Eric50 Posted December 15, 2012 Share Posted December 15, 2012 For all the neo-keynesians on this board (and for the others too) there is a must read interview of Leszek Balcerowicz, a Polish economist, in today's WSJ. This is actually an incredible irony: people who understand best the nature of capitalism are often found in former communist countries. "Generally in the West, intellectuals like to blame the markets," he says. "There is a widespread belief that crises occur in capitalism mostly. The word crisis is associated with the word capitalism. While if you look in a comparative way, you see that the largest economic and also human catastrophes happen in non-market systems, when there's a heavy concentration of political power—Stalin, Mao, the Khmer Rouge, many other cases." Going back to the 19th century, industrializing economies recovered best after a crisis with no or limited intervention. Yet Keynesians continue to insist that only the state can compensate for the flaws of the market, he says. "This idea that markets tend to fall into self-perpetuating crises and only wise government can extract the country out of this crisis implicitly assumes that you have two kinds of people. Normal people who are operating in the markets, and better people who work for the state. They deny human nature." http://online.wsj.com/article/SB10001424127887323981504578179310418828782.html Link to comment Share on other sites More sharing options...
Palantir Posted December 15, 2012 Share Posted December 15, 2012 Another economist fighting yesterdays war. Many of these practitioners have built their ideas and careers on fighting inflation, and as a result tend to be ideologically opposed to monetary easing measures. Man with a hammer.... Mr Balcerowicz does not acknowledge the obvious problems with his ideas - he doesn't recognize the fact that we're seeing the risk of monetary contraction with the end of a credit bubble, something that would be disastrous and impair the economy massively for many years. He assumes that businesses will immediately implement structural changes in a slowing economy, and doesnt acknowledge the fact that many of them would find it impossible to do so with credit tightening substantially. He assumes that ME is distortive, but apparently believes that monetary contraction wouldn't be? Finally, there's another implicit assumption in his line of logic that the credit bubble and recession was driven by business efficiencies, and that it is these businesses that need to restructure operations, and are being hindered by Fed policies. There is no theoretical or empirical basis for this idea. Nobody knows why credit bubbles happen... Link to comment Share on other sites More sharing options...
PlanMaestro Posted December 15, 2012 Share Posted December 15, 2012 More like the new Cavallo. Link to comment Share on other sites More sharing options...
Eric50 Posted December 15, 2012 Author Share Posted December 15, 2012 Another economist fighting yesterdays war. Many of these practitioners have built their ideas and careers on fighting inflation, and as a result tend to be ideologically opposed to monetary easing measures. Man with a hammer.... "Man with a hammer..." This is the whole point. Bernanke has only one tool, monetary easing, and that's all he can do... With disastrous results... Nobody knows why credit bubbles happen... Your underlying assumption is incorrect: Why did we have the tech bubble in the late 90s? Why did we have the real estate bubble in 2002-2007??? Ever heard about monetary easing and low interest rates back then? Don't you think that those fed the speculation? Easing/printing is all the Fed can do - again they are the ones with only one mental model... And they can't even realize that it has unexpected consequences and create bubbles... Link to comment Share on other sites More sharing options...
Palantir Posted December 16, 2012 Share Posted December 16, 2012 No, he can do monetary "tightening" too. What evidence is there that the results have been "disastrous"? Please remind me what happened the last time the money supply contracted after a massive credit bubble burst? Are you aware the Federal Reserve started raising their rates starting with 2004 from their low and pretty much every quarter until the credit crisis broke out in 2007? Overall Fed rates stayed depressed for only a short period of time, and cannot account for the massive credit bubble. Why were there credit bubbles elsewhere? You've bought into this BS of "Fed caused the bubble because they kept rates low 02-07", a position that has little empirical evidence and yet you presume it to be fact. You realize many of the people who saw the credit bubble happening first thought about it in the 98-03 period? Mike Burry published his report on "Extension of Credit by Instrument" in 2003... So yes, I have heard of "monetary easing and low interest rates back then". You basically ignored every single point I made in the post above. Instead of questioning why I have heard of it, please try to learn why others have a very obvious reason for disagreeing with you. Link to comment Share on other sites More sharing options...
Eric50 Posted December 17, 2012 Author Share Posted December 17, 2012 Palantir, There is an elephant in the room and you don’t see it. You think monetary easing is the solution while it is the problem. You are advocating more of the same thinking it will solve the problem. But the initial problem was created by the Fed’s monetization. What’s interest rate? It’s the price of money. Historically many countries have tried to control prices and it has never worked. Nixon implemented price controls in the early 70s; it led to instability and inflation. France also tried price controls in the early 80s when I grew up there; believe me the results were not pleasant…. By imposing interest rates, the Fed is actually trying to control the price of money, creating in the process huge misallocations of capital. History just keeps repeating itself. You are saying that tightening right after a credit bubble would be disastrous. There is actually a precedent for that. Back in 1920-21 the Fed’s answer to the depression was to tighten. It was ugly for a few months with a sharp GDP contraction but it did not last long. It cleansed up the system and set the foundation for a strong expansion in the few years to come. Look at Japan. They’ve kept loose monetary policies for more than 20 years and they never cleaned up the excesses of the late 80s. They lost two decades and in the meantime their monetization helped create incredible fiscal unbalances… You are saying there is no evidence that the Fed created and fed the tech and real estate bubbles. Do you really think that we would have had the same bubbles without low interest rates? Would people have borrowed as much with higher interest rates? Sure, the Fed started to raise the rates in 2004 but not enough to break the momentum. This is just human nature, people wanted to keep up with their neighbors… Just don’t add fuel to the fire… Some could see the bubble started to grow in 2002 and 2003 and the reasons why but no one could know when it would burst. Another example is the real estate bubbles in Spain and Ireland. The ECB policy was aligned for the German economy that was in a recession. Both Spain and Ireland economies were overheating at the time. Since they were part of the EZ they had to deal with low interest rates at a time when they should have been much higher. That fed the speculators and the bubbles… Similarly the current policies are creating a bubble in the bond market. I don’t know how much longer it will last but I suspect we’ll know soon. The Fed is trapped: at one moment its monetization won’t lower rates anymore as the bond market will revolt and the value of the dollar will be questioned. More money printing cannot solve the problem; the more the Fed prints, the worst it becomes. Link to comment Share on other sites More sharing options...
vinod1 Posted December 17, 2012 Share Posted December 17, 2012 Palantir, There is an elephant in the room and you don’t see it. You think monetary easing is the solution while it is the problem. You are advocating more of the same thinking it will solve the problem. But the initial problem was created by the Fed’s monetization. What’s interest rate? It’s the price of money. Historically many countries have tried to control prices and it has never worked. Nixon implemented price controls in the early 70s; it led to instability and inflation. France also tried price controls in the early 80s when I grew up there; believe me the results were not pleasant…. By imposing interest rates, the Fed is actually trying to control the price of money, creating in the process huge misallocations of capital. History just keeps repeating itself. You are saying that tightening right after a credit bubble would be disastrous. There is actually a precedent for that. Back in 1920-21 the Fed’s answer to the depression was to tighten. It was ugly for a few months with a sharp GDP contraction but it did not last long. It cleansed up the system and set the foundation for a strong expansion in the few years to come. Look at Japan. They’ve kept loose monetary policies for more than 20 years and they never cleaned up the excesses of the late 80s. They lost two decades and in the meantime their monetization helped create incredible fiscal unbalances… You are saying there is no evidence that the Fed created and fed the tech and real estate bubbles. Do you really think that we would have had the same bubbles without low interest rates? Would people have borrowed as much with higher interest rates? Sure, the Fed started to raise the rates in 2004 but not enough to break the momentum. This is just human nature, people wanted to keep up with their neighbors… Just don’t add fuel to the fire… Some could see the bubble started to grow in 2002 and 2003 and the reasons why but no one could know when it would burst. Another example is the real estate bubbles in Spain and Ireland. The ECB policy was aligned for the German economy that was in a recession. Both Spain and Ireland economies were overheating at the time. Since they were part of the EZ they had to deal with low interest rates at a time when they should have been much higher. That fed the speculators and the bubbles… Similarly the current policies are creating a bubble in the bond market. I don’t know how much longer it will last but I suspect we’ll know soon. The Fed is trapped: at one moment its monetization won’t lower rates anymore as the bond market will revolt and the value of the dollar will be questioned. More money printing cannot solve the problem; the more the Fed prints, the worst it becomes. I understand where you are coming from since this is pretty much what I used to believe. I have changed my opinion since after reading Richard Koo's and Bernanke's writings. 1. I agree monetary easing is not the solution. The main solution would be via fiscal policy. But given the deadlock on fiscal policy, Fed is doing its bit, which is through monetary policy and they are keeping rates low when unemployment is high and inflation is low. Are they supposed to raise rates when both unemployment is high and inflation is low? QE is only an extension of this logic and it makes sense to me. I do not understand how increasing interest rates would clense the system? How does that work? 2. Japan's stock market is down 75%, residential real estate is down 70% and commercial real estate is down 85%. I would think that if this happened in any country there would be a depression with very high employment (say over 20%). The fact that Japan has been able to keep its nominal GDP pretty stable and unemployment pretty low (less than 5%) seem to be an outstanding achievement. I think they did an awesome job. 3. Do not disagree that continued low interest rate in mid 2000 contributed to the housing bubble. Fed did mess up. 4. I do not understand how the "bond market is going to revolt". What would cause it to revolt? The only way is via inflation, if not Fed would be buying as much debt as needed (Monetization basically). Barring a cost push inflation, inflation would only increase if GDP is booming. That would not be too bad. As to the value of the dollar being questioned. That is part of the plan. Vinod Link to comment Share on other sites More sharing options...
PlanMaestro Posted December 17, 2012 Share Posted December 17, 2012 As to the value of the dollar being questioned. That is part of the plan. +1 It's not a bug … Link to comment Share on other sites More sharing options...
Eric50 Posted December 17, 2012 Author Share Posted December 17, 2012 1. I agree monetary easing is not the solution. The main solution would be via fiscal policy. But given the deadlock on fiscal policy, Fed is doing its bit, which is through monetary policy and they are keeping rates low when unemployment is high and inflation is low. Are they supposed to raise rates when both unemployment is high and inflation is low? QE is only an extension of this logic and it makes sense to me. I do not understand how increasing interest rates would clense the system? How does that work? The nature of capitalism is that the competent people take the business or the market share of the incompetents. The incompetents lose market share or become bankrupt and hopefully they learn a lesson. This is how the system cleanses itself naturally with every economic cycle. However, if there is a systematic support through low interest rates or bailouts there is no failure possible… You just reward incompetency and you weaken the strong who cannot gain market share. It’s like pruning in your yard; you have to regularly cut the bad branches so that the nice ones can grow. If you don’t prune them, the beautiful ones cannot grow as much. It’s also not moral as you help/reward the people who took risks that they should not have taken. At the same time, the savers, the people who consume less than they earn, are squeezed because they get a poor return on their investments… I don’t think it’s a very moral society to have a grand-mother who has saved $500k to get a 1% return on her CDs while the idiots who over-extend themselves and bought overpriced properties got helped through lower rates… And the grand mother is going to be financially squeezed by higher inflation… Similarly the current low rates encourage the federal government to continue its insane spending. It pays about $200bn a year in interest with super low rates. They’d pay much more with higher rates and would be forced to get the spending under control… 2. Japan's stock market is down 75%, residential real estate is down 70% and commercial real estate is down 85%. I would think that if this happened in any country there would be a depression with very high employment (say over 20%). The fact that Japan has been able to keep its nominal GDP pretty stable and unemployment pretty low (less than 5%) seem to be an outstanding achievement. I think they did an awesome job. Iceland is the perfect example of what Japan and the US should have done in my opinion. It let the system cleanse itself. Its banks were over-leveraged and exploding, it let the capitalist code take care of the bank losses as it is set up to function. The bank bond holders ate the losses and the bank executives got prosecuted. It was ugly for a while but now the country is recovering nicely. http://www.bloomberg.com/news/2012-09-26/is-remedy-for-next-crisis-buried-in-iceland-view-correct-.html I think it is a more moral society and it pays off in the long term. In contrast, Japan’s crisis is far from over. The day of reckoning is approaching. Sovereign debt to GDP is 220%. Japan’s balance sheet is a disaster. Abe, the new PM elected this weekend has already signaled that he wants the Japanese Central Bank to increase the monetization of the debt…. I suspect the Yen is ready to start a long downward slide… 4. I do not understand how the "bond market is going to revolt". What would cause it to revolt? The only way is via inflation, if not Fed would be buying as much debt as needed (Monetization basically). Barring a cost push inflation, inflation would only increase if GDP is booming. That would not be too bad. As to the value of the dollar being questioned. That is part of the plan. Interest rates are super low right now and the federal spending is out of control. The annual deficit has averaged $1.3bn a year the past 4 years and the total deficit is $16bn. Total spending is about $3.7bn a year with a revenue of about $2.4bn. While better than Japan, nobody with a decent mind would lend money to such a business at current rates… Right now the Fed is monetizing some of the debt and many investors are stupid/sheepish/don’t know what is happening but there will be a moment when the bond will realize/decide that it is not sustainable…. Just like what happened in Spain or in Greece, the market will wake up one day and force the rates up. Nobody knows when it will happen, it’s not predictable imo. But it will happen just like there is gravity… The interest payment that is about $200bn pa will shoot up, especially since most of the debt is short term and needs regular refinancing… Either the Fed will print even more (risk of very serious inflation) or the government decides to be serious and cut drastically the spending. Either way it’s pretty ugly. Link to comment Share on other sites More sharing options...
Eric50 Posted December 17, 2012 Author Share Posted December 17, 2012 Correction below, it's not in bn but in tn... "Interest rates are super low right now and the federal spending is out of control. The annual deficit has averaged $1.3tr a year the past 4 years and the total deficit is $16tr. Total spending is about $3.7tr a year with a revenue of about $2.4tr." Theses numbers are so mind-blowing that I can't even write trillions... Link to comment Share on other sites More sharing options...
vinod1 Posted December 18, 2012 Share Posted December 18, 2012 The nature of capitalism is that the competent people take the business or the market share of the incompetents. The incompetents lose market share or become bankrupt and hopefully they learn a lesson. This is how the system cleanses itself naturally with every economic cycle. However, if there is a systematic support through low interest rates or bailouts there is no failure possible… You just reward incompetency and you weaken the strong who cannot gain market share. It’s like pruning in your yard; you have to regularly cut the bad branches so that the nice ones can grow. If you don’t prune them, the beautiful ones cannot grow as much. It’s also not moral as you help/reward the people who took risks that they should not have taken. At the same time, the savers, the people who consume less than they earn, are squeezed because they get a poor return on their investments… I don’t think it’s a very moral society to have a grand-mother who has saved $500k to get a 1% return on her CDs while the idiots who over-extend themselves and bought overpriced properties got helped through lower rates… And the grand mother is going to be financially squeezed by higher inflation… Similarly the current low rates encourage the federal government to continue its insane spending. It pays about $200bn a year in interest with super low rates. They’d pay much more with higher rates and would be forced to get the spending under control… The shareholders of the institutions have suffered. It is only the management that has not suffered and I do not see how punishing the companies further would teach the management any lessons. Management has made the money and even if they lose their jobs it is not really a big deal for them. In contrast the shareholders and the vast majority of the people via their pensions, 401k, etc would suffer if Government did not help save many of the companies. Take AIG, their shareholders have suffered, the managers have been fired (but they did keep all their money), so what would be the point of bankrupting it? To teach future shareholders? Government has to act for the greater good and if it means some have not been punished so be it. There are other ways to deal with moral hazard. I do not think we should mix "morality" with good economic policy. Iceland is the perfect example of what Japan and the US should have done in my opinion. It let the system cleanse itself. Its banks were over-leveraged and exploding, it let the capitalist code take care of the bank losses as it is set up to function. The bank bond holders ate the losses and the bank executives got prosecuted. It was ugly for a while but now the country is recovering nicely. http://www.bloomberg.com/news/2012-09-26/is-remedy-for-next-crisis-buried-in-iceland-view-correct-.html I think it is a more moral society and it pays off in the long term. In contrast, Japan’s crisis is far from over. The day of reckoning is approaching. Sovereign debt to GDP is 220%. Japan’s balance sheet is a disaster. Abe, the new PM elected this weekend has already signaled that he wants the Japanese Central Bank to increase the monetization of the debt…. I suspect the Yen is ready to start a long downward slide… Iceland is a tiny country and I do not think those lessons can be applied to US. Their currency collapsed by 80% which would give a boost to a small economy like Iceland without impacting other countries (since it constitutes only a very small part of the trade for larger countries). It looks like they have written off the debt of consumers (moral hazard, immoral, helping out the incompetent - all that you seem to oppose). I have been hearing about the day of reckoning since 2001. I think they would manage just fine as US has done in 2009-2009. A little hiccup and business as usual. Again they want the Yen to collapse. Interest rates are super low right now and the federal spending is out of control. The annual deficit has averaged $1.3bn a year the past 4 years and the total deficit is $16bn. Total spending is about $3.7bn a year with a revenue of about $2.4bn. While better than Japan, nobody with a decent mind would lend money to such a business at current rates… Right now the Fed is monetizing some of the debt and many investors are stupid/sheepish/don’t know what is happening but there will be a moment when the bond will realize/decide that it is not sustainable…. Just like what happened in Spain or in Greece, the market will wake up one day and force the rates up. Nobody knows when it will happen, it’s not predictable imo. But it will happen just like there is gravity… The interest payment that is about $200bn pa will shoot up, especially since most of the debt is short term and needs regular refinancing… Either the Fed will print even more (risk of very serious inflation) or the government decides to be serious and cut drastically the spending. Either way it’s pretty ugly. It is not going to happen. Fed can buy as many bonds as it wants. Spain and Greece cannot. The only way interest rates are going to raise is if inflation raises. Cost push inflation (via a commodity inflation) is unlikely but even if it happens it would not be all that large as they constitute much smaller % of GDP now. Again to my point, the only way inflation is going up is if economy is booming. So we are not going to see pressure on the bond market until the economy booms. Vinod Link to comment Share on other sites More sharing options...
ERICOPOLY Posted December 18, 2012 Share Posted December 18, 2012 Fed can buy as many bonds as it wants. ... ...Again to my point, the only way inflation is going up is if economy is booming. So we are not going to see pressure on the bond market until the economy booms. Vinod I think that makes sense. Money is created when new credit (debt) arises. Over the past year or so BofA personally destroyed $100b worth of money by letting the LT debt roll off their books without replacement. That was deflationary. The Fed can then purchase $100b of MBS and it's a wash. Unless BofA starts expanding it's lending again... but as you suggested that doesn't happen until the economy booms. So the Fed perhaps is just replacing the evaporating money rather than creating a flood of new money. The inflation occurred in the past during the credit boom -- now the Fed is just propping it up rather than letting the inflation unwind. Link to comment Share on other sites More sharing options...
biaggio Posted December 18, 2012 Share Posted December 18, 2012 Employment level may be the thing to watch. Inflation not an issue until people are working and qualified to borrow. Low interest rates short and long until then. I like Dallo's concept on keeping interest rates below GDP growth in order to be able to grow out of various problems. Link to comment Share on other sites More sharing options...
Eric50 Posted December 18, 2012 Author Share Posted December 18, 2012 The shareholders of the institutions have suffered. It is only the management that has not suffered and I do not see how punishing the companies further would teach the management any lessons. Management has made the money and even if they lose their jobs it is not really a big deal for them. In contrast the shareholders and the vast majority of the people via their pensions, 401k, etc would suffer if Government did not help save many of the companies. Take AIG, their shareholders have suffered, the managers have been fired (but they did keep all their money), so what would be the point of bankrupting it? To teach future shareholders? Government has to act for the greater good and if it means some have not been punished so be it. There are other ways to deal with moral hazard. I do not think we should mix "morality" with good economic policy. We can differentiate between two kinds of government support: - direct bailout of a failing business. I’d argue that the crisis would have been lesser if the government had not bailed-out bankrupt businesses before. For example, by organizing a bailout of Long Term Capital Management back in 1998 the Fed sent a strong message to the market that it would support any failing financial organization. That led to the crazy growth and risk taking of banks until everything exploded in 2008. Bankers knew they’d get a bailout if they failed. It changed their behaviors (there were other factors like investment banks changing their corporate structures from partnerships to corporations; but I think those had less impact) and created the too big to fail institutions… Another example is the bailout of Chrysler in 1979. The car industry would have restructured much sooner if Chrysler had not been saved then by the government. - Permanent support through lower interest rated than the market would provide. This is my point from earlier and probably the worst kind of intervention because it distorts the market in the long term. Re management not suffering from their bad decisions. I think we all agree this is an issue…. Re AIG I would have preferred a regular bankruptcy. I’m sure many other institutions would have been happy to buy at a crazy discount all the great parts of AIG. But I agree at the time the emergency was such that the government had no choice. The bad decisions had already been made. Why do you think we should not mix morality with good economic decision? Iceland is a tiny country and I do not think those lessons can be applied to US. Their currency collapsed by 80% which would give a boost to a small economy like Iceland without impacting other countries (since it constitutes only a very small part of the trade for larger countries). It looks like they have written off the debt of consumers (moral hazard, immoral, helping out the incompetent - all that you seem to oppose). I have been hearing about the day of reckoning since 2001. I think they would manage just fine as US has done in 2009-2009. A little hiccup and business as usual. Again they want the Yen to collapse. Agree with the moral hazard in Iceland. I’m aware too that many people have announced the day of reckoning in Japan for a long time. That actually tells a lot about how resilient modern economies can be. But have you seen Japanese stats on saving rates, aging of the population? Look at Japan P&L and balance sheet. It’s clearly not sustainable and I’d bet a lot of money it will be more than a little hiccup… Here are a bunch of links if you want to start digging: http://www.gurufocus.com/news/154556/kyle-bass-third-quarter-letter-imminent-defaults http://www.zerohedge.com/news/2012-10-27/meanwhile-japan http://www.financialsense.com/contributors/grant-williams/2012/07/30/things-that-make-you-go-hmmm http://www.zerohedge.com/news/when-japan-goes-japanese-presenting-terminal-keynesian-endgame-14-charts http://capitalistexploits.at/2011/11/betting-on-an-inevitable-and-overlooked-crisis/ It is not going to happen. Fed can buy as many bonds as it wants. Spain and Greece cannot. The only way interest rates are going to raise is if inflation raises. Cost push inflation (via a commodity inflation) is unlikely but even if it happens it would not be all that large as they constitute much smaller % of GDP now. Again to my point, the only way inflation is going up is if economy is booming. So we are not going to see pressure on the bond market until the economy booms. Your statements contradict themselves: “Fed can buy as many bonds as it wants.” And “the only way inflation is going up is if economy is booming”. That’s not possible in my opinion; monetization of the debt is clearly inflationary in the long term. We live on earth and there is gravity. Again I grew up in France in the 80s and I’ve seen inflation. Believe me it was not due to a booming economy… Also, I think we are in a transition period between a deflation scare period and a real inflation (or stagflation) period. The deflation scare period is ending with massive money printing everywhere (QE3 in September, last week Fed announcement, LTRO in September, Abe elected in Japan, etc). We are now entering (or about to enter) an inflationary phase. Just a quick example from yesterday. I have 4 children and I’m self insured. When I started my current health insurance almost 4 years ago I used to pay $490 a month for the 6 of us. I got a letter yesterday with the new premium : $770 a month for exactly the same coverage… That’s a 57% increase over less than 4 years…. Quite inflationary, no? Link to comment Share on other sites More sharing options...
racemize Posted December 18, 2012 Share Posted December 18, 2012 I have 4 children and I’m self insured. When I started my current health insurance almost 4 years ago I used to pay $490 a month for the 6 of us. I got a letter yesterday with the new premium : $770 a month for exactly the same coverage… That’s a 57% increase over less than 4 years…. Quite inflationary, no? I don't think the health industry is a good example here--you could have said the same thing about health care cost increases for more than a decade. Link to comment Share on other sites More sharing options...
vinod1 Posted December 18, 2012 Share Posted December 18, 2012 Why do you think we should not mix morality with good economic decision? Why inflict suffering on the rest of the population via economic turmoil by bankrupting the companies, etc. Even though the policies bailout some of the people who took the risks, we should not let it implement policies that would benefit the overall economy. We have been down this road before in 1930's. What you are proposing is what Herbert Hoover has tried with disastrous results. http://www.mannmuseum.com/american-policies-during-the-great-depression/2/ Contemplating the wreck of his country's economy and his own political career, Herbert Hoover wrote bitterly in retrospect about those in his administration who had advised inaction during the downslide: The 'leave-it-alone liquidationists' headed by Secretary of the Treasury Mellon felt that government must keep its hands off and let the slump liquidate itself. Mr. Mellon had only one formula: 'Liquidate labor, liquidate stocks, liquidate the farmers, liquidate real estate'. He held that even panic was not altogether a bad thing. He said: 'It will purge the rottenness out of the system. High costs of living and high living will come down. People will work harder, live a more moral life. Values will be adjusted, and enterprising people will pick up the wrecks from less competent people' As to Japan, I agree it is not sustainable. Just saying all the "Doom and Gloom" about Japan has been 100% wrong for the past 12 years. It is likely to be wrong going forward as well as Japan would find a way to muddle through. If I had made a prediction and been wrong about something for 12 years, I would reconsider the thesis. You need to be able to put some realistic time frame and say if you was not proven right by that time, you am probably wrong. To me the Doom and Gloom thesis about Japan fits the bill. Your statements contradict themselves: “Fed can buy as many bonds as it wants.” And “the only way inflation is going up is if economy is booming”. That’s not possible in my opinion; monetization of the debt is clearly inflationary in the long term. We live on earth and there is gravity. Again I grew up in France in the 80s and I’ve seen inflation. Believe me it was not due to a booming economy… Inflation has to come from two sources 1. Cost push - via increase in input costs typically raw materials. Since services are taking up a larger share of the GDP, any such cost push inflation is likely to be modest. It might be a tad high but that would be within acceptable range. 2. Demand push - Inflation should come only when consumers are able to spend more money on goods/services. Unless government directly stuffs everyone's pocket directly with currency, literally throwing money from Helicopters, the only way consumers would be in this position is when economy improves and unemployment drops thus putting pressure on wages. In the 1970s it is a combination of cost push (oil) and wage contracts/plensions that had built in inflation adjustments. Both of these risks are dramatically lower now - commodities make smaller percent of GDP; Lower percentage of workforce under unions, lower percentage of workforce having any built in wage inflation clauses, lower number of people with pensions that have built in wage increases. All this makes inflation less likely. Fed is going to suck up liquidity when it needs to i.e. when economy starts growing rapidly. You are basically assuming that just because debt if monetized it automatically leads to inflation. It would not. Its effect has to flow through the two mechanisms above. Fed would act when needed so it would not lead to higher inflation. Vinod Link to comment Share on other sites More sharing options...
meiroy Posted December 19, 2012 Share Posted December 19, 2012 Ericopoly, Could you explain this: "Over the past year or so BofA personally destroyed $100b worth of money by letting the LT debt roll off their books without replacement. That was deflationary. The Fed can then purchase $100b of MBS and it's a wash." Link to comment Share on other sites More sharing options...
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