November 3, 2010

Quantitative Easing II

The Fed wants to concoct some more money: "Quantitative Easing II."

I don't get it. To avoid a recession, the Fed dreamed up more money followed the bursting of the subprime bubble in the summer of 2007. The biggest effect of printing more money was, apparently, to drive up the price of gasoline to almost $5 per gallon in June 2008. (I recall with a shudder putting $87 worth of gas into my minivan -- very stressful). In turn, high gas prices just killed home prices in long-commute exurbs, like Palmdale / Lancaster and the Inland Empire of California. It permanently changed the psychology of homebuyers, which had been, well, sure, gas costs $3 per gallon now, but it might well go back to $1.10 per gallon like it was a few years ago. In 2008, the psychology changed to: Uh, oh, $10 per gallon is going to happen one of these days, so I'd better not get stuck way out in the exurbs.

(By the way, I have a suspicion that the Peking Olympics had something to do with the spike in oil prices. Remember how diesel got much more expensive than gasoline? Were the Chinese stockpiling diesel for some reason? Anyway, it's odd that trying to find an explanation for this bit of traumatic recent history has largely been forgotten.)

And that collapse of exurban home prices is what set in motion the collapse of Fannie/Freddie and Lehman in September 2008.

So, how is Quantitative Easing II going to make people want to buy all the foreclosed homes in the exurbs? I mean, I could see how high gas prices could do inner suburbs some good by making them more desirable than exurbs, but I can't see how printing money solves the main housing problem: the exurbs. Maybe printing more money won't inflate oil prices this time, but it sure seemed to last time.

89 comments:

robert61 said...

Printing money will raise oil and commodity prices and will hurt the relative value of exurban housing. Printing money is not the solution to those problems. It's the solution to the problem of not having any money, but not wanting to raise taxes or cut spending.

Anonymous said...

What about car sharing and car pooling, in which local communities broker groups taking the same work journey?

T said...

"It's the solution to the problem of not having any money, but not wanting to raise taxes or cut spending."

Too true. Now with a divided house and senate, printing money is the only game in town to keep our over leveraged economy sputtering along.

Anonymous said...

Maybe it has to be admitted that exurbs are just not a great idea.

Dave said...

In theory, QE will lower mortgage rates and real interest rates in general. In reality, if someone is unemployed, it doesn't matter if mortgage rates are 5% or 3%, because they won't qualify for a mortgage (or a refi) anyway.

On the pseudo-positive side of the ledger, QE may stimulate exports a little by weakening the dollar further. It also might stimulate some wealth effect by inflating stocks and other financial assets. But it will raise gas and food prices. And it will increase the chances of an eventual dollar/treasury crash.

dearieme said...

Printing money won't do any good at all if nobody who's a good credit risk actually wants to borrow. It'll probably be some time before the harm becomes clear though, and then the blame can be heaped on the next President.

rightsaidfred said...

Our central planners HOPE they can spur some economic activity with the expedient of printing money.

There has been times of monetary constraint in the past, but I can hardly believe that is what we have now.

This didn't work for Zimbabwe, but maybe they just did it wrong.

The Audacity of Hope indeed.

Bob said...

You are correct that the big peak in oil prices was because of pre-olympic stockpiling by the Chinese.

Their increased consumption also means oil prices will never get much lower than they are now.

You should read Paul Krugman's blog for an explanation of QE and another concepts directed at educated laymen.

The goal of QE in any case is to prevent Japanese style deflation and to reduce long-term corporate interest rates. Right now short-term rates are below 1% for AAA companies because of expected low inflation and a glut of savings.

There is no specific concern with helping people buy exurb foreclosures. More like let's expand the business even if our return is only 5% because we can borrow at 3%.

Anonymous said...

Please explain how "printing more money" can drive up the price of gasoline without also similarly driving the price up of other goods and services.

headache said...

Maybe the Fed needs to consult Robert Mugabe, who is the contemporary expert at printing money and devaluing his currency.

Anonymous said...

Steve-O,

You're still working under the assumption that our leaders are looking out for us.

They're not, they're in it for themselves.

jack strocchi said...

Steve Sailer said:

The Fed wants to concoct some more money: "Quantitative Easing II."
I don't get it.



Steve

Have the greatest respect for your political sociology, not your political economy. The Austrians were spot on for the causes of the GFC. But the Kenysians are the go-to guys for the cure of the GFC.


Expansionary economic policy does not really drive up the price of base industrial commodities unless there is panic buying by consumer - or speculation by investors. Which explanation looks more plausible in the light of what we now know about financial traders behaviour with electricity and grain futures?

There is no mystery to the Fed's policy, they are desperately re-applying CPR to the patient who has a tendency to flat-line given the terrific loss of economic liquidity over the past few years.

The GFC started as a solvency crisis (in security stocks) caused by drastic over-leveraging on very dodgy assets. This naturally degenerates into a liquidity crisis (cash flow) as firms credit lines dry up whilst they amortise debt or call in loans.

That means that the US's economic authorities (the Fed and Treasury) must now resort to desperate measures: fiat money creation by the Fed and pump-priming deficit spending by Treasury.

The Fed initially went in for qualitative liberalising ie changing the composition of financial firms balance sheets to reduce their reliance on cash reserves for credit.That was supposed to give firms a little more breathing room to take a punt on riskier assets, without the need for large cash reserves.

The Fed is going for a second round of quantitative easing because the first round has now been exhausted. Quantitative easing increases the aggregation of the financial firms balance sheet, giving them more cash reserves which thereby increases their high-powered monetary base.

It remains to be seen how far the US economy can go with the Fed continuing to pump juice into the economy in the hope that it will spontaneously burst into life.

I am not optimistic.

Anonymous said...

Yes, the Chinese were buying up oil ahead of the Olympics to ensure supplies, and they were also filling the strategic petroleum reserve.

Hugh Hendry was the first to note that the price of oil started running up along with the Chinese currency and both stopped at the same time. Since the RMB still closely follows the U.S. dollar even when unpegged, once their currency starts to rise it opens up the possibility for Chinese to engage in the carry trade. Borrow U.S. dollars, buy a commodity priced in dollars such as oil, collect profit. Since financial markets are non-linear, a small change in the value of the currency can fuel huge moves in other markets.

As for the result of QEII, I believe your intuition is spot on. What the Fed wants to do is trigger an inflationary cycle where all prices, most importantly wages and asset prices, start rising. However, all they can do is print up the money. If most people don't want to borrow, most of the money will end up in the hands of people hedging against inflation with commodities. The net result will be temporary inflation, such as in 2008, that acts as a huge tax on the economy and eventually triggers another deflation.

josh said...

I'm confused by how this QE actually works in actual actuality. Can anybody direct me where to go? Preferably to a crank of some kind.

slumber_j said...

Many theorized at the time the the '08 oil-price spike was the result of Chinese stockpiling for the Olympics, so you're not alone there.

QE2 will do a couple of things: devalue the dollar so we inflate our way out of debt, and hit a partial reset button on dollar-denominated wealth. It's the last step in a fundamentally redistributionist program: the gov't has nationalized tons of bad debt through its various bailouts, and issued new Treasury debt to cover it. Through the devaluation that QE2 will entail, the Fed will automatically do a slow-motion partial-default on the Treasury debt.

Whether the wealth-redistribution that results is intentional or not, it certainly will happen. In this environment, you want no fixed-income investment that isn't inflation-protected--hence the recent run on TIPS. In other words, get out of cash and all non-TIPS bonds as fast as you can, before Ben Bernanke makes that stuff worth a lot less than it has been.

Then again, everybody's been doing just that for weeks now...

Anyway, robert61 is right: devaluation is all you can reasonably do in a debt crisis when you don't want to raise taxes or cut spending. It's either devalue or openly default on the government debt, and nobody wants that to happen.

jimbo said...

QE doesn't really do anything, other than changing the term structure of interest rates (and it's not even very good at doing that). The talk of "money printing" is overblown: all the Fed is doing is exchanging one asset (reserves) for another (bonds), in an attempt to get the price of the bonds up and thus their yield down. It doesn't change the net financial assets of the private sector at all. Here's a good explanation: http://bilbo.economicoutlook.net/blog/?p=661

So it's not likely to do anything ,good or bad, just like it didn't do anything when the Fed tried it last year, or when the Japanese tried it in the 90s.

What's really needed are actions that will actually increase the assets of the private sector - much bigger deficits, brought about by tax cuts and transfers to the states. But that's a fiscal action, beyond the Fed's mandate, and with the all the Tea Party deficit terrorists who are ready to march into the capitol, it doesn't seem very likely...

Jeff Burton said...

Take a look at a chart of oil prices since 2007. The effect you fear is already happening.

Indy said...

Printing Money Will:

1. Lower the US Trade-Deficit (this is probably good).

2. Cause all commodities to increase in price in dollar terms, but especially-so for ones that are scarce or with controlled-supplies (oil) that can not rapidly adjust supply to rising price signals. So, oil, gold, and rare-earth metals will go up more than Agricultural products since additional unused marginal land can be planted with more price-spike crops for next year. (This is also probably good for the US long-term, but our still petroleum-dependent lifestyles and heavy dependence on foreign-imports will make this very painful in the short term and act as a drag on the rest of the economy).

3. Cause general inflation which rewards debtors at the expense of creditors and cash-savers (though probably rewards equity investors).

4. Since additional debt is something like additional "Money" in our macroeconomic system - it will help to cushion the deflationary blow from the ongoing outstanding credit-contraction - mostly derived from "charge-offs" of unrecoverable mortgage and credit-card debts. (The $1.8 Trillion Federal Deficit is playing it's own similar role is slowing the decline of the total private+public indebtedness-to-GDP ratio).

5. Lower the real rate of interest the government pays on it's debt, and the real burden of repaying and revolving the existing debt.

6. Put pressure on China to maintain their dollar-peg while sustaining high rates of growth, which they will have to do by subsidizing low interest rates for capital-intensive firms at the expense of their savers and consumers.

7. If the China peg stands, and the Dollar devalues significantly vs. the Euro, Pound, and Yen (it already has fallen 30% vs. the Yen in the last 3 years), then it will inevitably start a currency devaluation war, since neither the UK, Europe, nor Japan can afford to absorb the effects without their own intervention - one of the reasons Gold is so high. All hard currencies on earth are about to go softer.

And what all this implies is that it is hoped that this will help barely squeeze us through a period of painful, slow-improvement, *adjustment* to a new global economic order and equilibrium. Whether we establish that new equilibrium, or merely set ourselves up for another crisis, remains to be seen.

So, how confident are you that our Economic Shepherds are on the right path?

Black Death said...

The theory seems to be that driving down the value of the dollar will make US exports cheaper, thereby creating jobs. Of course, this will also make imports (such as oil) more expensive. I'm not so sure that it will help the housing market, or even that it's intended to do so. And many nations seem to be playing the same game, so "beggar your neighbor" isn't too likely to succeed.

Anonymous said...

Why are you assuming that the Fed chooses its policies to help middle-class exurbanities, and not the wealthy elite?

Dahinda said...

Part of the reason that gas prices went up was that the Saudis and Russians and other major oil producers didn't or couldn't increase production as they had in the past when prices shot up. If this happened because they wanted to stick it to us or because there is no more excess capacity to increase production due to peak oil or whatever it doesn't matter. It had the effect of bringing in a lot of speculators bidding up the price of oil further creating the high prices at the pump.

Mr. Anon said...

The governors of the Fed do not swear a hippocratic oath. Thier job is not to do no harm. Thier job is to do whatever the f**k they want - usually whatever promotes the interests of the jackals in the finance "industry".

zanon said...

QE will make no difference.

Right now, bank asset sit as a mix of reserve accounts and short and long dated treasury securities. All "quantitative easing" does is change the mix of what banks hold to more reserves, more short term treasuries, and fewer long term treasuries. This will change "money supply" because of how money supply is calculated, but frankly it is like moving money from your saving account to your checking account and saying your "money supply" has gone up.

It will lower long term interest rates, and this may spur investment, but it also means we will get less interest income. The net effect of these two opposite forces is unclear.

eh said...

Money is 'concocted' all the time; that's the basis for a fractional reserve banking system (maybe better called a fiat money system when a central bank is doing it). It's just not usually done on such a large scale and on such a public stage.

The Congress shall have Power...To coin Money, regulate the Value thereof,...

As you suggest, QE-1 was primarily intended to support housing by buying up MBS and helping to keep mortgagte rates low, which given the on-the-ground economic realities in many locales made no sense, then or now.

But the fear of deflation was strong enough. And still is.

It's generally assumed QE-2 will be used to soak up the huge coming supply of federal debt.

The real question is why, since the Constitution grants to Congress the right to coin money, does this money have to be created as debt? If the federal government needs to borrow money in order to spend it, why not just create the money and spend it? Maybe you could tax it out of existence later.

A Thomas Edison money quote:

"If the Nation can issue a dollar bond it can issue a dollar bill. The element that makes the bond good makes the bill good also. The difference between the bond and the bill is that the bond lets the money broker collect twice the amount of the bond and an additional 20%. Whereas the currency, the honest sort provided by the Constitution pays nobody but those who contribute in some useful way. It is absurd to say our Country can issue bonds and cannot issue currency. Both are promises to pay, but one fattens the usurer and the other helps the People."

Anonymous said...

Conspiracy reason for oil going up: http://www.rollingstone.com/politics/news/12697/64796

Leonard said...

how is Quantitative Easing II going to make people want to buy all the foreclosed homes in the exurbs?

According to Keynesian theory, average people are irrational in particular ways. One of these is that they irrationally resist decreases in their nominal wage, but not their real wage. Thus inflation, which decreases the real value of each unit of money, is seen as a good thing; it forces a real pay cut on workers without any nominal pay cut.

(A somewhat more tenable version of the same idea is that structural factors -- union contracts and such -- are the factor preventing pay cuts.)

A similar irrationality is true for asset prices. People irrationally refuse to sell their house for less than they bought it for, even if conditions are quite different. (This is, in my experience, often true.) Say that average price of housing is off by 50% from its bubble high. Then we need to crater the value of the dollar by half. This will cause the house that someone bought for $500k, which now cannot be sold for more than $250k, back up to $500k. Then the irrational sellers will relent and sell, and the economy will get moving again.

That's the theory, anyway, as I understand it. So far as I can tell, outside of the political whining of the little people, Keynesians don't think there are any really bad effects to moderate inflation if they control it.

Rohan Swee said...

So, how is Quantitative Easing II going to make people want to buy all the foreclosed homes in the exurbs?...Maybe printing more money won't inflate oil prices this time...

You're laboring under the misapprehension that QE must have something to do with addressing the economic distress of ordinary Americans and promoting general prosperity. "**** off and die, lowly middle class worms and stupid honest thrifty retired people, everything must be sacrificed to maintain the status quo for the people who matter" takes too long to say, and is a bit straightforward for this mealy-mouthed age. "Quantitative easing" is a nice pithy euphemism that will hopefully continue to fool some of the people all of the time and all of the people for just long enough.

Evil Sandmich said...

QEII isn't even remotely conceived to help the general populace, but to provide a taxpayer built hole that rich bankers can dump their junk into.

ironrailsironweights said...

It could that the Fed has figured that the exurban house market already has been shaken out as far as it can go, and that a weaker dollar will provide enough of a boost to U.S. manufacturers to outweigh any further damage to the housing market.

Peter

Reg C├Žsar said...

...Peking Olympics...

Thanks for using the English name for the Chinese capital, rather than the unpronounceable (to us) Mandarin name. I can never remember which tone to use!

International Jew said...

Inflation will impoverish people who retired on own savings -- predominantly GOP -- while retired gov't workers will float on up with inflation-indexed pensions.

Who whom.

Dan J said...

It is only natural that diesel costs more than gas. The world runs on diesel. The modern diesel engine is superior to the gasoline engine.

There still needs to be a market for gas, because you can't make diesel from crude without making gas on the side. Someone has to burn it.

headache said...

I'm guessing the same people who pilfered the dot-com and housing bubbles are going to profit from this. It would be eye-popping to get a full audit of the Fed. They are probably going to shred all the docs beforehand, the way the Stasi tried to cover their tracks when East Germany collapsed.

Luke Lea said...

Printing money is meant to solve the unemployment problem. The price level rises faster than nominal wages, which means real wages fall, and thus the demand for labor increases. Supply and demand.

Paul Mendez said...

If creating money out of thin air was the key to prosperity, don't you think some Sumerian Secretary of the Treasury would have figured this out a few thousand years ago, and all of mankind would have been wealthy ever since?

Anonymous said...

Agreed, really the Fed is just gutting the currency right now, like it has since oh, 2000 or so. Obama's "stimulus" program combined with cheap money, I wonder where this could all lead? Oh I know the late 1970's.

Anonymous said...

Its about time the phrase "printing money" was retired.

As I come to realise the full horror of the fractional reserve banking scam - merely printing money would be preferable.

Chief Seattle said...

The mathematics of debt mean that either the money supply increases at a rate that matches the average interest rate or there are debt defaults. So to avoid defaults the Fed has to keep increasing debt. If the people wont borrow the government must take up the slack. The nice thing about government debt owned by the Fed is it's exactly equivalent to printing new money. All the interest on that debt is nullified, since the Treasury interest on the bonds to the Fed and the Fed pays its net "profits" (interest income) back to the Treasury.

In the gold-standard days debt got cleared (defaulted) periodically which kept things in balance. Since then it has grown like dead brush on a forest floor. The Fed has to undertake bigger and bigger efforts to avoid defaults (deflation).

Anonymous said...

Simply not enforcing the laws against conterfeiting should do wonders for the US economy. Counterfeiters put dollars in people's pockets, people who will spemd all the counterfeit money as quickly as possible (no loss to savings here). This will empty store shelves and car dealer lots which in turn will cause more production of goods and cars, which in turn will make factories more profitable and the added demand will force everyone to hire more workers to step up production. The workers with new jobs will spend some of their earnings causing more goods to fly off the shelves and more factory production and more profit and more new jobs until we are all rediciously rich, QED.

Anonymous said...

The "collapse in exurban home prices" must be a local Los Angeles phenomenon. There is no such thing in the Eastern U.S.

Anonymous said...

Steve, you need some Modern Monetary Theory.

Here is a decent intro to it:

http://neweconomicperspectives.blogspot.com/2010/10/are-there-spending-constraints-on.html

Anonymous said...

Steve,

Savings equal the deficit.

You can't net save financial assets without the government going into deficit.

Whiskey said...

Steve -- Gasoline price rises were definitely affected by monetary expansion, but demand from China (all those new drivers) and to a lesser extent India, along with tensions in the Persian Gulf, drove oil above $140 a barrel, briefly.

If the price rise was primarily driven by monetary expansion (oil is priced in dollars, too many new dollars means oil rises), it would be even higher, instead of bouncing around the OPEC band of $70-85 a barrel. Given the expansion of monetary supply. What matters strongly is both aggregate global demand (particularly China) AND US military supremacy in the Persian Gulf.

Want cheaper oil? Don't want to spend $87 filling your minivan? Then you need US military dominance, over Iran particularly but also Pakistan, with a massive big navy cruising the Gulf, continued bases and a big Army in Iraq (pumping out that oil), leverage over the Saudis, and keeping Iran from pressuring the Gulf states to lowering production (Iran cannot produce much due to decades of neglect, they need sky-high oil prices as did Saddam).

Nothing comes for free, the cost of your minivan's fueling is paid for by US military dominance in the critical oil/gas producing region -- the Persian Gulf.

AmericanGoy said...

The elite make their money off the stock market - bubbles.

The stock market - the mammon if you are biblically inclined - needs to feed. It needs more and more of YOUR money.

Previously the boom and bust economy provided the money (in booms) to feed the monster.

It was not enough, and pensions were killed off and monies put into 401K plans (and the idiot Americans rejoiced, the clueless herd that we are - "We want YOU to control YOUR money!" LOL).

It is NOT enough - the engine is whizzing and smoking and gears and other parts are flying off - mammon needs more.

Next logical step, after QE (aaaaaaaand loaning money to member banks at 0% - yes, zero percent loans to banks; and changing accounting to mark to unicorn aaaaaaaand other stuff that I could not bother to remember) is..... well we all KNOW it.

Social security will be "reformed", and this time it will be billed as a bipartisan "reform" whooopee!

I look forward to not just my US$ but all currencies in the world declining 10% (at least) annually, and break and daily necessities increasing in price (actually staying same price - just the monies' value gets lower) and DVD and computers and HDTVs get priced cheaper.

Look south, toward Mexico - that is our future.

Whiskey said...

QE2 will push up stock prices. Thats all it does. Germany would have none of it, and had its way in the Eurozone. You cannot push on a string. Near zero interest rates won't put money in consumer pockets, create jobs (well here, anyway, it will fuel expansion in China and India) or stimulate domestic consumption, any more than this worked in Japan for the last twenty years. It will also allow the Fed to monetize the debt, inflate it away to nothing-ness.

Zero Hedge and sober, staid blogs like the FT's Alphaville, both believe the commodities boom is in part, driven by investors who know holding dollar cash, Fed bonds, and the like will be stupid in high inflation. The TIPS negative yield, investors paying more than the yield to get inflation protection, tells us what the market expects.

Obama stubbornly refuses to do real Keynsian pump priming: military spending (build say five new carrier groups now! and restart the F-35 Raptor program), a moon program, and other military/near military spending that puts millions of people to work, enhances US power over critical trade routes/commodities, and provides powerful R&D subsidies down the road. Instead he wants a supersized fiscal policy of spending lots on community organizers. He's stupid.

Most of the elites are.

If the Exurbs cease to exist to allow ordinary Whites to escape from Blacks and Hispanics, expect a giant increase in racial tensions as Whites stop feeling guilty about bad things other Whites did to non-Whites fifty years ago. Amidst oppression of themselves by crime and violence directed at their own White skin. The Feds have already said that "Civil Rights were created to protect people like John Lewis from being beaten by people with the skin color of Bull Connor. Not the other way around." So pushing ex-exurbanites into near barrios/ghettos is a recipe for an explosion of violence. First one way, and then both ways.

Note: US manufacturing accounts for only about 12% employment. Most US exports are agricultural, requiring relatively little labor (corn, wheat, soybeans harvest by combines not Mexican laborers). A side effect of global QE2 is sky-rocketing agricultural prices (cotton, corn, wheat, rice, sugar) given tight supply, dramatically increasing demand in China, and devaluations of the dollar (same with oil, most commodities are priced in dollars).

Just shoot me said...

"The nice thing about government debt owned by the Fed is it's exactly equivalent to printing new money. All the interest on that debt is nullified, since the Treasury interest on the bonds to the Fed and the Fed pays its net "profits" (interest income) back to the Treasury."

Not so fast. The Fed pays its net "profits" back to the Treasury with "net" meaning AFTER "operating expenses." What we don't know is what or how much those "operating expenses" are.
And since the Fed refuses all audits, we'll probably never know just how much graft and top-skimming into Fed-owners' pockets those "operating expenses" represent.

Anonymous said...

--- CONTINUED ---

*My guess is that the density curve for the housing price collapse is very uneven and non-uniform - I'd guess that a large portion of [what ought to be] the 28% average drop in "real" prices would come from about 28% of houses suddenly becoming completely worthless [as was the case with e.g. the Detroit neighborhood in which Mitt Romney came of age], whereas the bulk of the houses will tend to hold their value fairly well, as whites flee the disaster in the Sand States & the Blue States, in search of the relative sanity to be found in the Red States [such as Texas, Utah, Oklahoma, Virginia, Georgia, and the like].

**Personally, I think that low fertility rates in the trendier, high-cost areas of the country merely reflect the underlying nihilism of the trendy crowd to begin with, i.e. it's the nihilism which is pushing both the low fertility and the worship of Mammon.

Steve Sailer said...

Right, about 3/4ths of the decline in home values nationwide in 2008 were in California, Arizona, and Nevada.

Just shoot me said...

"Nothing comes for free, the cost of your minivan's fueling is paid for by US military dominance in the critical oil/gas producing region -- the Persian Gulf."

Huh. Since the Fischer–Tropsch process to turn coal into oil has been known since Germany developed it in WWII because the Allies blocked their petrol imports, and since the Rockies have about a bazillion tons of coal, and since we have to pay for our gas either at the pump or through taxes to keep the Persian Gulf shipping lanes open, then an honest accounting of costs would tell us whether domestic-made synfuels are as cost-inefficient as we've been assured.

I've never seen such an honest accounting, though.

At the least, such homegrown sources would bring us the inestimable glee of getting to tell the Sauds and "our special ally," the "only democracy in the middle east," to stuff it.

P.S. Why do I suspect Whiskey is laid-off engineer for a Defense contractor, whose wife dumped him for a tennis instructor?

Wandrin said...

"I'm confused by how this QE actually works in actual actuality"


Imagine a large hot-air balloon carrying a bunch of people with a gigantic hole in it. The person in charge of flying the balloon could:

a) Land, fix the hole, then take off again.
b) Keep firing the gas cannister thereby keeping the balloon in the air as long as possible before the gas runs out and the balloon suffers a catastrophic crash.

Now imagine the person in charge of the gas cannister:
a) Is responsible for the hole in the balloon and will be found out if the balloon lands.
b) Has a parachute
c) Gets money for every second the balloon stays in the air.

Mercer said...

"The "collapse in exurban home prices" must be a local Los Angeles phenomenon. There is no such thing in the Eastern U.S."

It happened in DC suburbs like Manassas.

A decline in the dollar would be helpful for exports and to reduce outsourcing. It might hurt exurbanites but I don't think the nations economic policies should be determined by what could prop up exurban prices. Unemployed people can't pay mortgages even if gas is cheap.

Bob said...

Inflation is not bad for savers. When inflation was in the 10% range in the late 70's, interest made by savers was above 10% as well.

What is bad is unexpected inflation when they are locked into low interest rate instruments.

However, lately savers have gotten a windfall gain because of the past few years' unexpected disinflation. As long as inflation doesn't cause the price level to go above its long-term trend, then all increasing inflation now will do is take back that windfall.

For less prudent savers who invested in shaky instruments like private MBS and low-grade corporate bonds, more inflation will reduce their returns, but make default less likely, and also increase recovery if default nonetheless occurs.

Bob said...

A lot of the misinformation sprouted here about the USA's impending hyper-inflationary doom comes from people misled by gold-selling hucksters who sell coins with little or no numismatic value at 100% markups over bullion.

Glenn Beck and right-wing talk radio seems to have more than 25% ads for such sleazy gold sellers, and of course such heavy ad spending also buys the host's personal and ideological endorsement.

Daytime CNBC is only a little better. While CNBC gets a lot of gold scammers to advertise and therefore also pumps gold during the shows, at the same time they also get brokerage houses who want shows that are hyperbullish about the economy.

Shan said...

I don't see how an increase in gas (of $2) can have that much effect on housing prices in commuter towns. So it costs an extra $1,000 a year in gas. The average homeowner spends what, 10 years in a home before moving? An extra $10k then in commuting over 10 years. Big deal!

Anonymous said...

Yes, the Chinese were buying up oil ahead of the Olympics to ensure supplies, and they were also filling the strategic petroleum reserve.

Hugh Hendry was the first to note that the price of oil started running up along with the Chinese currency and both stopped at the same time.


The price of oil started to run up steeply in 2005, when the previously-steady 1% or so per annum increase in world oil extraction suddenly stopped.  Prices started increasing in 2002 and rocketed from 2005-08 as oil production stagnated.  Only recession cut demand, giving buyers some relief.

Unless Chindia collapse (not likely) or lose their taste for oil-powered transport (not likely either), their bids for oil will keep prices at historically high levels.  This is problematic for the US economy, because so many Americans are idiots who think they have a birthright to cheap gas and as much of it as they want.  If the body politic had enough sensible people we could bitch-slap the idiots with another $2-$5/gallon in gas taxes, but we don't.  This means that we won't have sufficient pressure to invest in efficiency until a nascent expansion pushes prices up, but we'll wind up back in recession before those investments can be made.  Only policy can break that stalemate.

Anonymous said...

Now imagine the person in charge of the gas cannister:

d) Can purchase [legally, i.e. without having to go to jail afterwards] short contracts on the balloon & its cargo.

Short contracts are pure, unadulterated evil.

none of the above said...

Shan:

Some of the exurbs can be a *long* way from the city, and if you have kids and both parents work, one of you is probably driving a minivan or SUV on your commute. (A small car is a *huge* pain in the ass when you're trying to cram three kids in carseats/boosters in there.) On top of that, exurbs' appeal was always "gee, look, I can afford a decent house if I accept this godawful commute." Once it turns out that people on your income can now afford a decent house 40 miles closer to work, your house's value is suddenly much lower.

none of the above said...

We're outside the realm of familiar economic situations, and the pronouncements of economists on What Must Be Done Now seem to me to be mainly applications of not-obviously-applicable models to a changed world.

As Steve is fond of saying, there is no inner circle. Bernanke and Geithner and Summers and all probably know a lot of ways to screw the economy up, but almost certainly don't know how to fix it. They are likely to have only the shakiest notion of what will happen in response to their actions.

Anonymous said...

Bob: The goal of QE in any case is to prevent Japanese style deflation...

Whiskey: You cannot push on a string.

Along the lines of my remarks about fertility rates & the dearth of young 30-ish professionals to give value to the exurban real estate market, I think that Mark Steyn is the only person [at least in the commentariat] who ever really "grokked" the Japanese dilemma: Once they quit making babies, the Japanese had no young people to grab the damned string and PULL on it.

Ultimately, the only "capital" is human capital.

And you can't have human capital without humans.

And humans come from babies.

So no babies = no humans = no human capital = no capital.

It's really pretty simple.

Anonymous said...

Whoa - "grok" is due to Heinlein.

Huh.

CJ said...

Not an economist -- but then could economists do much more to discredit themselves than they have done in the past five years? This so-called "quantitative easing" is what they have been doing in Japan for the past 20 years. Result -- continued deflation and an enormous, enormous public debt.

Wandrin said...

1) The democrats have been continually adding more weight for the US economy to carry through their invite the world and then bribe them to vote democrat agenda.

2) The neocons have been continually adding more weight for the US economy to carry through their invade the world agenda.

3) Meanwhile the corporate elite have been siphoning America's capital off and invested it in SE Asia instead of re-investing it in America. If you don't constantly re-invest then your economy will weaken.

So more weight constantly being added to an economy that is constantly weakening.

The only thing holding it all up is cheap credit whether at the governmental or personal level.

It will go down because it can't stay up.

Whether it goes down with mostly deflation or mostly inflation or both doesn't much matter because when it goes down very bad things will happen that are worse than deflation or hyper-inflation.

Michal said...

Arnold Kling on what QE might bring about best case scenario, worst case scenario style.

Anonymous said...

"Maybe it has to be admitted that exurbs are just not a great idea."

Exurbs would be fine if linked to urban centers by light rail, given rising oil prices.

But, you'd have to raise taxes or bonds to do that, and voters are understandably skeptical of such things right now, although frankly if there's any truth to Keynesianism at all, it is true that infrastructure investments that promote long term economic growth would be the best way to stimulate the economy.

If the powers that be really believed in that kind of stimulus, though, they'd be pushing for a massive upgrade to our electrical system and building dozens of new nuclear plants. They aren't doing that, though, which leads me to doubt that they believe in the stimulus BS that they are pushing.

Anonymous said...

"You should read Paul Krugman's blog"

There goes your credibility, Bob: right down the crapper.

Anonymous said...

This is why we buy gold (although I am glad I bought mine at $250 rather than $1350).

Bonus Gift said...

My hope is that once all this "QE" silliness ends about where the Austrians expected it to end and the useful idiots/"economists" are with any luck thoroughly discredited then we can begin to build an economy based on actual productivity instead of "cheap" labor that in the end turns out to be anything but cheap. But I probably won’t be holding my breath.

Dutch Boy said...

Anyway, robert61 is right: devaluation is all you can reasonably do in a debt crisis when you don't want to raise taxes or cut spending. It's either devalue or openly default on the government debt, and nobody wants that to happen.
Comment: default strikes me as the superior alternative. Inflation will devastate everybody, default principally hurts bondholders (many of them foreigners). People who loan money to those they have a reasonable expectation cannot repay can expect nothing else than default. Furthermore, default will stop the open credit card line that has allowed our lords and masters to continue their foolish policies of de-industrialization and massive deficit spending.

Jubilee said...

Gold shoots back up to 1380, right on cue.

Anonymous said...

This so-called "quantitative easing" is what they have been doing in Japan for the past 20 years. Result -- continued deflation and an enormous, enormous public debt.

That debt is denominated in Yen. And the Yen has been one of the world's strongest currencies for the past 20 years. And that debt represents the high savings rate of Japanese citizens. Most of the debt is held by Japanese savers.

Paul DeReno said...

Printing money is Ben Bernanke's way to facilitate a leveraged buyout of the USA, its government and its people. It is theft and impoverishment through inflation, with the only winners being the money printing banks and inside traders; that's all it is, and that's all its intended to be.

Congress (the party that controls it is irrelevant) is going to put up a bailout of toxic mortgage assets and facilitate foreclosures. What has happened is that JPMorrganChaseGoldmanHSBCBoA etc. created tons of fraudulent derivative paper (insurance on worthless properties which function as bets that someone eventually discovers that a worthless property is worthless amongst other great ideas). They sold this fraudulent paper to each other, taking sides on outrageous bets that were also fraudulent.

Many think these were "risky" bets, but there was no risk. I am leveraging at a factor of 1000X, which means that I as a bank, can create S1,000K of fiat credit for every dollar I sell to a retail investor and buy from another bank, who can turn around and buy it back from me for $2,000K for $2 he got from a retail sale. The retail investors barely realize that banks can create fiat credit from nothing, let alone that they operate as a cartel. The retail investor thinks that these banks are competing using ever more sophisticated financial products and thus can afford this leverage legitimately.

So the retail investor gets suckered in to buying $4 of the toxic crap instead of $2, which increases the interbank volume to $4,000K of newly created fiat leverage, much of which is eaten as commissions and bonuses, because with creative accounting, the liabilities can be hidden to provide the appearance of massive profits. The bankers simply shave some of the money they create as fees and bonuses. They use creative accounting and securities fraud as the means through which they can literally print money and give it to themselves. This in turn dupes the retail investor into another $6 and so on.

You will notice that we have huge bailout debts, but that they remain at human levels. $1 trillion for TARP + $20 trillion for other bailouts and guarantees is stunning, but we have something by which we can reference it. For one thing, we can say that we borrowed one year's worth of American GDP to bail out big banks.

The derivative bubble, on the other hand, is not just big, it's totally unfathomable, in the quadrillions. The bailout money we can compare to out retail investor's $6. The quadrillion dollar derivative bubble is the fraudulent interbank paper created to drive up prices so that government agencies and pension funds would part with what was then real money in exchange for junk paper.

The banks are "in trouble" because they A-hold a bunch of real assets at inflated values, and B-hold a lot of bogus paper at inflated values. But this is just trouble in the sense that accounting rules hold that the banks are insolvent and must go out of business. But they already ignored the Mark-to-market practice, and they will probably be bailed out of their positions. Thus, they issued junk securities to buy the Gov. and sold off the Gov. to pay back their bonds at a profit. Hostile Takeover complete.

Svigor said...

Whether the wealth-redistribution that results is intentional or not, it certainly will happen. In this environment, you want no fixed-income investment that isn't inflation-protected--hence the recent run on TIPS. In other words, get out of cash and all non-TIPS bonds as fast as you can, before Ben Bernanke makes that stuff worth a lot less than it has been.

Right. I've been slooowwwly, grudgingly, beginning to learn a teeny-tiny bit about economics. Just enough to put myself out there and look like an idiot.

But the at least part of the upshot of inflation seems to be debt forgiveness (fixed amounts), screwing over of people on fixed incomes, a more-gradual screwing of labor (takes time and work to get what you're due in inflated dollars), and a wash for the parasi- er, government, who take a percentage.

Anonymous said...

From Breitbart, Nov 4 09:05 AM US/Eastern:
"Oil hits six-month peaks on falling dollar, Fed move"

Steve, the Oracle.

Paul DeReno said...

Inflation is not bad for savers. When inflation was in the 10% range in the late 70's, interest made by savers was above 10% as well.

Bob likes to say obviously false things.

From 1970 to 2000, the average yield on government bonds was negative when accounting for official inflation rates. When accounting for real inflation, government bondholders were wiped out of a third of their savings.

This FORCES people to either buy gold or get into riskier investments that insiders can manipulate (that's the idea). That's why we have had a massive tech bubble, real estate bubble, and Dow Jones bubble tat will shortly collapse.

Gold is the safer investment, but it has been manipulated so blatantly for so long that a class action lawsuit has been filed against Morgan and HSBC for their massive silver shorts (yes, the lawsuit is in silver, but it pertains to their gold shennanegans as well). The whole idea is to give investors no escape from the fnanicial Ponzi so that they can keep accumulating leverage until they crash the whole thing down and take the whole thing over.

Paul DeReno said...

And lastly, Steve, regarding the Peking Olympics, all commodity prices are manipulated by the futures market that is cartel-structured. You may think I'm a nut for saying so, but the fact remains that oil prices at any moment are what the financial/oil cartel wants them to be for the reasons they wish.

Svigor said...

P.S. Why do I suspect Whiskey is laid-off engineer for a Defense contractor, whose wife dumped him for a tennis instructor?

Bike messenger! Gawd, aren't you paying attention? Actually, I've noticed Whiskey getting gradually more sensible over time. Still worried about his multiple personality disorder, though (no Whiskey, I haven't forgotten that post about Mexicans at, where was it? Breitbart?)

Captain Jack Aubrey said...

"Maybe it has to be admitted that exurbs are just not a great idea."

Maybe it has to be admitted that the solution to one problem is ultimately the cause of another, and that what we really have to decide is which problems we'd prefer to live with.

Kill the suburbs and you kill native birthrates. But that can be solved by importing more immigrants - I mean, why give your country to your own children when you can just as easily give it to someone else's children?

But immigrants create neighborhoods most Americans don't want to live in, and so the natives move even further out, requiring even more fuel. And immigrant children don't have the same potential as natives, so we need EVEN MORE OF THEM!

I am tired of politicians and unelected bureaucrats trying to solve problems we did not ask them to solve, and creating "solutions" worse than the original problems.

Needless to say, QE and all other indicators point to the fact that two years from now the economy will still be "in the ditch," and the Democrats will all still be sucking the giant slurpees Obama bought them with money borrowed from China.

The Anti-Gnostic said...

Want cheaper oil? Don't want to spend $87 filling your minivan? Then you need US military dominance, over Iran particularly but also Pakistan, with a massive big navy cruising the Gulf, continued bases and a big Army in Iraq (pumping out that oil), leverage over the Saudis, and keeping Iran from pressuring the Gulf states to lowering production (Iran cannot produce much due to decades of neglect, they need sky-high oil prices as did Saddam).

Yeah - it's a good thing we have CENTCOM and a carrier group over there plus armies in Iraq and Afghanistan. Otherwise gas would be REALLY expensive. Like the bad old days of the 1950's when we weren't in the Saudi peninsula plus two other countries. I bet gas was so high back then we didn't even bother manufacturing cars.

Moving along,

In your calculations, have you netted out the costs for national security regs and military build-up to tamp down all that blowback from our imperial ventures? Have you thanked an American vet for protecting your cheap oil today?

See, I just might decide that below-market oil isn't worth it. And if you need cheaper oil because you insist on a 5/3 McMansion accessible only via your thermal inversion-generating GMC Tahoe, then I might need to tell you that you can effing go over there and get the effing oil your effing self.

Just shoot me said...

"Exurbs would be fine if linked to urban centers by light rail, given rising oil prices."

Oh, please. The entire raison d'etre of the exurbs is so White people can escape the non-White inner city riffraff. Why would they be in favor of the construction of light rail, which will give the underclass predators a ride out to where they've fled to?

josh said...

Wandrin,

That's how it works in figurative analogy. I mean I want details on how this money actually affects the money supply. I read winterspeak's entry repeated here by Zanon? I'm not qualified to judge if they are correct.

Anonymous said...

Off topic, but here's an interesting account from a leftist website about Obama's circle of rich African American poker friends and their influence on finance policy.

http://www.counterpunch.org/andrew11042010.html

Anonymous said...

Did the first two parts of my reply ever work their way to the top of the LIFO stack?

Silver said...

From 1970 to 2000, the average yield on government bonds was negative when accounting for official inflation rates. When accounting for real inflation, government bondholders were wiped out of a third of their savings.

Bob's not saying obviously false things at all, Paul.

Forget about bondholders for a moment. Bob said interest rates rose above the inflation rate despite high rates of inflation. And so they did: Annualized 6-month CDs vs historical inflation.

As for bondholders, well, buying bonds is a sucker's game. "Modern Money Theory" is quite correct that whether the government issues debt or issues currency makes no real difference. The problem is (a) the risk of runaway inflation, and (b) stifling economic activity due to the higher interest rates required to keep inflation in check.

Check out this quote from one of the progressive loons at the netroots link: "We can always have as much welfare as we want without taxing the rich at all."

Only fidelity to plain English prevents shivers being sent down your spine, since you have to believe not even the loons could mean by "welfare" anything that outstrips the returns on actual productive economic activity -- then again, anything's possible with people who tell themselves that just because incentives aren't everything, they can be regarded as nothing, therefore spend, spend, spend!

ben tillman said...

"Quantitative easing" -- what a ludicrous and obfuscatory piece of jargon!

Wandrin said...

"I mean I want details on how this money actually affects the money supply."

No one knows. If there's deflation in the system there's no number you can calculate to say what it is so QE2 will be either not enough, just enough or too much. They want inflation to eat away the debt so if QE2 is not enough they'll do more of it until they get some inflation.

Eventually there'll be lots of inflation but who knows when.

Anonymous said...

Diesel prices have risen so much in recent years relative to gasoline because of EPA regulations that drastically reduced the amount of sulphur permitted in diesel fuel.

To produce diesel meeting the new ultra-low sulphur spec, refineries needed to build costly new hydrotreater units. Not everyone did, and the supply was constricted, raising prices.

beowulf said...

If creating money out of thin air was the key to prosperity, don't you think some Sumerian Secretary of the Treasury would have figured this out a few thousand years ago, and all of mankind would have been wealthy ever since?

You're an idiot, the Sumerians did figure it out.

One of the oldest known bronze coins was the Sumerian shekel, dating from 3,200 B.C.... The temples were public institutions that also served welfare functions, including the support of widows, orphans, the elderly and infirm...
The temples also acted as central banks. Sacrificial coins inscribed “debt to the Gods” were paid to farmers in acknowledgment that wheat had been contributed to the temple.. These coins were also lent to borrowers. When interest was paid on the loans, it went back to the temple to fund the community’s economic and social programs...

http://www.webofdebt.com/excerpts/chapter-5.php

Dutch Boy said...

Ancient civilizations used bronze or brass coins as monetary tokens (ancient fiat money, if you will). For example,the main monetary unit of ancient Rome was the silver denarius. Over time, the denarius became so debased that the emperors issued token bronze coins in vast numbers and ceased issuing the denarius. For large transactions or saving for the wealthy, the Romans maintained gold coins (first the aureus, then the solidus). Overall, the direction of Roman monetary policy was toward debasement, then disappearance of precious metal coinage and a vast expansion of bronze fiat money token coins. Moral of the story: when governments need money, they will create it and they don't need a printing press or Federal Reserve to do it, nor will a precious metal standard prevent it.

Just shoot me said...

"Moral of the story: when governments need money, they will create it and they don't need a printing press or Federal Reserve to do it, nor will a precious metal standard prevent it."


Right. U.S. was on a gold standard and FDR, with Nixon completing it, ended it and instituted fiat. And you're right. The Fed doesn't even need a printing press. Now it's done by mere keystroke on a computer screen.

And, the story always plays out the same way. Fiat money always devolves into hyperinflation, which is exactly equivalent to massive taxes.

At which time, the peasants start the pitchfork-sharpening.

The only good a PM-standard does is to slow down the progession of the story. But it's still worth it. Delaying death is always a good thing.