And they:

- are the creditors, to whom the debtors (governments, states, people, big firms, etc) will be exponentially more beholden in a deflation (see comment in my post above).  creditors benefit (power-wise) in a deflation.

- have been saving - they (banks, etc.) are, by every account - hoarding cash in record amounts.  ie: they are anticipating deflation and the expotential rise in the value of cash that deflation brings.

-  are interested in keeping the status quo alive as long as it keeps funneling money and power in their direction... if/when that changes, and they need a new "quo" to make them rich and powerful, then they will advocate/control/move to that "quo" and - unfortunately - will likely do so regardless of the suffering it inflicts on others.



Thu, 09/27/2012 - 14:19 | 2836180 Sean7k
Sean7k's picture

We may never have hyperinflation or even high inflation. As Smith makes painfully clear- deleveraging is offsetting the effects of money printing. It is in a closed loop. 

The banks are losing asset value, but being refloated with new currency that is sterilized from buying treasuries and keeping large cash balances. By not giving new loans, the money merely makes up for their losses. Those losses are traded to the taxpayer via the FED. 

The taxpayer isn't being forced to pay the full tax bill, so he is blissfully unaware of the coming danger. 

At some future point in time, two things will happen: the FED will declare the debt and ask the government to pay. Two, people will suddenly realize not all assets have the value they thought they did. 

At this point, one of two things happen: one, the people accept it and the level of austerity necessary coupled with a huge diminishment in entitlements or, two, the people will revolt in some manner.

Either way, the bankers win. Austerity means interest payments forever in amounts beyond their wildest dreams. Revolution means warfare that is financed and a heavier yoke for the people or they lose out on fake money that cost them nothing, while they now use their gold to re-establish themselves in a global reset.

There is the possibility that the people wake up and just withdraw from the system, but when the biggest story in America concerns the return of union refs, I'm thinking Americans are too ignorant to act.


Thu, 09/27/2012 - 12:26 | 2835728 Raymond Reason
Raymond Reason's picture

That is the FAIT accompli.  FIAT is a faith based system, and when it is abused, people lose faith.  It is almost inconceivable that it would not lead to inflation, despite convincing arguments for deflation. 

Thu, 09/27/2012 - 12:40 | 2835779 Bastiat
Bastiat's picture

Fiat accompli.

Thu, 09/27/2012 - 12:27 | 2835732 Hubbs
Hubbs's picture

This exactly my  dilemna for investing in stocks. They may go up in price nominally, but to cash out, you need to pay the tax man in dollars, and who knows what you'll actually keep of that to buy tangibles/energy/food.  Then if the money suddenly floods the system as everyone realizes their $ holdings are worthless, you take another hit. In which case, many of the  "rich" (on paper) 5% also may have nothing.  So, watch how much land and gold they are acquiring.  They ain't stupid.

Thu, 09/27/2012 - 16:28 | 2836649 Catch-22
Catch-22's picture

... also, a trip into stocks involves a broker and the return OF your money, not the return ON your money, is still the biggest concern…

Thu, 09/27/2012 - 12:31 | 2835744 Killtruck
Killtruck's picture

Spot on, Stackers. Fuck yeah.

Thu, 09/27/2012 - 12:43 | 2835788 blunderdog
blunderdog's picture

You can't sell stuff that no one will buy.

Thu, 09/27/2012 - 12:48 | 2835811 ParkAveFlasher
ParkAveFlasher's picture

"Why not diamonds?" - Ron Paul, to Ben Bernanke, regarding Central Banks' preference for gold bullion reserves.

Thu, 09/27/2012 - 13:32 | 2836002 aerojet
aerojet's picture

That had to be a tongue-in-cheek question.  Everyone knows that diamonds aren't rare at all and that the stockpiles are being held off of the market to create perceived scarcity.

Thu, 09/27/2012 - 12:44 | 2835789 Sean7k
Sean7k's picture

They would lose trillions, effectively giving the dollar a debt jubilee. They would make US goods a great buy and drive the value of the dollar back up while destroying their own export markets. Not that it matters, ALL CENTRAL BANKS ARE IN COLLUSION. That is why they are buying foreign stocks to boost all the markets. 

It is never as simple as it seems.

Thu, 09/27/2012 - 12:46 | 2835806 dmger14
dmger14's picture

True dat.  Velocity increases in the good times and bad, and we are bad and moving badder.  Also, asset value declines only lead to money supply declines when debts are defaulted on.  If I own a house and am underwater but still making payments, there is no money supply decline.

Thu, 09/27/2012 - 12:51 | 2835823 Lester
Lester's picture

Author contends there are 7,000,000 holders of the specific equities or instruments that might benefit from the QE...

Way over estimated. Most Americans considered in "the top" these days are not widely divested. If you got wealth, unless inherited or endowed, your wealth is directly tied to your enterprise. One reason so many employee-owned ESOP and other similar entities arise is so an owner can cash-out. Not like employees would buy a corp unless there was financing arranged etc.

There ain't that many liquid rich; asset rich with cash-flow, but once the cash stops flowing (and it will) what they perceived to be a fortune will no longer deliver.

Banking and inventory management practices, along with Govt deliberate effort, are the chief culprits in The Murder of American Business

Thu, 09/27/2012 - 13:06 | 2835885 mick68
mick68's picture

You are correct, but until this happens, the "dead money" will remain so and have little effect on inflation.

Thu, 09/27/2012 - 13:08 | 2835902 tired1
tired1's picture

It wont until it does...

Thu, 09/27/2012 - 13:29 | 2835991 aerojet
aerojet's picture

What makes you think they are even remotely capable of doing what you suggest?  The central banks are clearly coordinating their actions.  There will be no surprises.

Thu, 09/27/2012 - 13:49 | 2836068 YouAreBliss
YouAreBliss's picture

The Money Velocity spikes, as everyone spends (and hoards) anything of value (toilet paper and canned beans?) to preserve what little purchasing power is left of their savings.   Presto - instant - uncontrollable hyper-inflation. 


Like a run away nuclear reaction - the melt down comes quick. 


And the Fed can do nothing to stop it - other then issue a new currency backed by real assets (gold, federal lands, farm land, etc...) - hello Blue (dirt) dollars.

Invest in chalk boards - you'll see a lot of them!!!

The Ascent of Money Part 4b

Fri, 09/28/2012 - 02:56 | 2836890 cranky-old-geezer
cranky-old-geezer's picture



Money volecity could explode in the blink of an eye if the world decides to dump it's dollar "reserves".

Velocity isn't the problem.  Loss of confidence is the problem.  Loss of confidence is what makes a currency lose value and motivates currency holders to dump it, along with any security denominated in that currency (like treasury bonds).

Loss of confidence can't be measured and shown on charts like velocity can. 

Velocity is a ruse to distract attention from the real issue, loss of confidence.

Loss of confidence tends to happen rather suddenly too, something else you can't look at a chart and predict.

Let's also recall that money is destroyed, not just created, when assets fall in value and bad debt is written down. 

That's where I stopped reading.  Smith is a moron when it comes to monetary theory.  

No, declining asset values and writing off debt does NOT destroy money.  It simply means the same amount of currency in circulation is now chasing fewer assets, a factor of inflation.

He's a moron when it comes to bank accounting also. 

When debt is written off, reduction of an asset, done with a credit accounting entry, the corresponding debit accounting entry is to writeoff expense, an account on the P&L statement, which reduces profit.  

No money was involved in that accounting entry.  No money disappeared from the money supply.

Same thing when assets values are marked down.  Credit the asset account, debit writedown expense on the P&L.  No money involved, no money disappears from the money supply.

So his argument about asset mark-downs and debt writeoff reducing the money supply (deflation) is bullshit.  Just plain bullshit.

As I explained, it actually increases the money supply relative to asset values, which is inflation.

The amount of debt written off is the amount of cash that will never come back to that bank and be taken out of the money supply.  It stays in the money supply forever.

So the entire premise of his article, writing off debt and marking down the value of financial paper (mark to market?) reduces the inflationary effect of money printing, is blatantly false. 

I showed how it actually increases the inflationary effect.

Thu, 09/27/2012 - 12:50 | 2835818 slaughterer
slaughterer's picture

OT: 12 noon, perfect 50% Fib retrace of the drop of the last two days.  Algos in "stall and see" mode. Need some Robotraders.

Thu, 09/27/2012 - 13:01 | 2835859 Snakeeyes
Snakeeyes's picture

Agree. Inflation won't hit until banks start lending in housing. And with today's terrible economic numbers, I doubt if banks will do it.

Thu, 09/27/2012 - 12:16 | 2835673 SoundMoney45
SoundMoney45's picture

Has the author visited a grocery store over the past five years?  You cannot eat CPI hedonic adjustments.

Thu, 09/27/2012 - 12:24 | 2835711 BeetleBailey
BeetleBailey's picture

He shops where Bernanke shops: Circa 1949 Food-O-Rama

Thu, 09/27/2012 - 13:07 | 2835897 akak
akak's picture

Don't be silly --- vampires don't shop for food.

Fri, 09/28/2012 - 09:10 | 2838297 BeetleBailey
BeetleBailey's picture

Indeed akak...I stand corrected.

My bad.

Thu, 09/27/2012 - 13:04 | 2835790 akak
akak's picture

This quasi-Keynesian "money being destroyed by falling asset values" gibberish is SO idiotic, I am amazed that anyone has the guts --- and the monetary cluelessness --- to make it.  Charles has obviously been doing some shopping at the Karl Denninger House of Crazy lately.

To equate falling asset values with monetary destruction is bullshit pure and simple.  For the last fucking time, you Douchinger clone, ASSETS ARE NOT MONEY!  (Nor is any and ALL debt, a basic grade-school-level mistake that the deflationists just love to trot out.)

Charles, you may have "two minds", but get back to us when at least ONE of them is working properly.

Thu, 09/27/2012 - 13:06 | 2835884 Zexe
Zexe's picture

actually i am amzed you are the only sane person in this community to point out this idiocy of falling asset values equals money destruction. this idiot cant tell the difference between assets and liabilities, he has never seen a balance sheet of a bank, never mind understand fractional reserve banking. he tals about M1 M2  M this M that but does not understand money does not dissapear....if anything financial asset destruction is inflationary, you have less goods and assets in total and the same amount of money.



Thu, 09/27/2012 - 13:54 | 2836083 Manipulism
Manipulism's picture

Look at his shirt>

all you need to know.


Thu, 09/27/2012 - 14:01 | 2836115 akak
akak's picture

Hey, it looks like many of mine!

Regardless, I could never trust anyone who is oft wominds.

Thu, 09/27/2012 - 15:30 | 2836439 Miss Expectations
Miss Expectations's picture

Well, there was a time when Charles wore no shirt.  This is an improvement.

Thu, 09/27/2012 - 15:19 | 2836387 kito
kito's picture

gee, i wish the real world could subscribe to akaks monetary theory, so that the next time i lose my pants in a stock, and the VALUE OF MY ASSET gets sliced in half, i could call my broker and say, hey THERE WASNT ANY MONETARY DESTRUCTION!!!! GIVE ME BACK MY PRINICPAL INVESTMENT, which would just so happen to be in DOLLARS!!..........................youre too preoccupied with your deprecation to ever consider the lunacy of what you aver....................................

Thu, 09/27/2012 - 15:39 | 2836435 akak
akak's picture

Stocks are not money.

Even less are stock valuations money.

Being clueless of such fundamental and utterly basic concepts, your successful journey on the road to ruin is assured.

Say "Hi" to Karl Denninger for me when you get to the end of it.  He'll be the one lying on a mattress stuffed with dollar bills, moaning "Goddamn gold, you can't eat it ... can't eat it ... can't eat it ..."

Thu, 09/27/2012 - 15:52 | 2836542 jimmyjames
jimmyjames's picture

Stocks are not money.


Stocks are money equivalents same as bonds same as any liquid asset-

If you buy a stock and the price drops--you lose "money"...if the price make "money"

Did peoples net worth (money supply) increase during the housing boom?

Did peoples net worth (money supply) decrease during the bust-

Don't forget the personal ATM scam that evolved from "equity"...did or didn't equity "act" like money--was it "inflation"?..was it inflationary"

Kito is right-you are the assbackwards usual

Thu, 09/27/2012 - 16:01 | 2836578 akak
akak's picture


If you buy a stock and the price drops--you lose "money"...if the price make "money"

Did peoples net worth (money supply) increase during the housing boom?

Did peoples net worth (money supply) decrease during the bust-


My God you are an idiot.

One's paper net worth is FAR from the same thing as actual money.  I mean, God damn, how can you even dare parade such wild ignorance as factual?

Yes, people talk about "making money" when their portfolios increase in value, but there is NO monetary creation involved in that process whatsoever.  Your specious and ignorant definition of "money" as virtually anything and everything financially related is ludicrous and meaningless.

Really, where do you blazing idiots come up with this shit?


Thu, 09/27/2012 - 16:21 | 2836629 jimmyjames
jimmyjames's picture

LOL--Ak doesn't even know how the stock markets function let alone the fucken monetary system-

You are in deep need of study-


Thu, 09/27/2012 - 21:55 | 2837420 Tompooz
Tompooz's picture

For my education please, akak:


How come rising house/asset  prices are inflationary, but falling asset prices are (according to you and some others here) also inflationary? 

And when debt is paid down, is that not "destruction of money" according to monetary theory?

Fri, 09/28/2012 - 11:30 | 2839031 1911A1
1911A1's picture

It depends on how you are defining inflation.  If inflation is expansion of the money supply, change in asset prices is not inflation.  However, if an unencumbered asset is used to secure a new loan, then money supply would increase and thus be inflationary.  Change in asset prices can also be caused by changes in supply and demand, which is not inflation under this definition.

If you define inflation as a general increase in prices, then an aggregate increase in asset prices by definition would be inflation.

And when debt is paid down, is that not "destruction of money" according to monetary theory?

Yes.  It is the opposite of creating a loan which expands the money supply.


Thu, 09/27/2012 - 16:30 | 2836664 kito
kito's picture

again, your response is nothing more than self serving, without any explanantion to back up your insane view that money is not burned up when stocks, derivatives, or any other asset lose value.............

Thu, 09/27/2012 - 16:47 | 2836721 1911A1
1911A1's picture

Currency, demand deposits, time deposits, commercial paper and T-Bills do not "burn up" when other assets decline in value.  Based on the generally accepted definition of "money supply", akak is correct.

Thu, 09/27/2012 - 17:22 | 2836821 kito
kito's picture

nobody is arguing those burn up when there are "other" assets that decline in value (wow, at least you recognize there are "other" assets).......the point is, that when you leverage the point there is a bubble that bursts, you better believe that the popping of that bubble means destruction of wealth, loss of monetary value of assets, and with that comes deflationary pressures.......................not really hard to grasp.............

Fri, 09/28/2012 - 11:31 | 2837027 1911A1
1911A1's picture

There are always non-monetary assets, thus the existance of the term "monetary assets".  I don't understand what your point is regarding that.

When asset bubbles blow up, the purchasing power of the asset owners goes down, the purchasing power of the money owners goes up, ergo they are not the same.

Thu, 09/27/2012 - 16:29 | 2836659 sessinpo
sessinpo's picture

And when you go apply for an equity $150,000 loan to pay for your kids college tuition on a $200,000 paid off house but the loan officer says its only worth $100,000. You'll scream at the banker.



You crack me up.

Thu, 09/27/2012 - 16:44 | 2836702 1911A1
1911A1's picture

M4 doesn't even include stocks and bonds as "money".

Assets (i.e. my house, bicycle, car) are not necessarily money, but they can be traded for money.


Thu, 09/27/2012 - 17:05 | 2836761 sessinpo
sessinpo's picture

Assets are a store of wealth measured in money. Once you understand that, you'll understand my point. You prove my point by saying that the asset can be traded for money.

Thu, 09/27/2012 - 21:32 | 2837046 1911A1
1911A1's picture

No you seem to have no point.  The fact that we can value an asset in terms of money does not mean the asset is money.  If the asset was money there would be no need to secure a loan of money against the asset.  We can value an asset in any medium of exchange we so choose such as oz. of gold, barrels of oil, hours of work, head of cattle, etc.

Sat, 09/29/2012 - 06:48 | 2841258 sessinpo
sessinpo's picture

I'm sorry you don't understand that everything must be measured for comparison purposes. In society, money, cash, is that measure. Until you understand that, there is no point for further discussion with you.

It would be like telling you water is wet, but then you tell me no its not, you just think its wet because you are thirsty. Well, I'm sorry, the rest of us have to live in the real world which means I need water to rehydrate my body.


Like I said, the point which you keep on missing, is assets are a store of wealth, BUT MEASURED IN MONEY. Again to prove my point which you say I don't have simply because you don't see it. Go look for an asset you want such as a house or car or whatever. Then tell that seller that you will buy their house or car for a specific quantity of donuts, or maybe cashews. Then be prepared to get laughed at. Then come back with cash and see a different attitude from that seller.


This is why so many Americans are poor. While I say assets are money, I also state clearly as I have in every post in this thread that assets are a store of value, WHICH IS CONVERTED INTO CASH, when you want to do a transfer. Go ahead, try eating your house or car. Then come back and refute me statement after you tried that and found you had to transfer that asset to money to buy groceries at the store. This is also why I rant against our current monetary system and the FRB, because they have a monopoly on that transfer, the use of money.


As for: "We can value an asset in any medium of exchange we so choose such as oz. of gold, barrels of oil, hours of work, head of cattle, etc."

Wrong again. You can only value an asset in a medium of exchange the other party is willing to accept. And at this point in time, dealing with reality, that medium is US dollars. Oh sure, you might find the rare occassion that you might be able to barter in other mediums. And again, you prove my point by pointing out example of cattle, oil or hours worked. How are those things measured and payed?

Answer, US Dollars.

Thu, 09/27/2012 - 12:44 | 2835792 Raymond Reason
Raymond Reason's picture

College tuition, hospital room rent, cell phone bills.

Thu, 09/27/2012 - 13:18 | 2835941 Blankenstein
Blankenstein's picture

Apartment rent, cable bill, clothes, shoes, personal items .....


Has the author monitored the price of toilet paper, kleenex or papertowels?  In the past 5 years the sizes have gotten smaller, while the prices have increased.  This is also true of certain grocery items.

Thu, 09/27/2012 - 14:06 | 2836139 Raymond Reason
Raymond Reason's picture

Phantom inflation.  Less paper on the roll, less cereal in the box.  No one will notice. 

Thu, 09/27/2012 - 15:45 | 2835908 MachoMan
MachoMan's picture

Exactly.  The thing is, not ALL of the printed money is stuffed in a hole.  This is why prices are increasing, e.g. groceries.  Some of it slips into the real economy and begins turning over.  The notion that inflation is maintained merely because banks are hoarding the money is patently ridiculous when faced with the fact of price increases across the board (except housing of course).  In the end, even this trickle up inflation can have the same effect as any other inflation...  it just takes longer...  and, sadly, this stagflation may be more painful, over the long term, than the alternatives.

Must be nice to write articles from the ivory tower.

Thu, 09/27/2012 - 13:58 | 2836103 aerojet
aerojet's picture

There has been a tremendous amount of wild speculation on margin in the commodities markets because it's the only place left to try and find some alpha.  Fuel prices are playing a big role in food prices, and speculators have taken oil as high as it can go, which honestly, isn't that high.  Deflation is still winning, you just don't know it yet.  Also, grocery chains are taking a huge hit--people aren't buying food!  So suppliers are taking a hit, and having to raise prices and shrink sizes. 

It's like this:  You have "fixed costs" associated with producing food items that are increasing because of fuel prices.  If your customers are disappearing, you can A) Raise prices (shrink the size) or B) go out of business.  So you raise and shrink in order to try and live another day. Get it?  It's not demand driven, it is being driven by unprofitability.  Now factor in other elephants in the room like pension obligations--all of a sudden a lot of employees are starting to retire and want to draw on their company-sponsored retirement plans.  Whoops!  The perfect storm!



Thu, 09/27/2012 - 14:10 | 2836152 akak
akak's picture

Yeah, OK Nixon, all these food price and cost of living increases over the last 40+ years are simply due to those diabolical "speculators", right?

The hysterical and ridiculous lengths that you deflationary flat-earthers will go to support your wild and unsupportable egghead theories in the face of all empirical evidence to the contrary is simply astounding.

Another shopper at the Karl Denninger House of Crazy.

Thu, 09/27/2012 - 12:17 | 2835682 Hedgetard55
Hedgetard55's picture

All I know is Ben is stealing my interest income and giving it to his bankster buddies, and he is transferring toxic MBS from insolvent banks to the taxpayer by debasing the currency.

Thu, 09/27/2012 - 12:19 | 2835691 LawsofPhysics
LawsofPhysics's picture

Theft is theft is theft, by inflation or by taxation.  Prepare.

Thu, 09/27/2012 - 13:01 | 2835854 Joe Davola
Joe Davola's picture

Doing a number on retirees.

Thu, 09/27/2012 - 13:56 | 2836093 Tango in the Blight
Tango in the Blight's picture

Ben the two of us need look no more
We both found what we were looking for
With a friend to call my own I'll never be alone
And you my friend will see you've got a friend in me
(you've got a friend in me)

Ben you're always running here and there
(here and there)
You feel you're not wanted anywhere
If you ever look behind and don't like what you find
There's something you should know you've got a place to go
(you've got a place to go)

I used to say "I and me"
Now it's us now it's we
(I used to say "I is me")
(now it's us now it's we)

Ben most people would turn you away
(turn you away)
I don't listen to a word they say
(a word they say)
They don't see you as I do I wish they would try to
I'm sure they'd think again if they had a friend like Ben

Like Ben
Like Ben
Like Ben

Thu, 09/27/2012 - 12:22 | 2835685 LawsofPhysics
LawsofPhysics's picture

Once again, total garbage.  Does velocity matter when there are no sellers, or if everything goes bidless or if the currency DIES?!?!  LMFAO!

Possession rapidly becoming 100% of the law.

Thu, 09/27/2012 - 12:57 | 2835842 youngman
youngman's picture

And I think it will happpen very fast...on a Saturday night.....a holiday weekend....come Tuesday.....everything will be locked up....or out....the big boys will be able to play in the Asian markets or something...we the little guys will be skinned buy now....and don´t have the oh shit moment

Thu, 09/27/2012 - 12:20 | 2835689 Dre4dwolf
Dre4dwolf's picture

Except the bank doesn't ever lose money on a mortgage thats being written down, it only losses the chance to make extra money.


Banks create the credit out of thin air to pay for the house, by taking promissory notes (mortgage note) on its books as an asset/deposit (as if it were cash deposited).


This is new money that enters the system, so before that house was purchased for 300,000, the bank created 300,000$ out of thin air then pretended to lend it out to the borrower so that he could buy the house, most inflation actually comes from banks making private "loans" to businesses and individuals.


When these loans "go bad" the bank isn't lossing anything, nothing is destroyed but future POTENTIAL revenue that would of been generated, the bank still made money from w/e mortgage payments + the down payment the "borrower" made, not to mention that the banks are securitizing and selling off these "mortgages" as investment paper.... most of it counterfeited (after auditing my own mortgage i found that they had sold it to dozens of people, and that they have indeed forged my signature numerous times to sell copies and copes of the note over and over).

Banks have nothing to lose, they take no risk making loans.

Read Modern Money Mechanics, its all in there, Fraud is the name of the game for banks, its... monopolized ponzi scheme with protection from big govt bailouts, bailouts that the banks only use to paper over the fraud/pay off investors with when the jig is up.


Thu, 09/27/2012 - 12:21 | 2835703 LawsofPhysics
LawsofPhysics's picture

"Banks have nothing to lose, they take no risk making loans."

Correct, no chance for  real consequences for bad behavior.  This is moral hazard and NOTHING will change until this is addressed. If banks were really "working" they would have to do something called due diligence and would have to eat the losses from their own bad decisions.

Thu, 09/27/2012 - 12:29 | 2835739 Dre4dwolf
Dre4dwolf's picture

Exactly, so the only way we will actually see hyper inflation is when the derivatives/mortgage fraud begins to be exposed and investors rush in to cash out, the banks will have to use all that bernanke bailout money to pay off investors and stay afloat , this will cause hyper-inflation as bank reservers are all drained while the bank is rushing to pay off scared investors that the bank has actually defrauded.

Banks defraud the homeowner, the government, the investors and the american people in general ESPECIALLY THE POOR by inflating the currency and raising the cost of living as a % of income of the poor, (poor go from spending 30% of their income on food/gas/housing to 70~90%).


Rich get richer with bailouts, poor get poorer by dollar being de-valued.


All the banks right now are a ticking  time bomb of inflation waiting to go off, the most sure fire way to cause hyper inflation is to inflate bank reserves out the ass , exactly what bernank is doing.... after-all that money has to chase assets eventually, its only a question of when and how it transfers from reserves to bank balances on individuals.


To ignore this is to ignore the largest issue with the entire system, its like ignoring the fact that the pin on the hand-grenade has been pulled and that eventually your gona throw it, where it lands no one knows (asset bubble explosion), most people think a lot of it will endup in precious metals, food prices, gas prices, fuel prices (housing and rental prices/cost of living/heating), oil


I don't think any one asset alone is going to hyper inflate, I think its going to be more of a broad form of inflation affecting everything.

Thu, 09/27/2012 - 12:45 | 2835801 scatterbrains
scatterbrains's picture

speaking of which UGA (gasoline fund) caught a wicked hardon this morning..  and again looks like it wants to beat SPY to break out highs. 

Thu, 09/27/2012 - 13:13 | 2835919 MachoMan
MachoMan's picture

Right, but who are the investors?  You seem to think that there is this mom and pop sort of meme...  all of whom will rush to the bank to exit.  It doesn't work like that...  it's MFG, et al...  the mothership siphons all the reserves back.  The investors get to play with the court system while the money is sitting at the mothership/parent bank/TBTF.

I think the bigger worry, in this scenario, is the loss of faith in the currency/system.

Thu, 09/27/2012 - 13:31 | 2835998 silverserfer
silverserfer's picture

loss of afaith in the system shouldnt be a worry macho, that would be a good thing. It would be very crowded here in this forum if that happened.  

Thu, 09/27/2012 - 15:51 | 2836521 MachoMan
MachoMan's picture

I wasn't speaking personally, I lost faith a long time ago.  just putting myself in the shoes of the person I was responding to....  and, rubbing his nose in the real cause of hyperinflation a lil bit...

and please don't believe that hyperinflation will be any panacea...  I thought we would have figured out by now that change, for the sake of change, might not be so hot...  we need to ask first whether it would be good.

Thu, 09/27/2012 - 12:38 | 2835753 Winston Churchill
Winston Churchill's picture

That was the theory.In practice something altogether happened.

The banks stole the money coming in from the SBS to buy MBS bonds.

Its safely sitting in  'haven' bank accounts.Then they levered up the miniscule balance forty times

to fund the mortgage loans.Linda Green and frauclosure, are additional frauds to cover the first big

fraud.There are a dozen forensic accountant reports out there proving exactly this.

I'm sure Obummer and Bagholder have been sent copies,but somehow cannot see a crime.

Helps when you keep your eyes tightly closed, and cross your fingers..

Thu, 09/27/2012 - 12:37 | 2835767 clagr
clagr's picture

Your theory on losses is only missing one quality--reality!

Thu, 09/27/2012 - 12:39 | 2835778 PiratePawpaw
PiratePawpaw's picture

Plus, the $50,000 paid down in cash in the example was CASH. It was paid up front. It did transfer from one account to another. It did not vanish. It just belongs to someone else and they will spend it somewhere.

I quit reading there.

Thu, 09/27/2012 - 12:47 | 2835809 Dre4dwolf
Dre4dwolf's picture

Yea, I think the original poster of the article kinda drank too much banker koolaid =/ once he started saying crazy shit like "50 grand vaporized" and "banks take losses" i completely dismissed even looking at the charts, because theres no point.


Any chart that has anything to do with banking is almost ALLWAYS GOING TO BE A CHART SHOWING EXPONENTIAL GROWTH, because the money supply is always expanding exponentially, the reason its not noticeable early on in this  system is because exponents speedup at the end ( the last 10 minutes of an exponential chart will have more "growth" than the last 90 years of the chart.


The inability for people to visualize exponents is a big problem.... people simply "dont get it" that its all coming undone as soon as you make that bend on the exponential chart, that marks the "shit hits the fan" moment where the currency is counting down to failure.


Thu, 09/27/2012 - 13:10 | 2835907 pods
pods's picture

When I explain money to others, I always use a mortgage to hit them upside the head with:

You go to a bank for a loan, they look at your income, credit score, and appraisal of the property.  Then if things are good, they loan you the money to buy the house, right?

They always say "right" and then I tell them wrong,  that THEY are creating the money through signing the note, and the bank is going to charge them 2x that amount in interest for the priviledge of creating your own money to buy that house.  When they realize that little nugget, their jaw's drop and faces start to get red.

Biggest.  Scam.  Ever.

And you wonder why the biggest, most opulent buildings are always banks?

Biggest cartel ever.




Thu, 09/27/2012 - 13:17 | 2835936 MachoMan
MachoMan's picture

Oversimplification.  The money is created out of thin air, but after it is created the assignees end up owing a debt to the money creator.  The banking system mimics life in general in that there are banks who are in the club and those who are not...  the mortgage lender in your generic scenario could very well be a bank that could get shut down for making a bad loan...

Thu, 09/27/2012 - 13:58 | 2836098 1911A1
1911A1's picture

The lender also owes the seller the cash value of the mortgage immediately.

Thu, 09/27/2012 - 22:31 | 2837450 Tompooz
Tompooz's picture

and the seller can put it in circulation where it increases the money supply.

But when the seller uses all the cash he receives to pay off a loan, NO nett money is created by the mortgage loan.

"Follow the money" to determine when it becomes inflationary.  


Thu, 09/27/2012 - 14:16 | 2836181 pods
pods's picture

Sure there is the other side of the ledger, but when you originate a mortgage does the origination NOT create the funds to purchase the property?

And banks et all can only "lend" up to their required reserve ratios, so the mortgages are then sliced, diced, multiplied and sold off to pension funds, Finland, etc.

So mostly the banks/mortgage lenders only receive a small portion of the interest over the life of the loan, but do receive the origination fees.

And, with MERS, SIVs, etc it has been shown that the most egregious (countrywide etc) have placed loans into numerous MBSs, so this funny money is fractionally reserved upon fractional reserves.

Sure the small fish may go under, but that is the way of things.

Back in 2008 I used to monitor the FDIC website every Friday for the bank closures.  And what I noticed more than the type of bank that was closed (smaller regional or local) was the agreements brokered and who came in to swipe the good while the bad was given to us.

Bigger fish eating the smaller.  


Thu, 09/27/2012 - 14:54 | 2836289 1911A1
1911A1's picture

Sure there is the other side of the ledger, but when you originate a mortgage does the origination NOT create the funds to purchase the property?

This assertion is common, but I don't think it is strictly correct.  A lender can issue unbacked credit but not unbacked currency.  The credit is converted into currency/money by selling the mortage to a 3rd party and these funds can then be delivered to the seller.  A lender (except for the Fed) cannot issue an unlimited quantity of unbacked credit as they must deliver actual currency/money to the seller.


Thu, 09/27/2012 - 15:09 | 2836331 pods
pods's picture

I will agree that credit and currency are two different things.  But in today's world, credit trades the same as currency.

Banks are limited in the credit they can emit by reserve requirements.  Banks sell loans off to third parties and act as a servicer for the note to maintain their reserve ratios.  

That is why smaller banks went under when the market locked up due to being over leveraged, and when these loans became impaired the effect was multiplied.

The collapse of the smaller banks led to changes in the FASB rules before the big ones were taken over. Once these "assets" could be marked to model, or marked to fantasy, they again were within the reserve requirements.

I have not sold a property before, but I would assume that the funds for purchase were made when the title was signed over and the funds came from the originator of the loan (or the underwriting bank), not the third party to whom the loan was sold.

I could very well be wrong though, wouldn't be the first, and certainly won't be the last time.



Thu, 09/27/2012 - 15:36 | 2836471 MachoMan
MachoMan's picture

There is but a single bank that has the authority to issue currency.  It has a monopoly on the privilege (a nice privilege indeed).  Every single lender other than the FED is simply a repackager of loans...  simply sells the debt down the stream.  The way the system is set up, there is a single lender who creates currency and no other lender "creates loan proceeds out of thin air".  So long as there is a real obligation from the lender to repay its creditors, then there is...  what we really contemplate by entrepreneurship (and, thereby, afforded some protection by morality).

The funds for a home purchase originate from either the lender's existing capital, from the capital of another, or directly through currency created by the FED.  It simply varies by transaction and distance from the helicopter, so to speak.  The funds have to be available at the time of closing in order to purchase the property (the seller demands this and the closing agent ensures it occurs).  The funds either come directly from the originator of the loan or through a third party in conjunction with the sale (e.g. a pre-agreed assignee of the note).  In the former scenario, the originator actually has skin in the game...  In the case of the latter, the originator is simply a saleman, taking a commission, with the risk (and largest chunk of the pie) pushed down stream.  Some combination/mix of the two is also possible.

You're probably over complicating the transaction...  most banks/lenders are no different than J6P...  the further removed an entity is from the money creation, the more closely the transaction tends to resemble something we would traditionally view as a bona fide loan.  Granted, technically speaking, the first of the FED's debtors has skin in the game due to the obligation to repay...  practically speaking we know this is bullshit, but I digress.  (although, at some unknown point in time, the plug can be pulled and the loans called back to their originator...  albeit the debtors will be a bit short).  Your community bank has to either fund its loans with its own capital or borrow it from someone else.  Technically speaking, there is not a perfect tit for tat money creation for each home loan by the FED...  you might say it operates with a machete moreso than a scalpel. 

Thu, 09/27/2012 - 15:54 | 2836550 pods
pods's picture

I appreciate it Machoman.

When we refinanced our house, we used a local independent guy.  He informed us the loan will be bought in a week or two. It was, by WF.

The higher up the food chain you are it seems the better access you have to the money spigot.


Thu, 09/27/2012 - 17:33 | 2836838 MachoMan
MachoMan's picture

Absolutely.  This is the cantillon effect.  The thing is, "benefit" from being close to the spigot can take many shapes and forms... 

Thu, 09/27/2012 - 19:29 | 2837102 socalbeach
socalbeach's picture

From the Federal Reserve publication, Modern Money Mechanics, page 2:

"Since $1 in currency and $1 in checkable deposits are freely convertible into each other and both can be used directly for expenditures, they are money in equal degree."

Since banks can add to checking account balances when making a loan, I don't see the practical difference.  You wrote,

"A lender can issue unbacked credit but not unbacked currency..."

Fri, 09/28/2012 - 11:41 | 2838966 1911A1
1911A1's picture

Currency (paper dollars and coins) is money, but money includes things which are not currency.  $1 in checkable deposits is not credit.  Credit is a promise to pay in the future, it is not money and can not be deposited in a checking account.  The seller who accepts credit can not immediately go and spend the credit to purchase something else, they must wait until they are paid money by the creditor, then they may spend the money.  Credit becomes an unsecured loan and is no longer credit when the creditor pays the seller with money before the purchaser pays the creditor with money.

Banks can add to aggregate checking account balances when making a loan, but they also obtain a security interest in an asset worth more than the issued loan.  They loan actual money (NOT credit) to the lendee in exchange for a claim on an asset which should have a greater value than the loan amount.

Fri, 09/28/2012 - 02:11 | 2837785 Dre4dwolf
Dre4dwolf's picture

There is no difference between credit and currency both are credit on account, banks are not required to follow GAAP anymore, they haven't been following GAAP for decades.


The currency in circulation only represents something like 2 ~ 3% of all currency, 98% of it exists no where else but in computerized bank ledgers, ledgers that the banks control.

There is no over-sight, banks CAN create CURRENCY and reserve ratios are more of a guideline than a rule, and anyhow, reserve ratios are set sooooo low now that its almost meaningless.... most banks are probably leveraged 100 to 1. (credit to currency), and since its essentially a closed system , theres no way for outsiders to distinguish currency from credit, banks could even makup depositors and deposits if they wanted, theres no over-sight, just look at what happened with MF Global.... when the shit hits the fan the big shots grab the bag and bug out and plead the fifth , when asked about what happened they create fantasy stories about accounts that "just vaporized" and over-complicate the transactions intentionally so that no prosecutor can make any sense of the crime.


Banks are fraudulant crime cartels, and they use their monopoly on currency / credit expansion as a weapon to steal real wealth (assets like homes and such) while taking no risk.


Fri, 09/28/2012 - 12:13 | 2838973 1911A1
1911A1's picture

There is no difference between credit and currency both are credit on account

False.  Credit, currency and money are not all the same thing.  If they were, there would be no need for the three terms.

Currency is paper dollars and coins.

Money is either M1-M4, pick your definition.  It includes things like currency, demand and time deposits but NOT credit.

Credit is a promise to pay money at some point in the future.  Credit ceases to exist once the money is payed.

Credit can not be deposited into demand accounts, only money can be deposited.

Thu, 09/27/2012 - 13:56 | 2836085 1911A1
1911A1's picture

So what does the seller get?  Or stated another way, when the seller withdraws the cash, where does the cash come from?  (Currency is not created by mortgage lenders.)


Thu, 09/27/2012 - 14:19 | 2836196 pods
pods's picture

The seller gets the newly created funds. Not sure of the question.

The cash would be printed by the mint, but good luck finding a bank on short notice that would have the cash for a mortgage type withdrawal.


Thu, 09/27/2012 - 15:50 | 2836531 Blankenstein
Blankenstein's picture

The seller first has to pay off any outstanding mortgages and liens.  As for the balance they are due, how many times do the sellers actually get "cash" when they sell a home?  Is it not usually transferred electonically to an account they hold?  Also, many sellers are not leaving the market and are buying another property, so that money is quickly transferred as a downpayment to a bank and another mortgage is taken out.  

Thu, 09/27/2012 - 16:29 | 2836653 1911A1
1911A1's picture

As for the balance they are due, how many times do the sellers actually get "cash" when they sell a home?

It doesn't matter if they get physical cash or a deposit into their bank account.  The lender must settle with the seller for actual money, not credit.  See MachoMan's explaination above.

Thu, 09/27/2012 - 17:38 | 2836855 MachoMan
MachoMan's picture

Exactly.  If you have some equity sitting there...  after payment of the liens, taxes, closing costs, etc., then you'll get a check for the remainder or it will be deposited in your account...  you can then march up to the bank and demand cash.  I'd just make sure it was the main branch because the satellites probably don't have much cash on hand or have been instructed not to dole it out, regardless of your degree of entitlement.

You can't say on the one hand credit is a part of the money supply and then on the other deny that same credit is part of the money supply when you can actually convert it to cash...

Thu, 09/27/2012 - 12:58 | 2835848 LULZBank
LULZBank's picture

Yes, funny how he makes all the money go "vanish" except for the people who have to pay for it and deleverage, pay off debts or go broke.

And no talk about exponential growths and resource depletion.

Mr Smith seems like just the tool, the Fed needs.

Thu, 09/27/2012 - 22:43 | 2837496 Tompooz
Tompooz's picture

"Mr Smith seems like just the tool, the Fed needs."

Maybe somebody else's fool (although I appreciate him for generating this discussion once more), but not the Fed's. The Fed wants to create inflationary EXPECTATIONS, on top of a moderate actual inflation.

Thu, 09/27/2012 - 13:03 | 2835867 crusty curmudgeon
crusty curmudgeon's picture

I was looking for this comment as that's exactly what I did. 

I'm trying really hard to understand why the author would think a $50,000 down payment would vanish.  But I got nothing.

Thu, 09/27/2012 - 13:11 | 2835915 pods
pods's picture

That 50k certainly did vanish.  It was deposited, laundered, fractionally multiplied and is now sitting in the Caymans.


Thu, 09/27/2012 - 13:59 | 2836108 Manipulism
Manipulism's picture

Banks have nothing to lose, they take no risk making loans.


You nailed it and its worse, they win when the borrower defaults.

These bankster bastards where trained to drive people in bankruptcy.

This is a fact, proven in german tv long time ago.


Thu, 09/27/2012 - 14:00 | 2836111 aerojet
aerojet's picture

Pretty much dead on, and yet somebody still downvoted you.

Thu, 09/27/2012 - 12:36 | 2835696 Quinvarius
Quinvarius's picture

The money isn't in a hole.  It is on bank balance sheets, where it is being multiplied 40x.  You think that these asses who sacrificed their brothers at Lehman are not going to scramble to be the first steer to stampede when fireworks start?

There is a funny attitude of peope to look back in history at hyperinflations or other crisis and assume they took place all at once.  Just because the explanation can fit into one paragraph does not mean it went from 0 to 110 in 5 minutes.  It is only when it is compounding at the end when it becomes obvious.   

And the velocity argument has already been debunked.  When you print a bunch of money all at once, velocity always drops.  It is how velocity is computed.  You always divide by the money supply in the last step.  More instant money always means lower velocity in the short term.  By the end of QE3 velocity should be even lower.

Thu, 09/27/2012 - 12:21 | 2835697 otto skorzeny
otto skorzeny's picture

"Incomes are declining"-unless you are a govt worker- the cops and firefighters in the towns around here(commie NE IL) keep signing new contracts that give them 3 or 4% raises for 4 or 5 years while they slash education/public services to the bone. who else is getting that in this economy?

Thu, 09/27/2012 - 12:57 | 2835843 ParkAveFlasher
ParkAveFlasher's picture

Those nominal raises won't mean much in an inflation scenario.  That's reason #1 Ben B. & the Fed Gov fudge inflation.  At the union negotiation, they can say, "well, +2% over inflation means you're not only keeping up with our [sic: published, mangled, fudged] inflation but you're making over inflation, which you can invest in things like orange juice futures, and BLT sandwiches.  Now sign right here for 10 years of 4% salary growth per annum."  Meanwhile, when the items the workers need start ratcheting up in price at say 5% per year intervals, their only recourse is to reneg, which they can't, or strike. 

Thu, 09/27/2012 - 13:39 | 2836024 chubbar
chubbar's picture

Well they mean a lot to the poor fuckers who are continually getting tax increases to pay for someones gov't salary increase while the taxpayers salary stays stagnant. Gov't workers seem to think that they are special and shouldn't have to feel the pain of the folks who actually work in the real economy who get no raises, but also get the inflation.

Thu, 09/27/2012 - 12:21 | 2835701 Cognitive Dissonance
Cognitive Dissonance's picture

Sooner or later that "dead' money will break out. The longer it remains bottled up, the bigger the bust out.

Thu, 09/27/2012 - 12:22 | 2835707 otto skorzeny
otto skorzeny's picture

big deflation first-then the explosion.

Thu, 09/27/2012 - 12:25 | 2835717 Mr Lennon Hendrix
Mr Lennon Hendrix's picture

A buddy of mine lives in Eureka with his girlfriend.  She was trimming herbs for someone and she got paid in moldy dollars.  The grower had obviously stashed dollars in the ground and they had gotten wet.

Dollars rot.  By definition money "must store wealth".

Anyone holding dollars at the end of this game of hot potato will be the loser.

I don't care if someone decides to start a stamp collection.  Do whatever makes you happy.  Just get the fuck out of fiat.

Thu, 09/27/2012 - 12:28 | 2835737 Cognitive Dissonance
Cognitive Dissonance's picture

As if on cue......

Gold is now $1,776........How patriotic........

Thu, 09/27/2012 - 12:32 | 2835751 Mr Lennon Hendrix
Mr Lennon Hendrix's picture

Reality sets in....people grab their arm rests....the plane is going to crash....and then the air masks drop....

Thu, 09/27/2012 - 12:41 | 2835782 Cognitive Dissonance
Cognitive Dissonance's picture

Always remember to place the oxygen mask on Ben Bernanke before yourself.

You can't help anyone unless the master printer is conscious and hitting Ctrl-P

Thu, 09/27/2012 - 13:00 | 2835855 ParkAveFlasher
ParkAveFlasher's picture

I'd put the mask on Ben, and then beat the shit out of him.

Thu, 09/27/2012 - 12:45 | 2835795 4Y_LURKER
4Y_LURKER's picture

"Oxygen gets you high. In a catastrophic emergency, you're taking giant panicked breaths. Suddenly you become euphoric, docile. You accept your fate. It's all right here. Emergency water landing - 600 miles an hour. Blank faces, calm as Hindu cows."  


Thu, 09/27/2012 - 13:00 | 2835853 LULZBank
LULZBank's picture

Brilliant dialogue from Fight Club!

Thu, 09/27/2012 - 14:10 | 2836158 aerojet
aerojet's picture

It was a funny scene, but it has no bearing in reality.  There is zero evidence that the safety systems installed in jetliners were designed to make people accept their fates. 

Also, do astronauts stay high all the time in the space station or it whatever remaining craft are flying to and from it?  No.

I like "Fight Club" as much as anyone did, but at the end of the day, it's a stupid movie written by a gay guy who has some really whacked out ideas about society.

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