I figured out why QE is actually deflationary

[OverVolt]

So just some background

Government debt: ~$16T
Private debt: ~$60T
Fed Balance sheet ~$5T

Some basics: The money supply and how stimulated the economy is overall is due to debt creation. So long as we are leveraging the financial system to infinity, times are good. When there is deleveraging, times are bad.

In 2008 private debt started to deleverage and government debt took over and increased to compensate. (counter-cyclical compensation- this is a good thing, or else we get 1930s great depression part deuce)

Japan has a precedent for this, they are currently on QE8, and their economy is in a deflationary abyss.

So when the fed increases its balance sheet, what does this mean?

The fed buys MBS, and helps to prop up the housing market, or buys bonds and helps prop up the bond market. This forces people to take out larger loans for houses, school, whatever, on a personal finance level because they are in competition with the fed. It also lowers the interest rate enabling the borrowing of large amounts on the same wage.

Carrying high debt loads means people in their monthly payments are throwing a good bit of money away in interest, carrying high debt loads tends to cause deflation.

So thats why all this QE money supply expansion hasn't really led to inflation, and it won't. The money never makes it down to mainstreet in the form of wages, it just forces us to take larger loans.

This forces money velocity WAY down. And its going to stay there.

http://research.stlouisfed.org/fred2/series/M2V

Theoretically, people would expect money velocity to rebound in a normally functioning economy, but that will never happen without mass defaults to bring us back to normalcy, and mass defaults will never happen if the fed keeps propping up markets.

 

[Doc Savage Fan]

Our next bubble is the debt bubble. Deflation is coming.

 

[Jaskalas]

Servicing debt might reduce purchasing power, but doesn't that just cancel out the increase from incurring debt?

Also... which factor contributes to inflation or deflation?

 

[OverVolt]

Yea, taking out large loans contributes to inflation by leverage, but when the fed props up the markets to facilitate those large loans, it forces alot of people who would have otherwise defaulted to keep paying interest/barely afford the minimum payment. The goal of propping up the markets is to prevent a wave of defaults. Their buying power is almost zero and is deflationary.

And the people who do take out large loans, even at a small interest rate, end up paying alot of interest too. The people taking out new, big loans subsidize the ones trying to pay down old, should-have-defaulted loans.

 

[DCal430]

So just some background

Government debt: ~$16T
Private debt: ~$60T
Fed Balance sheet ~$5T

Some basics: The money supply and how stimulated the economy is overall is due to debt creation. So long as we are leveraging the financial system to infinity, times are good. When there is deleveraging, times are bad.

In 2008 private debt started to deleverage and government debt took over and increased to compensate. (counter-cyclical compensation- this is a good thing, or else we get 1930s great depression part deuce)

Japan has a precedent for this, they are currently on QE8, and their economy is in a deflationary abyss.

So when the fed increases its balance sheet, what does this mean?

The fed buys MBS, and helps to prop up the housing market, or buys bonds and helps prop up the bond market. This forces people to take out larger loans for houses, school, whatever, on a personal finance level because they are in competition with the fed. It also lowers the interest rate enabling the borrowing of large amounts on the same wage.

Carrying high debt loads means people in their monthly payments are throwing a good bit of money away in interest, carrying high debt loads tends to cause deflation.

So thats why all this QE money supply expansion hasn't really led to inflation, and it won't. The money never makes it down to mainstreet in the form of wages, it just forces us to take larger loans.

This forces money velocity WAY down. And its going to stay there.

http://research.stlouisfed.org/fred2/series/M2V

Theoretically, people would expect money velocity to rebound in a normally functioning economy, but that will never happen without mass defaults to bring us back to normalcy, and mass defaults will never happen if the fed keeps propping up markets.

Guess these experts should throw their Ph.Ds away since we have you now. Their education and knowledge is all wrong, you are right.

 

[BoberFett]

Guess these experts should throw their Ph.Ds away since we have you now. Their education and knowledge is all wrong, you are right.

How dare anyone try to think. Leave that to your government appointed overlords!

When did "liberals" become the group that bows and kisses the feet of royalty? This forum is full of "liberals" who do nothing but tell others to sit down, shut up, and do as they're told by the elite.

 

[piasabird]

Havent been buying Groceries have you? Bought any Gasoline lately? So has the price of Automobiles been going down? What indicators are you using?

 

[OverVolt]

Havent been buying Groceries have you? Bought any Gasoline lately? So has the price of Automobiles been going down? What indicators are you using?

I was expecting worse from the drought honestly

 

[fskimospy]

Private sector debt has been steadily declining since the financial crisis yet there is no corresponding uptick in inflation as your model would predict. Can you explain this as it would seem to explicitly prove you wrong.

 

[OverVolt]

Private sector debt has been steadily declining since the financial crisis yet there is no corresponding uptick in inflation as your model would predict. Can you explain this as it would seem to explicitly prove you wrong.

Paying down the debt is deflationary, its really that the Fed balance sheet expansion enables us to pay down the debt. If the Fed expanded its balance sheet AND private debt was increasing again, is when we would see the types of inflation that people are scared about.

 

[fskimospy]

Paying down the debt is deflationary, its really that the Fed balance sheet expansion enables us to pay down the debt. If the Fed expanded its balance sheet AND private debt was increasing again, is when we would see the types of inflation that people are scared about.

Now that the average person is less indebted than they were 3 years ago, by your logic there should be more inflation. I didn't ask about paying down the debt.

 

[OverVolt]

Now that the average person is less indebted than they were 3 years ago, by your logic there should be more inflation. I didn't ask about paying down the debt.

Its pretty much assumed deleveraging -> deflation.

Less indebted in this economy = debt paid down.

Less debt isn't no debt. They're still in the process of paying it down, the more they save the more they put toward paying it down, unless private debt starts expanding again.

You're asking me how private debt doesn't expand when people are in the process of paying it down lol. Thats where the money is going, toward paying off more debt.

Some form of debt has to be in expansion for there to be inflation.

 

[DucatiMonster696]

No offense I believe you need to go back and do some more reading on the subject.

John Hussman provides a pretty in depth analysis as to why we are seeing a slowing in money velocity while the actions of QE have and are leading to increased future inflation.

http://www.hussmanfunds.com/wmc/wmc110124.htm

Zerohedge has a less in depth and brief analyses which also dismisses the notion of a deflationary future.

http://www.zerohedge.com/contributed/2012-08-10/inflation-m2-and-velocity-money

In addition individual private debt has not decreased in as much as it has been replaced by increased credit card debt in place of mortgage debt and the recent trend has US individual private debt soaring to new records.

http://www.huffingtonpost.com/2012/12/07/us-consumer-debt-record_n_2260457.html

Furthermore there are more then a few voices who contend that Japan's "Lost Decade" is not truly what some politically minded economists believe it was/is in context to what has occurred in that nation. As GDP is not the end all or be all of growth statistics for a nation and the gist is that while Japan's stock market may not have recovered fully investment dollars have instead flowed into more tangible assets (factories, real estate, commodities, etc) which do more good for the average consumer and citizen in Japan then propping up their stock market.

http://mises.org/daily/5170

 

[Acanthus]

Our next bubble is the debt bubble. Deflation is coming.

This is what QE actually tries to prevent. It is essentially a reversible form of money-printing.

The problem is that once deflation starts, it is very hard to stop, and is disastrously bad for businesses. (maybe that is what we need in the US, a few less huge corporations floating around)

 

[DominionSeraph]

How dare anyone try to think. Leave that to your government appointed overlords!

When did "liberals" become the group that bows and kisses the feet of royalty? This forum is full of "liberals" who do nothing but tell others to sit down, shut up, and do as they're told by the elite.

Fine by me if you conservatards try to think for yourselves. The result is hilarious:
http://www.youtube.com/watch?v=YsdeAF_Prfo

Keep spraying that deflationary vinegar, Bober.

 

[BoberFett]

Fine by me if you conservatards try to think for yourselves. The result is hilarious:
http://www.youtube.com/watch?v=YsdeAF_Prfo

Keep spraying that deflationary vinegar, Bober.

This from the guy who claimed he was some sort of savant who is so in control of his physiology that he was a special training dummy for the military...

Crawl back under whatever slime covored rock you wriggled from under, worm.

In case anyone is wondering, here's Dumb-in-ya-seraph's gem of a post:

http://forums.anandtech.com/showthread.php?p=31779862

15 seconds is an eternity.
I've been on that side. A lot. When I was on Naval Security and we went through training scenarios, I was usually the practice dummy because I have this ability to make my body act as though I don't know what's coming, making take-downs realistic. (I identify the inclination to pretend, and then I just don't do it.)

I have faced down the cops with a gun. Faced them down with a knife. And I'll tell ya', the only time it takes more than a split second to disengage is when they've got you in a wrist lock so that you can't open your hand.

"Not pointing the gun in your hands in the direction of the cops" is a pretty easy thing to do. While his time in Iraq probably had him trained to face down anything with the barrel of a gun, he was no longer in Iraq. You do not face down the police with a gun -- that has a tendency to get you killed.
As seen here.

http://forums.anandtech.com/showthread.php?p=32083465

 

[Jhhnn]

The fed buys MBS, and helps to prop up the housing market, or buys bonds and helps prop up the bond market. This forces people to take out larger loans for houses, school, whatever, on a personal finance level because they are in competition with the fed. It also lowers the interest rate enabling the borrowing of large amounts on the same wage.

Explain how people are forced to take out larger loans & compete with the Fed when the Fed is buying their debt, enabling them.

 

[OverVolt]

Explain how people are forced to take out larger loans & compete with the Fed when the Fed is buying their debt, enabling them.

The fed is directly buying MBS through QE3, raising house prices. Simultaneously, they bought alot of 10Y treasuries, lowering mortgages rates, in additional to operation twist lowering mortgage rates.

So for the same monthly payment people can take out a larger principle, prices go up on items people buy with loans, houses, education, etc. because of the lower interest rate. Meanwhile everyday buyingpower diminishes by comparison. It causes wages to be stagnant and people get caught under massive debt loads. Not exactly a recipe for inflation. Except houses, school and cars, that type of thing.

 

[LegendKiller]

Your whole premise is wrong.

QE does not cause deflation. Credit contraction causes deflation and the only major thing going on is credit contraction. Higher loan balances causes inflation because you bid up assets or the liquidity travels to other places. QE in MBS is causing asset inflation in other sectors of the debt market, this is dropping interest rates everywhere and flattening out risk-spread which is regressively beneficial.

Japan's QE has fought credit contraction, deflation has existed there for a long time for many reasons, namely demographic based.

 

[LegendKiller]

The fed is directly buying MBS through QE3, raising house prices. Simultaneously, they bought alot of 10Y treasuries, lowering mortgages rates, in additional to operation twist lowering mortgage rates.

So for the same monthly payment people can take out a larger principle, prices go up on items people buy with loans, houses, education, etc. because of the lower interest rate. Meanwhile everyday buyingpower diminishes by comparison. It causes wages to be stagnant and people get caught under massive debt loads. Not exactly a recipe for inflation. Except houses, school and cars, that type of thing.

Every day buying power increases through lower rates in other products. You are assuming that everybody is going to buy a more "expensive" product b/c the lower rate rather than more product. Even if that were true the end result is the same. A more expensive product usually takes more input to create it, thus generating wealth.

You are basically saying that "buying power" in everything but what you think should lead to inflation doesn't matter.

You are also confusing what cause the decrease in mortgage rates, it had almost nothing to do with the 10Y TSY and everything to do with MBS.

 

[OverVolt]

You are also confusing what cause the decrease in mortgage rates, it had almost nothing to do with the 10Y TSY and everything to do with MBS.

Just read it. No snarky comments on my part. Biting my tongue.

http://useconomy.about.com/od/bondsfaq/f/Bonds_Mortgages.htm

 

[OverVolt]

Japan's QE has fought credit contraction, deflation has existed there for a long time for many reasons, namely demographic based.

Check the money velocity graph. QE drops money velocity to the floor by expanding the supply. The logical response when money velocity crashes is to hoard money, because everyone else is hoarding money (unless buying something with a loan! :awe: then they have no choice but to sign their name to a huge debt load). Its not so much demographics as it is the QE.

It forced even corporations to hoard money ---> stagnant wages and unemployment.

What is Apples cashpile up to these days? :awe:

 

[LegendKiller]

Just read it. No snarky comments on my part. Biting my tongue.

http://useconomy.about.com/od/bondsfaq/f/Bonds_Mortgages.htm

Wow, about.com, nice.

I'll let you in on something sparky (har). I work for one of the biggest fixed income money managers in the country, I do securitization bond research, every day. I've been in the securitization market for almost a decade.

The Fed buying ~90% of the supply, the GSEs keeping G-Fees low and buying up the vast majority of mortgages and banks being starved of higher yielding assets is what is causing low rates in mortgages.

The days of mortgages being benchmarked to TSYs is over, it was over when the vast majority of mortgages were securitized rather than held to maturity on balance sheet.

You can save your snarky comments, I really don't give a flying fuck through a rolling donut.

 

[OverVolt]

The Fed buying ~90% of the supply, the GSEs keeping G-Fees low and buying up the vast majority of mortgages and banks being starved of higher yielding assets is what is causing low rates in mortgages.

Wow its almost like buying a whole bunch of TSYs led to lower mortgage rates! I wonder if it was intentional!

It doesn't matter how over complicated the banks try to make the market, it still works the same damn way.

 

[LegendKiller]

Check the money velocity graph. QE drops money velocity to the floor by expanding the supply. The logical response when money velocity crashes is to hoard money, because everyone else is hoarding money (unless buying something with a loan! :awe: then they have no choice but to sign their name to a huge debt load). Its not so much demographics as it is the QE.

It forced even corporations to hoard money ---> stagnant wages and unemployment.

What is Apples cashpile up to these days? :awe:

Money velocity drops to the floor because credit is contracting, those in the middle do not want to get caught with higher liabilities and lower wages in a deflationary/recessionary environment. Thus they save more. Look at Japan's saving rate, look at the US' savings rate.

Japan's situation is exacerbated by the fact that their demographics (older people) leads to savings. Their problem is further exacerbated by the fact that almost all of their TSY holdings are internal, this will be a huge problem for them when those older people start to go from accumulation to distribution/spending.

Velocity increases as confidence returns. That won't happen until housing picks up again with gusto and middle class jobs are created.