USG Debt bubble popping?

[The-Noid]

snip

The point you are trying to makes relates to "Monetary Base."

Money supply is much harder to prove due to lending and conduit vehicles. Money supply as a broad measure of M3 (which is exceedingly hard to calculate) may or may not be growing at this point. Japan has been fighting broad based money supply contraction even with a monumental size central bank balance sheet.

You would need a 300% increase in monetary base to get gold to $5000. Based on current hypothecated m3 stats that would increase total lending over $75T.

Printing or monetary base growth is what gold investors would like to happen. The term money supply shouldn't be used interchangeably.

 

[First]

Because any idiot can annualize numbers in two seconds. Showing actual gain sans adjustments shows how the economy is actually evolving.

The GDP Index values are all that matters, the Y/Y growth numbers are for the simpletons and newspaper quotes.

It's not particularly idiotic since it's common sense to quote seasonally adjusted numbers, for example, because comparing Q1 over Q4 isn't really a sensible comparison given factors such as holiday shopping.

 

[3chordcharlie]

He said annual, not annualized, but I see his point if that's what he was trying to say. And why would you not compare quarter-over-quarter again? AFAIK they're compared quarter-over-quarter from the previous year for seasonal adjustments.

That's what I thought I was saying. In the BEA numbers it looked like they actually were comparing Q4 to Q3 and giving an annualized (and seasonally adjusted) rate.

Really, the results of either method should be somewhat similar, and what I was arguing against was that you stated '3-4% this quarter, and again next quarter' inplying 6-8% total, in half a year.

 

[First]

I never said anything about changing the number of people. If the velocity changes, each dollar of currency changes hands more often; it's the same as increasing the money supply. I don't think it's likely relevent here though. I thought the GDP comparisons were to previous year, same quarter - they aren't. They are annualized rates. As in if you post 4% in each of 4 quarters, you have 4% growth; it isn't additive.

Yes, it's not compounded on a quarterly basis, correct. Though I'm still not sure what you mean about velocity. You always want to increase the money supply because every single day someone is being added to the pool of dollar usage. You have to counteract velocity with money supply increases of the same magnitude to maintain 0% inflation, if that were your goal, in other words.

Which means gowth has been at 3-4% in each quarter, not per quarter as you claimed. I was wrong; you were just much more wrong.I didn't say it would be soon; would need ~300% increase in money supply if the real price of gold stayed constant. Approx. a couple of months under typical hyperinflation scenarios. I don't agree with unassailable (edit - which is a very strong claim), and non-controversial doesn't mean accurate. What I'm saying is the commonly reported statistic substantially understates how many people would need to be restored to employment to complete a recovery.

I never said GDP was compounded quarterly. Also, U3 doesn't understate employment because it's very clear what it measures; it doesn't measure part-time workers who want full-time work but can't find it, as that's U6. It's unassailable because they're straight-forward numbers with contingent valuation methods that are non-controversial. You may not think non-controversial means much, but you have to come up with an alternative if you believe unemployment is substantially under-reported. Be specific.

Not a complete picture at all without considering debt levels and assorted other novelties. This recovery is occurring under what would normally be a highly inflationary monetary policy, which was my original point. That is troublesome.

I can't convince you otherwise, so whatever. I can only point to inflation being extremely low for over 2 years despite trillions in guarantees and infusions.

 

[First]

That's what I thought I was saying. In the BEA numbers it looked like they actually were comparing Q4 to Q3 and giving an annualized (and seasonally adjusted) rate.

Really, the results of either method should be somewhat similar, and what I was arguing against was that you stated '3-4% this quarter, and again next quarter' inplying 6-8% total, in half a year.

Yes, I see what you mean now. Of course, they're not compounded quarterly.

 

[3chordcharlie]

The point you are trying to makes relates to "Monetary Base."

Money supply is much harder to prove due to lending and conduit vehicles. Money supply as a broad measure of M3 (which is exceedingly hard to calculate) may or may not be growing at this point. Japan has been fighting broad based money supply contraction even with a monumental size central bank balance sheet.

You would need a 300% increase in monetary base to get gold to $5000. Based on current hypothecated m3 stats that would increase total lending over $75T.

Printing or monetary base growth is what gold investors would like to happen. The term money supply shouldn't be used interchangeably.

I'm talking mainly about money created due to loose Fed rate policy.

 

[Engineer]

This is what I find amazing, yet again, Engineer shows his ignorance in this area by making statements rather than asking questions.

from you in response to...

60% of the CPI is services. The price of services has stayed the same or gone down a bit because people are desperate for work. That is covering up for fact the that goods (the other 40%) have gone way up. If unemployment actually goes down and service prices go up all of a sudden the CPI will jump.

WTF did I even say in this thread?

 

[3chordcharlie]

Yes, it's not compounded on a quarterly basis, correct. Though I'm still not sure what you mean about velocity. You always want to increase the money supply because every single day someone is being added to the pool of dollar usage. You have to counteract velocity with money supply increases of the same magnitude to maintain 0% inflation, if that were your goal, in other words.

Okay, you're saying velocity increases, essentially as a response to a decrease in per capita money supply.

Then the portion of money supply increase needed to counteract this has little effect. That's fair enough. For the purposes of a 3-5ish year period, in most western nations, I would ignore population changes in analysis due to the small % change.

I never said GDP was compounded quarterly. Also, U3 doesn't understate employment because it's very clear what it measures; it doesn't measure part-time workers who want full-time work but can't find it, as that's U6. It's unassailable because they're straight-forward numbers with contingent valuation methods that are non-controversial. You may not think non-controversial means much, but you have to come up with an alternative if you believe unemployment is substantially under-reported. Be specific.

The problem is the commonly reported number doesn't tell you all that much; specifically most of (U4-U3) is going to pass back through being reported in U3 before you clear out the backlog. Some of U5 is also going to take jobs without reducing U3. So in good times, U3 is a good measure, mostly of frictional unemployment. In sustained poor times, and during a recovery, other measures become pretty relevent, and maybe even more important.

As a thought experiment, you could take baseline U6 during sustained times of high employment to estimate how many people are 'lying' about wanting work now.

I can't convince you otherwise, so whatever. I can only point to inflation being extremely low for over 2 years despite trillions in guarantees and infusions.

That's what bothers me and makes me wonder what's really going on. Because based only on the reported numbers... it just doesn't make sense. My gut still tells me that dumping as much nearly-free credit into the system as has been dumped must be causing a problem. Of course there is the accompanying problem of swelling and unsustainable government debt.

Hmm.. someone should start a thread about that

 

[The-Noid]

I'm talking mainly about money created due to loose Fed rate policy.

In a sense not inflationary though automatically.

If total bank lending and shadow bank lending (total money supply m3 or m4, depending on which country you are in) is shrinking the Fed's actions are not an automatic bonus for gold investing and inflation.

Monetary base growth however is inflationary and an automatic bonus for gold. This idea that the fed automatically will create growth in gold due to its current policies may turn out correct (what came first the chicken or the egg) but isn't an automatic slam dunk.

Don't get me wrong I think the Fed loses commodities even more but most people don't explain what is happening correctly.

 

[The-Noid]

That's what bothers me and makes me wonder what's really going on. Because based only on the reported numbers... it just doesn't make sense. My gut still tells me that dumping as much nearly-free credit into the system as has been dumped must be causing a problem. Of course there is the accompanying problem of swelling and unsustainable government debt.

Hmm.. someone should start a thread about that

That is because total money supply is shrinking or shrunk so badly. The Fed is using bank reserves not monetary base. Don't confuse the two terms.

You can look at Japan for the example, if your banking system is shrinking considerable the central bank can fill the hole using bank reserves. Using the monetary base has a different result.

The problem is inflation is almost completely centered in commodities and a good case can be made that is due to investment vehicles not actual inflation.

There is a certain run to commodities (myself included) because of the high past performance during periods of increasing inflation. It is a chicken and the egg argument. People used to run for commodities when inflation picked up, now they are running to commodities because they fear inflation, which is in a sense causing inflation.

 

[Darwin333]

Inflation is not "way beyond" 1.5%. I would love for you to prove that it is in an impirical way.

No, it is not silly, it is actually quite logical. Moreso, there's a reason why it is measured with AND without food/energy.

Published employment may not always be spot on but I think it's been corroborated reasonably well by private figures.

I don't think that you can deny that we have had a major ramp in commodity prices and we aren't talking about a few of them, much closer to, oh lets say, almost all of them. Food and energy are made from those commodities (as well as most consumer goods). Either the consumer is paying for the increased cost or the manufacturer is. If it is the manufacturer that would mean significantly reduced margins which would then mean the publicly traded ones are likely very overpriced due to those collapsing margins.

Either that or the tooth fairy is paying the difference, which is it?

As far as those who say we can inflate our way out of debt, without serious entitlement reform which we will not do, no we can't. It would cost us more than the debt we inflated away almost immediately so they couldn't even play kick the can with it unless they flubbed the inflation numbers (they would never do that...).

 

[3chordcharlie]

That is because total money supply is shrinking or shrunk so badly. The Fed is using bank reserves not monetary base. Don't confuse the two terms.

You can look at Japan for the example, if your banking system is shrinking considerable the central bank can fill the hole using bank reserves. Using the monetary base has a different result.

The problem is inflation is almost completely centered in commodities and a good case can be made that is due to investment vehicles not actual inflation.

There is a certain run to commodities (myself included) because of the high past performance during periods of increasing inflation. It is a chicken and the egg argument. People used to run for commodities when inflation picked up, now they are running to commodities because they fear inflation, which is in a sense causing inflation.

That's why pure cause and effect, or 'scientific' economics is fairly flawed - it's not a 'dumb' system like chemistry. If you know how things are predicted to unfold, you act accordingly, and often change the outcome.

There have also been a few direct currency dumps into the market over the past couple of years, including (unfunded) stimulus cheques; the equivalent of the Macro 1 'drop dollar bills around from a helicopter to change the money supply'.

The end result is I expect there is a wild ride still in store for the American dollar, and with it the rest of the world's fiat currencies. I'm really bothered by such a long-term loose money policy, and if it doesn't work (like in Japan) we could see a decade long recession.

 

[The-Noid]

There have also been a few direct currency dumps into the market over the past couple of years, including (unfunded) stimulus cheques; the equivalent of the Macro 1 'drop dollar bills around from a helicopter to change the money supply'.

You can't argue with someone that doesn't even understand the difference between fiscal stimulus and monetary stimulus. Fiscal is borrowing and has very low multiplier (i.e. look at Japan, which continues to borrow on the fiscal side) the monetary stimulus your argument is trying to make is you actually print money (increased monetary base) and drop it from helicopters. Borrowing $150B to send out checks for votes on the government side is inflationary agnostic, printing $150B to the monetary base and sending it out to consumers is massively inflationary as the multiplier from the monetary base is gigantic.

I own precious metals but the majority of people that make the precious metals argument are simply put a very slow subset of the world's population. They are not financially or economically oriented and make cases for gold's rise that make absolutely no sense. In the end gold and commodities should be up long term but generally not for the reasons gold bugs bring up.

 

[the DRIZZLE]

You can't argue with someone that doesn't even understand the difference between fiscal stimulus and monetary stimulus. Fiscal is borrowing and has very low multiplier (i.e. look at Japan, which continues to borrow on the fiscal side) the monetary stimulus your argument is trying to make is you actually print money (increased monetary base) and drop it from helicopters. Borrowing $150B to send out checks for votes on the government side is inflationary agnostic, printing $150B to the monetary base and sending it out to consumers is massively inflationary as the multiplier from the monetary base is gigantic.

I own precious metals but the majority of people that make the precious metals argument are simply put a very slow subset of the world's population. They are not financially or economically oriented and make cases for gold's rise that make absolutely no sense. In the end gold and commodities should be up long term but generally not for the reasons gold bugs bring up.

Fiscal deficits are only inflation agnostic if:
1. The central bank is independent
2. The central bank only cares about inflation

Since the fed has dual mandate to control inflation and unemployment fiscal deficits are likely inflationary.

 

[The-Noid]

Fiscal deficits are only inflation agnostic if:
1. The central bank is independent
2. The central bank only cares about inflation

Since the fed has dual mandate to control inflation and unemployment fiscal deficits are likely inflationary.

Again then not the action of the fiscal stimulus, still the action of the central bank.

If the fiscal deficit is monetized, it is inflation from the monetary side. If the monetary side fails to raise rates in the face of inflation and causes too much low cost borrowing on the fiscal side, the monetary side has still caused the inflation.

Fiscal deficits themselves are inflation agnostic, the monetary response is the inflationary aspect.

Thanks for making my point.

 

[matt0611]

Can one of you guys who are taking the "inflation is nothing to worry about" side give me your take on why we are not seeing very much inflation even though m1 has increased so much?

Is it because you think real prices are falling and so the growth in m1 is just resulting in low CPI increases or do you believe the velocity of money is so low, or that it will just take a while to get into the system?
Or a combination?

Graph of m1:

 

[The-Noid]

Can one of you guys who are taking the "inflation is nothing to worry about" side give me your take on why we are not seeing very much inflation even though m1 has increased so much?

Is it because you think real prices are falling and so the growth in m1 is just resulting in low CPI increases or do you believe the velocity of money is so low, or that it will just take a while to get into the system?
Or a combination?

Graph of m1:

Likely a combination of a multitude of things.

1.) There is an obvious lag and the lag should be much larger and fierce based on the magnitude of stimulus and magnitude of the banking/economic crisis.
2.) Although M3 (M2 + marginal liquidity providers, hedge funds, structured finance) is unpublished because it was extremely difficult to extrapolate based on multiple counting of many leveraged finance vehicles, it is nearly impossible to make a case that total money supply has not SHRUNK substantially (trillions of dollars worth) from its high point. With the shrinkage there it is fairly easy to make a case the total money supply outstanding has shrunk and it will take a significant amount of time before we actually see money supply growth. This is the argument for why Japan embarked on QE as the banking system popping caused a subsequent lack of lending and asset side growth.
3.) There is simply no wage inflation because the economy is weak (but that is a demand side and not a monetary side argument).

Please also note, I don't consider myself to be on either "side." I do think inflation wins but I don't think it is the slam dunk that a lot of people think it is.

Also, as I wrote earlier in the past: pensions, investors, hedgies, institutions, etc. ran to commodities for inflation protection as inflation picked up and we were overheating, this recession we have seen people run to commodities preemptively. All of the inflation we are seeing is basically focused there and if the economy doesn't expand or inflation doesn't come in the real economy there is a good chance people unwind these positions because of a lack of theory. I make no hypothesis as to whether people are running to commodities as a store of value (in that case why are futures leveraged so highly and why buy futures to begin with) or are they running to physical commodities and the leveraged futures price is a unbiased indicator of actual demand. The price everyone pays comes from futures so the physical is irrelevant, except in case the apocalypse comes (which is why I hold Silver and Gold outright, like everyone should but that has been the case for thousands of years not because of the last three years of Fed printing).

 

[3chordcharlie]

Can one of you guys who are taking the "inflation is nothing to worry about" side give me your take on why we are not seeing very much inflation even though m1 has increased so much?

Is it because you think real prices are falling and so the growth in m1 is just resulting in low CPI increases or do you believe the velocity of money is so low, or that it will just take a while to get into the system?
Or a combination?

Right or wrong, this is exactly what I was saying and thinking that lead to this little show!

To wit: the combination of what is happening with real prices, and monetary changes are giving an appearance of relative stability which I think is not accurate.

 

[The-Noid]

snip

Also obviously Velocity has shrunk, I figured that point need not be brought up.

If you did want to make the inflation argument this is the obvious graph to go to.

 

[Engineer]

This is what I find amazing, yet again, Engineer shows his ignorance in this area by making statements rather than asking questions.

(Again)...No response as to what I said during this thread to provoke this?

:thumbsdown::thumbsdown::thumbsdown:

 

[werepossum]

(Again)...No response as to what I said during this thread to provoke this?

:thumbsdown::thumbsdown::thumbsdown:

Considering that LK quoted a perfectly sensible post by "The DRIZZLE" that actually supports LK's own defense of official government inflation figures (pointing out that food and energy aren't that large factors in American budgets), it's pretty clear that LegendKiller had a complete brain fart and has either given up the thread in embarrassment, or is simply not able to read and post at the moment. Clearly you said nothing to draw that response, so don't sweat it. I'm more inclined toward Darwin's and GenX87's view myself, but I have to admit that LegendKiller and "The DRIZZLE" make compelling points to the contrary.

Of course, none of that addresses Bamacre's initial post, so I'll just agree that anyone dumping large amounts of American debt is a bad thing indeed. Our ability to avoid defaulting by monetizing the debt assumes that we can continue to sell debt in American dollars, not only for new debt but also for rolling over our existing debt. If that were to end - if for instance we can only sell debt in ero's or yen - then we lose that out except to do it all within the period of our debt, the vast majority of which is ten years or less. That would be akin to defaulting; we'd have no credit, no allies, and probably trade barriers with every other nation in the world. While these isolated actions are not evidence that this might happen, just the mere thought is enough to send shivers down my spine.

 

[Engineer]

Considering that LK quoted a perfectly sensible post by "The DRIZZLE" that actually supports LK's own defense of official government inflation figures (pointing out that food and energy aren't that large factors in American budgets), it's pretty clear that LegendKiller had a complete brain fart and has either given up the thread in embarrassment, or is simply not able to read and post at the moment. Clearly you said nothing to draw that response, so don't sweat it. I'm more inclined toward Darwin's and GenX87's view myself, but I have to admit that LegendKiller and "The DRIZZLE" make compelling points to the contrary.

I was leaning toward the same conclusion (about LK's post) but he has not responded to two posts here as well as two PM's to ask for clarification. Don't know.....doesn't look like I'll find out, lol.

 

[Fern]

-snip-
Nope, they're the same ones we've been using for several decades now and plenty of other employment data is available if you're confused.

Yes, but I believe the very method itself precludes it from being useful as a method of comparison from period-to-period.

The notion that you are not counted as unemployed when out of desperation or hopelessness of finding a job and give up is highly misleading IMO.

It has a way of tempering the numbers so that comparisons become almost meaningless. In times of a very bad economy, that metic will make the unemployment look lower because so many have given up on looking for a job. When things are good people are not hopeless and that group now suddenly qualifies as unemployed making the better numbers look worse.

It tends to average out the highs and lows based on a faulty and misleading metric. IMO, when things are so bad people are hopeless, that hopelessness should be factored in so as reflect that things are worse, not used to make them appear better. I.e., they've taken a negative indicator and turned it into a positive one. It's completely bassackward.

Fern

 

[LegendKiller]

Considering that LK quoted a perfectly sensible post by "The DRIZZLE" that actually supports LK's own defense of official government inflation figures (pointing out that food and energy aren't that large factors in American budgets), it's pretty clear that LegendKiller had a complete brain fart and has either given up the thread in embarrassment, or is simply not able to read and post at the moment. Clearly you said nothing to draw that response, so don't sweat it. I'm more inclined toward Darwin's and GenX87's view myself, but I have to admit that LegendKiller and "The DRIZZLE" make compelling points to the contrary.

Of course, none of that addresses Bamacre's initial post, so I'll just agree that anyone dumping large amounts of American debt is a bad thing indeed. Our ability to avoid defaulting by monetizing the debt assumes that we can continue to sell debt in American dollars, not only for new debt but also for rolling over our existing debt. If that were to end - if for instance we can only sell debt in ero's or yen - then we lose that out except to do it all within the period of our debt, the vast majority of which is ten years or less. That would be akin to defaulting; we'd have no credit, no allies, and probably trade barriers with every other nation in the world. While these isolated actions are not evidence that this might happen, just the mere thought is enough to send shivers down my spine.

My post was from a prior thread with Engineer, who, if I recall correctly, thought that GDP was nominal GDP, not real GDP, thus including inflation. I could be wrong, tried to find the post for a while and gave up.

Monetizing our debt is the only effective way we have to fight against China. Your post in a prior thread mentioned that the wage difference is huge for China, in 2005. However, 6 years later and almost 100% more pricing for them, wages in the larger cities are approaching US wages. There is a huge disparity that cannot be controlled by the central government.

I was discussing this very point with a friend and fellow CFA charterholder today. Personally, I think that the US is set very well for the future in that we have a huge amount of resources that we are not expending. While we are importing energy I don't doubt we'll be a net exporter in a few decades.

I don't worry too much for the future of this country.

 

[JSt0rm]

I don't worry too much for the future of this country.

But its so much easier to buy canned food and ammo and hope for the end of days then it is to succeed by using ones brain in this modern world.