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Guest Post: Why QE Won't Create Inflation Quite As Expected
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 (federalreserve.gov), 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 dshort.com):
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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True, fate is fate whether you accept it or not.. cannot be avoided. What if one could survive the crash but the lack of oxygen kills him.
I like such movies just to hear some new ideas or thoughts or points of view, not that I would buy them.
Gold algos skipped this headline today, apparently.
Yeah....... don't do stamp collecting. Unless you can eat them. Gun collecting on the other hand....
Yeah......cus anyone can eat a bullet.
<Was that my out loud voice?>
Bullets are for making other people eat.
"The grower had obviously stashed dollars in the ground and they had gotten wet."
This is how the benefits of the "New dollar" will be highlighted. Not only will the new bills be plastic, like NZ has already, but the transition phase, where everybody can hand in his old Franklins, will punish the underground economy disproportionally.
This is how the MSM will sell it anyway.
When the actual inflation hits a big enough number that the banks want to pull the cash out of the reserves they have with the fed to go chasing returns...then its a whole new ballgame...
Cowboys and Aliens, Bitchez
I am no economist and I don't have fancy charts, but I know that prices are up. I buy things like food, silver, ammunition. You know how I know the prices are up? Not from a fucking chart or an algo some quant put together, but because I fucking pay for these things I know what they used to cost.
You're being way too simplistic. Correlation is not causation.
And you are being disingenuous and/or obfuscatory.
The author has no idea of what IS inflation. All the rest of the so-called thesis is moot.
Inflation-like unemployment rate-is whatever Uncle Sam tells you it is.
DEFINITION of inflation...not RATE of inflation...Sheesh!!!!!
I don't even know where to begin.
"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. "
The bank's haven't been taking that hit because they haven't been forced to mark to market so that money isn't being destroyed until they sell at a reduced price if at.
For The Banks, Mark-to-Market Accounting Dies Again
Bank Stress Tests: A Substitute for “Mark-to-Market” Accounting?
snip
Thus, the bankers have put on assets that have higher than average credit risk or long term assets that possess interest rate risk and have not had to account for any increase in the over all riskiness of bank assets until they either write off the asset or sell the asset for a price that is below its purchase price.
But, that can mean that there are a lot of “over-valued” assets on the books of the banks.
Because banks do not have to mark their assets to market, the banking system can have lots of “zombie” banks around, banks whose financial condition is unknown to their investors or depositors. (link)
"The loans were paid down, paid off or written off."
Trillion's of dollars of these loans were off loaded to the taxpayers via the GSE's
Unlimited credit for GSEs seen as backdoor bailout
Is Fannie bailing out the banks? GSEs Remain Backdoor Bailouts for Banks
"Money velocity is plummeting and banks are hoarding Treasuries as much-needed collateral."
"Observe that once a lender lends his money he relinquishes his claims on real goods for the duration of the loan. Can the liquidation of credit, which is fully backed by savings, cause a decline in the money stock? Once the contract expires on the date of maturity the borrower returns the money to the original lender. As one can see, the repayment of the debt, or debt liquidation, doesn't have any effect on the stock of money."
http://mises.org/daily/5942/
"It's difficult to see how these forces could generate inflation."
This might help explain how it will generate inflation in asset's other then food, gas which we all know has already begun.
If banks start to loan this out, as Jamie Dimon, Fed President Charles Plosser and I suspect, the first result will be new money in the system. This new money will push up housing prices. As housing prices start to climb, bidders will start bidding up mortgage rates, as the rates go up, though, even more money will come out of excess reserves (Remember, there is approximately $1.5 trillion in excess reserves, that is a huge amount of money---never mind the money multiplier effect). This money pouring out of excess reserves is what Plosser expects and accompanying inflation (including, I believe, housing prices):
more here
HOT: Fed Prez Spills the Beans on the Excess Reserve Inflation Time Bomb
http://www.economicpolicyjournal.com/2012/09/hot-fed-prez-spills-beans-on-excess.html
Price increases in commodities due to speculation is not inflation.
True.
And price decreases in particular commodities or assets is not deflation (despite all the maniacal propaganda from pro-Establishment mouthpieces to the contrary).
I don't believe I said it was I merely pointed out we have inflation in food but anyway I didn't junk you. Speculation however can help drive up food costs because the price is no longer based simply on supply/demand. What I said in the response below this the one with the video was Banks are using the QE money to speculate.
Sounds like a disinformation piece. All I know is that if there is more money; hard assets and commodities will benefit; if there is less money, the hard assets and commodities will be substitutions. Either way, buy gold and silver.
Reminds me of those articles that said there was no housing bubble and tried to prove it. The obvious is obvious.
http://online.wsj.com/article/0,,SB112708454245544394,00.html?mod=opinion_main_commentaries
Is a quant like...a quiff?
a queef actually adds something of value to society
What happens when the "banks" that theFed. bought bonds from take that 1Trillion and invest it in "emerging markets" over seas?
Commodity inflation goes apeshit!
Banks aren't "investing" or loaning to EMs - their business model is a Ponzi scheme, not a Jenga game.
Rolling the money into multinationals, whose paper is eligible, that's a different story...
Ponzi as in the "banks" turning around and putting the Feds.money right back into the OIS @ 10basis points.
phantom liquidity creates real bonuses and inflation (membership has its priviledges) for everyone else, there is Usury
+1 Yen Cross they have been doing exactly that Michael Hudson explains it here
QE3 Another Fed Give Away to the Bankshttp://www.youtube.com/watch?v=2aKK4N-c3HQ
the banks are not stupid. in a deflationary collapse you hold money. why on earth would banks lend out money in this environment?
hoarding cash is the only strategy that makes any sense.
Banks will continue lending to Corps., who will in turn put the money to work over seas, where yields are better. Commodity prices will continue to rise.
Exactly. Hold money. Ditch currency.
We already had big deflation in 2008-9 then the big pump followed by big inflation once the fed loses the lid they have been trying desperately to keep on the pressure cooker.
We already had big deflation in 2008-9 then the big pump followed by big inflation once the fed loses the lid they have been trying desperately to keep on the pressure cooker.
Holy crap this article is delusional. That $50,000 cash deposit in his home mortgage example did NOT disappear. It was paid to the seller when he bought the house. That money then circulates through the economy at the velocity of money even if the buyer later sells the house for less.
My only guess is that the author is attempting to explain how fractional reserve banking reduces the money supply during a period of deleveraging. He absolutely blew it with his example.
I have tried to think through this concept of fractional reserve banking creating money, and i just can't buy it. It creates massive interest fees. But doesn't increase dollars in circulation. Therefore the deleveraging doesn't really reduce dollars. But maybe i'm missing something.
Credit is money because it spends the same. The $50K was not lost, but all the equity that existed on paper, which disappeared like a fart in the wind, more than balances out the $50K of actual money that went into the purchase.
You are, quite simply, a fucking idiot.
Like a typical blinkered Keynesian, you fail to look at the larger picture.
No, credit is manifestly NOT the same as money, because THE CREDIT TRANSACTION IS NOT FINALIZED!
Yes, the initial transaction looks identical, but when made with "money" (however one chooses to define it), the transaction is completed --- with credit, however, the payment is pushed off into the future, where it still MUST be made with money absent default. This is the pertinent fact that you clueless deflationary flat-earthers steadfastly refuse to acknowledge.
Your Velocity of nonsense...yes, the money doesn't go into households, it doesn't go into a hole. It goes into the pockets of certain elite assholes who are ripping our collective faces off.
Have you seen how the rich/everone else chasm is widening?
As a pup, i built cool crap out of all the crap my "rich" relatives threw away, and my brothers would wait until i was done to steal it...
i would also dismantle my gossipy mother's latest an greatest appliances just to watch her go nuts, but have them back together and operating by the time pop got back home. she would bitch and moan to pop half the night, and on occassion he would whip me to ablige her...
when we played baseball, my cooler brother would bean me in the stomach every single time i got up tp bat...
that is economics.
Voting to take our kids, our assets, and our empire identities to feed the machine we designed was counter-productive...
The argument that inflation is not created depends on all the suppliers of materials, goods and services all believing that depsite the central bank creating money out of thin air, that their purchasing power will not be reduced and their input costs will not increase. Perhaps they should hand out Ivy League economics degrees (or crackpipes) to all market participants, since the market is apparently just not bright or educated enough to get the big pricture...
I agree with the article. I don't see in the markets any hint that hyperinflation (let alone, big inflation) is coming.
Gold has been the asset class that benefited less from QE. Extrange, isn't it? Even though gold is in a primary bull market of its own, it is underperforming. Silver and Stocks benefited much more from QE. Furthermore, under Dow Theory, the stock market flashed a bull signal (June 29), long before gold and silver (August 22). This is additional evidence that QE was going to benefit more stocks than gold. So maybe the markets are telling us that QE is not going to be that bad for the economy after all (why silver rises more than gold? ) Even copper reacted bullishly to QE.
We will know that big inflation is coming when two things happen:
a) I follow the BLV (long term bond) / GLD (gold) ratio and, although in a difficult juncture, the ratio speaks clearly in favor of bonds. If the USD were to be destroyed (inflation) because of QE then we should see stronger gold and weaker bonds. This is not what the charts say.
b) Gold would become stronger than silver and than stocks.
So for now, the markets are not hinting inflation. Of course, things may change, and when they change the charts will alerts us.
here you can find additional explanation and charts as to the critical ratio BLV/GLD:
http://bit.ly/S3uX2R
Regards,
Untrue. The federal reserve is buying most of the long term bonds, so the price (or yield) that you ae watching so closely is fake. Imagine when the fed buys all the long term bonds. Then if you are following long term bonds as your measure of the cost of money, you will see the cost of money stuck at zero percent as inflation takes off.
You BLV measure only works when the federal reeserve is not present and all bonds are traded in an open market. That is not happening today nor will it happen.
I agree with you it is fake in the sense that they intervene but this is the price you get if you sell or the price you pay if you buy. The same goes with gold. There is manipulation, we know it, but if we want to sell gold we will only get the manipulated price, not the price we think that should prevail absent manipulation.
So in spite of everything such ratios tell us that the "manipulators" are still in control and this is an important piece of information. Such ratio may provide a hint in the future as to the first "cracks" in the manipulation scheme and hence that inflation or soaring gold are coming.
Benefitted less? LMFAO! with a dollar cost average of just under $300 an ounce how has my gold "benefitted less" then those FRNs I also hold? Bahhahahahahahaha!
it depends on the time frame. If you click the link, it refers to what is happening since June 2012. Not since 2002....
Medium term market action is telling us the stocks and silver have been stronger than gold...Long term we know who's the last man standing.
Well then, I guess the question is whether or not you want to be around "long term"?
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.
The US Treasury is going to spend the money it gets from selling those Treasury bonds putting it into circulation.
You need to consider the whole picture, when someone buys something you have to keep following the money,watch both sides of each transaction.
Bingo Garth!
it is the government who will lead the charge to hyperinflation. We peons are constrained in what we can spend. We are midgets who must ask what things cost. Not so with the USG. They will have what they must have and the price will not matter. Obama declared so in his Jan 2012 memo to department heads. They are to get what they need 'even if prices are temporarily high' (that is paraphrased not quoted).
The USG will compete with its citizens for the last gallon of gas and they will monetize if they must but they will get the gas.
So the rapid increase in food and gas prices is all a big mistake?? Good, I was worried... the price of guns is going up fast too... in hard times, guns can be used for food... "Fill the bag with grub, asshole, before I plug ya!!"... like that...
..or the take the prey out at 200 yards approach, followed by butcher and eat.
No, but it is also not because of inflation.
Yeah, it's all the fault of those evil speculators, right Nixon?
Get the fuck out of here.
The government needs to stop spending for his scheme to be true. Don't worry, the income stemming from US-T sales WILL be spent by government.
Riiiiiggggghhhhhtt. Who is buying again? If it is only the Fed, then the dollar will die.
In reponse to your article... ZH should modify their article rating system to include negative scores.
If it's "dead money" then Benanke lied when he said his purpose was to fight high unemployment.
If only the top seven million people will enjoy any "wealth effect" from this gift to the banks, this is just another asset confiscation from middle class savers and retirees to enrichen the top 1%.
If there are still insolvent banks four years after the biggest taxpayer heist of history, it's time to net out the depositors and let these banks and their counterparties fail.
Bernanke Lied! Heaven forfend.
Glad you figured that one out.
...it's time to net out the depositors and let these banks and their counterparties fail.
Nobody has the balls the tank international finance...yet. Usually wars occur first.
really? then someone explain to me todays daily bullshit ramp job?
Quarter end window dressing
Velocity is bullshit, one should consider the difference between monied capital (financial assets, debt and equity) and circulation (GDP). When the 30 % year kicks back to 4% in yield, monied capital will be spent by people with a lot cash or by corporations into capex. Then that gets transformed into wages and then prices rise, because price rise more monied capital is restless and spends more. (Today s definition of inflation is wrong). Simply put and to speak today s wrong parlance `inflation` = circulation increase in deleveraging mode (commodities are linked to this type of circulation increase). When the stock market start to sag and bond yield have bottomed, people with monied capital will either spend or invest of capex out of desperation of no return.THe 2% 20% structure guarantees that. The other alternative is that monied capital chases commodities directly without spending, then we have crack-up boom. FOrtunately corporations can not do that.
Forget real wages increase, it is useless. Use nominal increase in circulation coming from dishoarding of monied capital into circulation. Nominal GDP targeting is the way to scare people sitting on idle cash into spending. Nominal GDP targeting Bitchez!!!
EURO GOLD RECORD !!!
1380 EUR/Oz
negative rates of productivity will create inflation.
Forced spending by starving yield and pushing equities into a corner on the upside (while 2% + 20% hurts) while raising the 30% yield forces people to spend not because the return on investment on capex is good but because they are desperate and tired of having the cash eaten with negative real rates. Once the spending starts, it is inflationary and feeds on itself at a controlled rate, hte Fed can stop printing.
What prolongs hte deflation and hte need to print is the fear of Europe, CHina. As soon as Europe prints for good or we have a final outcome, the hangover is gone and the long bond yield rises and people and corporations with cash spend, the Fed can stop printing, we have nominal increase in GDP, wages, and commodities, and financial assets are in a sagging relative dearth period until the deleveraging is done. A true bul market for equities is a leveraging cycle from a low level of leverage. What we had from 2009 is a trempoline laid by the Fed from the people jumping out of hte Wall Street building. Fed removed the threat of deflation, but that is a bounce, not a true bull market. The ratio of circulation (GDP) to FInancial assets (Stocks and bonds) is way to high to be a true bull market.
It doesn't matter unless it's on the books. They could print 100T dollars, not record it, bury it and I might buy your story.. but once it's on the books.. it's in play = inflation.
Did I miss something ?
Not only in play, but used to purchase Treasurys as "collateral" which are then likely leveraged more via infinite hypothetication into any number of financial WMDs.
But I guess somehow gov spending is no longer inflationary?
Hey - what happened to the money that the person who sold the house got? hmm??????? this guy is completely wrong. No money was destroyed but debt was.
Debt is money--The house lost over $100K in "value"--that equity is gone as though it never existed because ti was never extracted. That more than overcomes the $50K that actually changed hands.
*Sigh*
More clueless deflationary flat-earthism.
No, you are flat-out wrong --- debt is NOT money! Otherwise, it would not be called "debt".
Just because our fiat money (sic) is issued as debt does not mean that the converse is true, that ALL debt is somehow also money. God! Where does such lunacy and ignorance originate? Anyone making such an argument 30 years ago would have been instantly laughed out of the room.
If ALL debt were somehow "money", you stupid, stupid person, then the USA would have and should have seen an unparalleled inflation across the board of around 1500% in the past 20 years, to match the rise in total debt in our economy. While prices obviously rose in that period, I fail to note that NONE rose by anywhere close to 1500%, even in the bubble assets of equities and real estate.
Back to the deflationary drawing board for you.
I like CHS, but I think he's missing the obvious here. QE is ultimately funding the government's $1.2T deficit - and that deficit is going to entitlements. So yes, the money is getting directly into households. It's not causing a wealth effect, but rather making subsistence living possible for those who wwould otherwise be destitute. But it is getting into households.
I am seriouly thinking about being a Guest Writer on ZH now.
I will include much more colourful skittle shitting Unicorns and rainbows in seven shades of Gold and Silver in contrast to mind boggling charts which cannot show reality either.
This is horseshit. I go to the store and buy shit and it's twice as expensive as it was 5-7 years ago.
Fuck off with your propaganda!
Oh, but don't you know that those (never-ending, 5-10% annual) food price increases are only a reflection of "volatility" in raw commodity prices and are therefore "transitory"?
I mean, Bernanke keeps saying it, so it must be true, right?
I am SO glad that in the BernankeMart where I shop, food prices NEVER increase more than 1% a year! I don't know why all the rest of you whiners don't shop there (just don't expect to find steak in the meat aisle --- pink-slime hamburger is good enough for you serfs!).
You guys don't fucking get it--nobody is arguing that food prices are way up. But the major component of those price increases is not due to inflation.
arguing over the number of holes in a sinking ship is beyond stupid.
No, we get it perfectly, Nixon --- you are an idiot and/or a liar.
Its bizarre how the chart of pretty much any stock index in the US looks identical to the IBEX or the ATG......when you divide dollars by gold. It is only inflation. Use oil if you have a bug up you ass for gold bugs. use copper. use lead. corn. whatever. It is monetary inflation moron.
By "monetary inflation" you mean government added liquidity that is now sloshing all over the place searching for yield? Then yes, it was monetary inflation, but that's a conspiracy theory around the Plunge Protection Team. But that term usually means an increase in the money supply, which hasn't taken place. That would have been far, far worse on prices. What I think has taken place is that a lot of big finance houses and banks had all the stops pulled out and they are leveraged to unbelievable proportions--40:1? 100:1? All stops were pulled out to try and keep the big guys in business. The point is, that margin is what is running up commodities, not money printing.
The Fed can create money but if it doesn't end up as household income it is "dead money."
Ofcourse, one very big reason all this money goes into the bank accounts of top 1% where it is "dead money" *wink* *wink* and it would not create inflation, except in the caviar and top end champagne market.
You slaves need to learn to appreciate your masters and their indulgences.
So, could we be seeing deflation for the 1% - cheaper pricey toys - and stagflation for the rest of us?
Dumb ass,...where do you think all this new MBS Fed money is going? Two minds? More like bi-polar, as Smith becomes just another mouthpiece for the FED. Sure, this money will sit there for awhile, but give it a match that mimics the light at the end of the tunnel and watch it go.
smith a mouthpiece for the fed? dobutful.....if, perhaps, mr smith were to argue that qe is good for job growth and housing, then you would be correct.......how do "give it a match" and watch it go??....... when bennybucks are already getting burned up in the shadow banking sector..............what you hyperinflationistas still dont comprehend, even though the charts stare at you in the face, is that bernanke cannot control this deflationary collapse.........there is already a wildfire consuming digital dollars.............and when the qe wall is breached, every asset gets crushed...nothing will be safe.....hold on to your physical dollars......they will be precious............there isnt much physical currency floating out there and its becoming harder to obtain...................................
So much MD20/20 .... so many dollars .... so little time ....
Long's kissing too much bankster ass in the beginning but it is a good interview.
Here is what I think happened the day in 2008 when the banksters called a meeting with our last less than 100 IQ president. After the banksters handed him the 3 page 700 billion dollar ransom note and told him the ATMs would quit working within 12 hours if he didn't sign and that there would be marshall law and war on the streets and he replied back, "Where do I sign..." well then they said, which never came out of the meeting, "That is not all Mr. President. The other thing is is that we can't stop the collapse from taking place." Bush went on to ask, and this is the critical part, how much time do I have to build the infrastructure and military operations until it does collapse?" The banksters replied back, "We don't really know but if you give us someone smart like Leon Panetta to work with we will do whatever it takes." Banksters then began working with the military and various agencies to fund the 3,500 corporations and military to prepare the US to be taken down with continuity of Federal Reserve controlled government, by the banksters in approximately 4 years which brings us to where we are today.
That's all that is going on. Why worry the system already collapsed 4 years ago. Just be prepared.
I believe you are missing some key elements in your analysis.
--
"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.
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."
--
Fair enough as far as it goes, but the fact of the matter is that money held as excess reserves at the Fed are not counted in the money supply. The money "buried in a hole" is "dead money", but the Fed recognizes that fact and does not count it as part of the money supply.
--
"Let's also recall that money is destroyed, not just created, when assets fall in value and bad debt is written down."
--
The money supply figures fall when bank loans are paid off or written off, so once again the effect is taken into account in the official money supply figures.
--
"The velocity of money buried in a hole is zero."
--
As noted earlier, much of that "money buried in a hole" is not being counted as money in the official Fed data on the money supply. But even if it was, the mainstream understanding of the "velocity of money" is controversial anyway. The Austrians, for instance, consider it a rather bogus metric: Is Velocity Magic? by Frank Shostak
--
"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."
--
That could well be true, and not yet support your case that a significant increase in the money supply won't produce inflation. Bubbles have a tendency to billow out in an area of least resistance rather than uniformly throughout an economy. We saw that to be the case with the dot.com bubble and the housing bubble.
As you note, the money also may well be finding its way to the most affluent rather than to mainstream America. So the inflation may hit hardest in luxury goods or property, stocks, bonds, art, precious metals or somewhere else.
Given that the dollar is currently the global reserve currency, it could also well be that much or all of the inflation is exported to other countries or regions.
In any event, continuing on our current path is just compounding the misallocation of resources the Federal Reserve and other Central Banksters have engendered so far.
I think the Monetary Base is still a key metric going forward. The Fed can obviously pull reserves out of the system in a number of ways, including paying higher interest on excess reserves, but that will also have other unintended consequences, such as perhaps causing interest rates on Treasuries to begin to climb.
I guess time will tell.
Dig a hole and fill it with currency.
LMFAO!
Results in no inflation? NOT!
Increasing the currency supply, is dilution. When you dilute something it becomes weaker.
A weaker currency is worthless through devaluation. Resulting in? Inflation.
Specifically, "Devalued currency induced cost/push inflation."
The US dollar is just the best looking horse at the glue factory! It's time is coming.
What the author fails to realize is that printed money thrown on a hole was thrown on bank balance sheets that ALREADY expanded and diluted the moneybase via endless credit. Now the question is, will they play under the limits now or go crazy? Today, credit expansion precedes money printing. Money printing is just admitting that the inflation already happened
It does not matter if the currency is thrown down a hole or on a bank balance sheet, or for that matter held by the Fed. It has still been created and has added to the total amount of currency that is available.
This is dilution, pure and simple. Which devalues the exsisting currency by that much. Resulting in the most powerful emotion known to mankind - FEAR! Which manfests itself in higher prices being charged and pushed through the supply line to the end user.
Devalued currency induced cost/push inflation.
nah, you jump the gun. If there is a ton of snow on the mountain tops, until it melts, the river doesn't rise. What the bankers did here was pump a bunch of air under the river to make it rise and then Ben blew a ton more snow on the mountain tops that will go to replace that air..
They are making inflation before new money is even printed from insane credit expansion.. it shifted
Couldn't get past that 'vanished' downpayment example... Did Corzine sell the mortgage?
Interestingly, the top 5% is the only demographic that is actively deleveraging, i.e. reducing debt rather than borrowing more. That's because inflation has crushed the middle class and they are living pay check to pay check.
he is not saying there is no inflation.
he is saying the inflation is not as high as the fed would want to have, the reason being money hoarding.
there i summed it up.
why oh why do i have to explain something this obvious in defense of charles hugh-smith??
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.)
I think this is not necessarily exactly what happened in the transaction. The $50,000 cash money was previous equity from an account with an account holder. He may or may not have had previous debts. We don't know, but assuming he is just a man without a home and $50,000 and has no previous debts to service or child support payments or alimony etc. and has an income, this may be a good opportunity for a bank to extract some interest from him. The Bank, doing its due diligence in the underwriting process would find all of this out and make risk decisions based on some basic research.
Either way, the house had a notional value of $350,000. The Bank which underwrote the mortgage required this guy to put some skin in the game to protect everybody in the transaction. This particular sum in this instance is only about 14% equity. I would probably never lend my own money on a house without asking for a significantly larger amount in a down payment. Because of securitized lending there is no risk retention in the banks so they go after this shit guns blazing. What if the guy receiving (aka "the home seller") the $350,000 from the homebuyer and the bank, (because that is where the sum to purchase this house is coming from) let's suppose he, (the home seller) has no debt to repay to anyone? He owned the home free and clear of any mortgage or tax debt. So, now that money did not just disappear did it? $50,000 came from the homebuyer and the other $300,000 came from the Bank underwriting the mortgage.
It now exists on another bank balance sheet as a deposit when the escrow sweeps funds from all parties. Credit contraction and money contraction are two different things. When Ben Bernanke creates money with a key stroke this is base money. It can't just be uncreated. The credit that expands on this base money will contract when Banks take a big hit to their equity with a collapse in asset prices and collapses in prices in the underlying collateral whether that be a House or a certain amount of commodity, a new revolutionary technology that makes everybody dump previous technology and all debt service associated with it etc...
The Bank also has to (re-pay its depositors and creditors that had to be tapped to underwrite the loan or asset in the first place.) So the Banks "Balance sheet" looked pretty good at first. It borrowed money from it's depositors at 0% and it's creditors (Other Banks) at rates near 0%. And turned around and re-loaned that wholesale money to underwrite the Loan that had a notional principal value of $300,000 against a piece of collateral that had a notional value at the day of purchase of $350,000. So in a normal world, where every bank had to adhere to very strict lending guidelines this would seem like a pretty "safe" investment for the Bank. What would make this whole fucking charade even safer would be to outlaw banks from using leverage to make loans. This would require this little Bank to sell one of its other assets or a pool of its assets on its books to raise its Equity to underwrite a new Loan at a new interest rate that would benefit the bank and earn it more interest for it's equity and share holders. Leverage and Borrowing short to lend long is where the banks always turn this shit into a house of cards. Canada has a decent model with respect to home lending. I don't think you can get a 30 year home loan up there. This helps mitigate risk.
Pretty much agree with most of the analysis.. except that money printing wont cause inflation, until it does, similar to the late 1970's. It really is an interesting dynamic between the debt/credit deflation and the monetary inflation. It doesnt seem unlikely to me that a scenario plays out whereby debt/credit massively deflates, monetary policy massively inflates to counteract (atleast partially), but as a result all confidence is lost in the USD and we see a hyperinflation in the midst of a massive credit crunch/deleveraging. I dont think its a sure bet or even >50%, but I think it makes some sense that it plays out like that
Look at the charts. Banks in US aren't lending for housing enough to generate inflation.
http://confoundedinterest.wordpress.com/2012/09/27/bad-economic-news-q2-gdp-slumps-to-1-3-durable-goods-orders-crash-13-2/
Who you gonna believe, bankster statistics or your own lyin' eyes?
As he showed clearly, we are still in the "crony capitalism" phase. This means that the politicians, who need the bankers currently and have the guns, are allowing them to play for pay. That will change when the bankers don't deliver the promised Nirvana and the Politicians become threatened. When they do, they will move on to "Financial Repression". That's the phase where they kick the bankers out and run the whole system by themselves. It is also the beginning of the Hyper part of Hyper-inflation. Politicians in history have all had one common flaw. They haven't a clue about money or how the economy actually works. We know this because we are seeing this process unfold before our eyes and we have history books replete with tales of previous politically driven Hyper-inflations. The politicians will mash down on the printing press accelerator and then lenders will demand more interest to offset risk. Risk here is described as too much cash chasing too few goods and less chance of repayment. It helps that the politicians tip their hand by repeatedly cheating lenders and lying about all sorts of things. Confidence goes away and interest rates will race higher and the spiral becomes a cyclone.
Where will this happen first? Maybe not here, Japan is up to its financial neck in paper, Europe & England are as well, China is getting desperate and then there's us.
My advice to readers here is be patient. You will never get an admission that inflation is rising from the government. That does not serve their purpose which is to stay in their jobs. Eventually, when the non-reading; common folks who are out there toiling to make ends meet, finally figure it out, they will raise hell and when they do, the Pols will strike. The bankers will be blamed, maybe jailed and promises of “reform” will flow from every political orifice. Of course, this will require government force against those who will get the blame: Short sellers, hoarders and people who generally have an advantage over the mass of voters.
This takes time, enjoy the time you have left.
One thing is for certian, the references to boating accidents never get old. The first time I read about losing "everything"(wink wink) due to a boating accident, I laughed. The 50th time I laughed even harder and now after reading the same reference from every third person on zero-hedge, for the last year and a half, it's even funnier!! Bravo!
Excellent post by Charles Hugh-Smith. I work in the retail brokerage biz up in Canada and we've long had the discussion among friends that the real fear that Bernanke had in his sights, all along, was deflation. He has explained to Congress many times over many years that the Fed can withdraw liquidity in a flash were rampant or nascent out of control burn down the nation inflation shows its head. But, we've had so little price inflation in part because (and you guys can correct my mistakes here)
If you worry warts think that it is going to be bad in the USA, I wouldn't want to trade places with my American neighbors when compared to what is going to hit the Chinese and eventually the Japanese. Nah, I think that it is more than obvious the real reason the US dollar is clearly perceived as the least problematic of all big currencies is because the conclusions reached after looking through the tea leaves is that Japan and China will be mega screwed compared to the Fed led USA. This doesn't mean that American's won't face the music (as Dr. Marc Faber predicts). They need to have a working Congress to pass legislation that can unstick the system. A hung trial usually means the whole effort is thrown out and they have to cobble together a new jury. A hung congress just means that the day of economic reckoning will arrive that much sooner.
Right on, you got it in one. But don't forget the Euro because, again going to history, these things take time (Mugabe took power in 1987 remember) and a small short circuit in the EU lighting system will shut off all the electricity for a bit. The Finns could drop out. Not a big member but just big enough to cause problems. They have - allegedly - received collateral. If they call that collateral from Greece, this might cause them to drop out, then Spain, etc. My bet is that it is something no-one here, self included, has thought about. But I do agree that the buck will be the last eaten by the Tiger. We've been throwing it lots of meat.
The worlds financial system reminds me of one of those single cell amoeba's....so sensitive to any outside influences that if you introduce one it instantly recoils (I hope I have chosen the correct analogy on the biological level). Anyway, my point is that I sense that the financial system is overly sensitive and we have to be open to having a 'black swan' event come by that the current group consciousness has not factored in. This type of event destroyed Long Term Capital and when the housing market finally started to retreat, all of Wall Street. It can happen again and most likely will. Maybe something like:
These are all black swan-like events that the collective does not have a quick response to other than sheer panic. Pray that none of it happens....but shit does....
I thought John Mauldin's article, Black Swans and Endogenous Uncertainty, was a good one.
I think it was excerpted from an article on his site entitled, Fingers of Instability.
and reprinted again on Financial Sense by David Galland under the title, Complexity Theory, Sand Piles, and Financial Crises
Credit is the nature of the beast. Never forget that. The last decades of bubbles are attributed to artificial credit. Credit. Money that never existed. We have been dwelling within both a literal and metaphorical house of cards. Greenspan's protege has been attempting to contain the collapse of frational reserve banking--not deflation.
Deflation implies the money was once real.
It was not.
Know your enemy.
Let me debunk this non-sense. If the fed is creating $1 Trillion in new money starting Jan 2013 (when fed runs out if short term paper) and the fed buys treasuries and MBS, which the banks in turn buys Treasuries as the author claims, then all the money is essentially being created to fund the deficit. The money is not buried in a hole. It's being lent to the gov. Does the gov not bid up the prices of goods and services as the largest consumer. How many years can the fed monetize the debt/deficit and deflation ensue. This deflation argument is absurd. The author completely ignores the fact that there are other people and nations using dollars besides the US...Good Grief!!!
I don't see how writedowns on bank balancesheets destroy money. That money is already in the hands of the seller of the house. Are you sure?
Writedowns destroy bank equity. They only destroy money when the bank goes bankrupt and can not make good on all liabilities.
If the bank's lending is constrained by its capital ratio, writedowns prevent new loans. Since the loan book is gradually being repaid, this destroys money, with a multiplier effect of 1/(capital ratio).
This seems to be what Bernanke is trying to offset (at the monetary/credit aggregates level).
My understanding is that the only way money gets destroyed is when it gets back to FED (where it is created). Otherwise it is just changing hands. When loans are paid back to banks (not FED) money is still there, it is in the cash reserves of the bank (to be granted as a loan again or pay the employees' salaries, etc). If not paid it is obviously in somebody else's hands, but not lost. In this case it is not the cash balances of the bank that gets the hit, it is the loan balances that are written down. The calculation in the article is wrong in my opinion.
You must be kidding right .. i stopped reading when it said that when you burry the money no inflation
The premesis that cash 'just disappears' is where you took a wrong turn Charles. It is still there in someone's posession is it not? And it is this cash that eventually piles up, along with other obligations to print cash, that get us to hyperinflation.
I understand the $150,000 on the banks books 'vanishing' but the cash???...how do you explain cash vanishing?
While I applaud the efforts to analyze the unseen, I'm detecting confusion with the concepts of credit and money within this article.
I do not follow the hypothical scenario explaining money destruction. Somehow $50,000 paid cash never existed, yet $150,000 of credit is a literal, phyiscal loss? The $50,000 didn't cease to exist, it was merely transfered elsewhere. The $300,000 loan didn't vanish, it was created by the loaning insitution. That money was paid to whomever the debtor was purchasing the house from. It did not vanish, but was merely reallocated elsewhere.
The $150,000 credit on the banks balance sheets did vanish, because it never actually existed. To the bank, their fractional reserved asset has now become a liability. When Bernanke counterfeits enough money to cover that liability, we now have genuine monetary inflation. The velocity has been reduced, but the conterfieting of Bernanke to fill the Abyss created by artificial credit does in fact achieve inflation.
As Bernanke's "hot money" was allocated to the rich, it has been relatively contained by investment class products like stocks, commodities, treasuries, and precious metals. This causes the inflation to spread more gradually, but it is still inexorable. It also explains the accerlation of the economic disparity among the populations of the world. As it has been said many times before, QE3's effects have already been priced in. First by credit, then by actual Federal Reserve Notes--digital or otherwise.
The Federal Government is borrowing $1.3 trillion a year, funded largely by the debt-monetizing Fed.
That offsets a whole lot of household deleveraging.
Hello all,
This is my first comment I am a young recent graduate trying to educate my self in the markets and macro Econ events. Please excuse me if I lack knowledge I know alot of you are very smart and rather strongly rooted in your opinions and views - not a bad thing.
I get the whole view on how QE causes inflation and I think I agree with it I am struggling to understand where views of deflation are coming from as discussed in earlier comments? I understand that deflation is caused from a fall in aggregate demand. If this is true why are 200 million iPhones being sold on the first day and why are prices going up such as food and gas. The reasoning that the fed wants QE to counteract deflation makes sense but I am struggling to see how deflation is evident.
Either way I realize we are fucked and the system is collapse. And again sorry if I don't make sense I am not that educated on this subject matter yet.
Ps. This message was actually sent from my iPhone while taking a shit
Welcome. Congradulations to being graduated; may your deprogramming be swift and gentle.
Your are correct in that deflation is not occuring. This crisis has born the world witness to the collapse of artificial credit created by fractional reserve banking. Money that never existed was being funneled into the housing bubble and all of its perifphery industries through credit. Over the last 5 years the artificial credit has been replaced with newly created money. This money has been recycled through treasury bonds or absorbed by the price inflation of asset class investments (Gold, stocks, commodities, etc.)
The increase of commodities is where inflation seeps down to the masses. That is why you have a contradiction. Bankers use terms to hide the truth to conceal their actions. Never listen to their words--analyze the likely repercussions of their actions to understand their intent. Only then will anything within the realm of economics or finance make sense.
http://mises.org/document/6071/Why-Credit-Deflation-Is-More-Likely-than-...
so gas was $.98 in 1998 now 2012 $3.82...up 290%
No Inflation....what an ass...this is the same guy that believes that its better that now you can buy a [plasma tv for 2k when in 2001 it cost 8k....
This fn guy is of the same mind set as the govt officials reporting no inflation excluding food and energy
Lets be honest how many TV's do you buy vs. how much gas do you buy...
CLOWN
Are dollars the equivalent of assets denominated in dollars?
If all houses in America lose half their value, why would this impact the monetary base? If the demand to hold cash reserves did not change (velocity), wouldn't this imply that there would just be more money chasing everything else in the economy?
"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."
Here's a question for the author on just this point above....Do you really think thats all they are doing to raise money for collateral or reserves?????
Come on you cant be this stupid....there is a host of products they are selling to the general public to raise money ie structured products...
anythoughts??
"Where's my bailout?" I see around $8,000 per capita if all the QE "money" had been distributed to the public. I wasn't planning to spend mine.
no matter how high or complex the internal walls of your vessel are the fluid overspill can only be delayed the inevitable result of too much fluid put in is overspill. Just because the financial engineer have a black box vessell they have not defied the laws of physics. So feel free to delude yourself into believing the vessell can take unlimited pumped fluids without inflation ... this is the deflationitist view that the bernanke can dissappear money at the rate he creates it. Nothing new under the sun the fairy tale derivatives and shadow banking system are no more than a dam construct capable of providing a delay of the inevitable.
So the banks are hording treasuries; however, these treasuries has to be bought with printed money, correct? So where did that printed money go? Didn't it go to the government to spend because what's the sense of borrowing if not spent, correct? I suppose that money go into circulation somehow; thus, increasing the monetary velocity.
Good inflation vs deflation debate. Although the deflationists presented a strong case I feel the inflationists won out.
For me the enormous expansion in the creation of usd and almost all major currencies by simple maths will lead to inflation. It is orchestrated and will continue to be. Historically prices and inflation are always over the long term up - and real inflation is far greater in real assets than CPI. Whatever linear and logical models will imply that for every action there isa reaction and wages or x or y will prevent 'growth' or inflation. This ignores a key dynamic, printing money, as debt and directing it to predecided x y z and wherever ever else it ends up going will create inflation. Saying inflation wont happen bcos blah blah, while ignoring money and debt supply, is like saying in July that it is so hot there will not be awinter this year. By the way please refer to gold price as the primary gauge of dollar devaluation. 700% rise in gold.
Finally a point made by areoflot that the creditors gain in deflation, this has some logic and raises the key question. I am convinced that whatever will profit and benefit the elite is what will actually occur, be that inflation or deflation. (although deflation in currency debasment and exponentially increasing money supply envirnment is artificial, temporary and unnatural). The clincher is that corporations prefer for the consumption age to continue, chaos may endanger their rigged game and monopoly.
"....That narrows the whole "wealth effect" to 7 million people out of 142 million workers..."
this what i have been screaming about since tarp 2008.....the plutocrats are plundering the nation blind - and of course the stupid people sort of get what they deserve and sort of don't....but mostly they deserve it because they have had 50 years to recognize that the government has lied to them ever since that fucktarded story about the magic bullet.....
bankster bailouts have been criminal starting with the 2 trillion dollars missing from the pentagon, announced the day before the bush crime syndicate attacked the pentagon and nyc.....
but the transmission mechanism is entirely broken for qe to involve blatant inflation though we have 7-10% obscure inflation.....the wealthy receive the bulk of the fiscal and monetary stimulus and there are only so many iphones which they can buy....everyone else can eat shit...