patrick.net

Jimmy--

I just didn't want to list every civilized country on here--it seemed kind of tedious. Unless you have a different definition of failure, I'd say the fact that most countries were on a fixed standard but switched to a fiat currency that is still in use is pretty good proof.

The larger issue w/ Bay Area homes are the expiration of QE and MBS purchases by the Fed.
The end of QE has not gotten much press; I read about it first on this CR thread. Ben has (for now!) landed the helicopters. The last of the MBS purchases are being sterilized by the Treasury Supplemental; supposedly, the Supplemental Bills (56 day terms) will be paid back as the Fed winds down some of its temporary measures from the beginning of the crisis (think TAF, TALF, etc...)

grywlfbg says
Couple comments here….
The Fed will never hyperinflate because it would mean the death of the Fed. Congress may try and force them to do it but even our idiot politicians know that governments tend to fall during currency crisis.
Second, the stated inflation rates are wrong. During the run-up they were dramatically UNDER-reporting inflation because they weren’t correctly factoring in housing costs. Likewise they are currently OVER-reporting inflation for the same reason.
Until all this money actually enters circulation we won’t have meaningful inflation. And at the end of the day, the banks don’t want to lend and people/companies don’t want to borrow. So for the foreseeable future all that printed money will be sitting in bank vaults or on reserve w/ the Fed.

The Fed doesn't have to want to hyperinflate for hyperinflation to occur, AFAIK no central bank has wanted to do that.

I would agree that the current rate of inflation is incorrect, but I don't think its being overreported now, still underreported IMO.

The banks don't have to lend out the money either for inflation/hyperinflation to occur. Even if they continue to sit on the funds for the next few years while the Fed prints eventually our creditors will get nervous and reduce or stop buying our debt on the long or short end or both. They don't have to sell it, just stop buying it and we'll have an hyperinflationary or high inflationary economic crisis.

tts says

The Fed doesn’t have to want to hyperinflate for hyperinflation to occur, AFAIK no central bank has wanted to do that.

It's not central banks that cause hyperinflation, it's a governments inability to meet is interest payment obligations or refinance it's debt. If/when hyperinflation happens in the USA, it will be no different. We are nowhere near that point, though certainly doing a slow steady march toward it by not addressing unfunded liabilities.

As for foreign central banks ceasing to stop buying treasuries sufficient to induce hyperinflation, that is extremely unlikely. It would not even do much to inflation here except for imports. It would likely be a positive thing for our economy, since really what they are doing is manipulating their currency to gain trade advantage.

MarkInSF says

It’s not central banks that cause hyperinflation, it’s a governments inability to meet is interest payment obligations or refinance it’s debt. If/when hyperinflation happens in the USA, it will be no different. We are nowhere near that point, though certainly doing a slow steady march toward it by not addressing unfunded liabilities.
As for foreign central banks ceasing to stop buying treasuries sufficient to induce hyperinflation, that is extremely unlikely. It would not even do much to inflation here except for imports. It would likely be a positive thing for our economy, since really what they are doing is manipulating their currency to gain trade advantage.

Historically debt payments exceeding 5% of GDP has been enough to cause an economic crisis in 2nd and 3rd world countries. The US was always considered a sort of special case, but even then it was thought that the max possible was perhaps 10% or so. We've been well over that since mid 2009. Some sort of inflationary/hyperinflationary crisis is a given at this point, the only question is when.

The gov. needs a constant growth in debt since they're rolling over their current debt with more debt, if they can't get more debt then they can't roll over their old stuff. They will of course resort to more QE when they get to that point, but by that point they'll nearly be the sole buyer of both short and long term US debt. Also the US depends heavily on cheap foreign goods, many if not most things people need are too expensive here. If you try to kill some or most of foreign trade to boost domestic manufacturing with monetary manipulation we'll get hurt far worse since few will be able to afford to buy the goods they produce and the goods will be too expensive to try and sell over seas.

The ugly fact of the matter is that there are no good or even palatable solutions to this mess left. The best we could hope for is an American version of what is going on in Japan, at worst we slowly turn into another shitty 3rd world country.

How about reining in some debt spending, compounding with a weaker dollar which will help exports, helped with a modest recovery plus a little light inflation.

There are answers, there are solutions. This isn't doom and gloom.

Just like when the banks started falling apart, the government did something.
Just like when the housing market started collapsing, the government did something.

It might not have been pretty but it appears to have worked, but there are still a lot of people sitting here scratching their heads saying "I don't get it, why aren't we at 1998 or early prices on houses! It doesn't make sense, the world should have imploded like I calculated with no one doing anything about it.... I'm stumped!"

tts says

Historically debt payments exceeding 5% of GDP has been enough to cause an economic crisis in 2nd and 3rd world countries. The US was always considered a sort of special case, but even then it was thought that the max possible was perhaps 10% or so. We’ve been well over that since mid 2009

I'm not following. 2008 was the biggest debt service to GDP.

$451B interest paid / $14.2T GDP = 3.2%

That is nowhere near 10%. Since then interest service has dropped as people rushed to the safety of treasuries because of the riskiness of private debt.

The US sovereign debt is nothing special. It's the "biggest debtor nation" but that's mostly because it's a huge country with huge economy. Many nations have comparable debt/GDP ratios. Japan's debt/GDP is about double ours.

They will of course resort to more QE when they get to that point.

This is one of the biggest misconceptions out there. QE was not undertaken because of sovereign debt issues. Not at all. It was all about private debt, mostly in finance and mortgages, and providing massive liquidity to keep the credit system from freezing up. Had that bubble in private debt not happened, there would be no QE.

pkennedy says

It might not have been pretty but it appears to have worked, but there are still a lot of people sitting here scratching their heads saying “I don’t get it, why aren’t we at 1998 or early prices on houses! It doesn’t make sense, the world should have imploded like I calculated with no one doing anything about it…. I’m stumped!”

Eventually it will come down to trends, it takes time. I dont see implosions, I see on going corrections.

Jimmy says

Civilized countries want/need a fiat currency so they can print and make the citizens pay through inflation.

You're forgetting the flip side. If citizens that hold money pay through inflation, then citizens in debt are getting an equal benefit through inflation, as their debt is inflated away. And since money supply and debt are equal, the benefit/taxation to citizens is nil.

pkennedy says

How about reining in some debt spending, compounding with a weaker dollar which will help exports, helped with a modest recovery plus a little light inflation.
There are answers, there are solutions. This isn’t doom and gloom.
Just like when the banks started falling apart, the government did something.
Just like when the housing market started collapsing, the government did something.

Doing something isn't the same as doing the right thing. The right thing would've been to allow the housing market and banking system to collapse. Things would've been very bad for years, but I don't believe it would've been the end of everything that some think it would. And it would've allowed regular folks to start over with a clean slate while punishing those who are currently profiting from the mess they started, while allowing home prices to drop to affordable levels without the need for suicide loans and laughably loose lending. As it stand I think we're going to get the worst of both situations, the poor and the middle class will be force to take all the losses and austerity measures to pay for everything while the rich become even richer and corrupt the gov. even further.

pkennedy says

It might not have been pretty but it appears to have worked, but there are still a lot of people sitting here scratching their heads saying “I don’t get it, why aren’t we at 1998 or early prices on houses! It doesn’t make sense, the world should have imploded like I calculated with no one doing anything about it…. I’m stumped!”

But it clearly didn't work. Housing prices only have had a minor jump in prices that is already fading fast while sales have hardly budged. Up something like .8% or so YoY IIRC. And they blew trillions of dollars just to do that. You think that looks like success, or a recovery? I don't. You're just being fooled market manipulation by the government.

I think we'll see a recovery when we get some real job and wage growth and when prices on homes drop to something much more reasonable vs. those wages (say around 3x or less local avg. income).

MarkInSF says

I’m not following. 2008 was the biggest debt service to GDP.

My mistake I meant deficit but for some reason put debt service. Please attribute to temporary retardedness, very annoying when that happens.

MarkInSF says

The US sovereign debt is nothing special. It’s the “biggest debtor nation” but that’s mostly because it’s a huge country with huge economy. Many nations have comparable debt/GDP ratios. Japan’s debt/GDP is about double ours.

Its not the size of the economy that matters, its the debt to GDP ratio that matters when it comes to debt service and the ability to take out more debt. Yes, others have had higher or similar ratios (like Japan) for a while now. These countries are however not doing well at all, and the situation in Japan is best referred to as a low level but multi decade depression, which is hardly desirable to say the least. It should be noted that there is no end in sight to Japan's issues, and AFAIK the situation is steadily deteriorating there since they're so dependent on foreign trade which is still in the gutter. It may turn out that all they did was delay their day of reckoning a few decades, we'll have to see.

MarkInSF says

This is one of the biggest misconceptions out there. QE was not undertaken because of sovereign debt issues. Not at all. It was all about private debt, mostly in finance and mortgages, and providing massive liquidity to keep the credit system from freezing up. Had that bubble in private debt not happened, there would be no QE.

A central bank can choose to implement QE for either reason, it need not be excess private debt deflation that will force the issue. What matters is wether or not the country can sell/finance its debt, if they can't then the choice is either QE, default (QE is really a type of default but you won't hear that spoken of publicly), or implement austerity measures while raising taxes to pay down debt.

tts says

This is incorrect. If you have high inflation it becomes impossible to save, you have to spend all your money almost as fast as you get it otherwise you’re screwed

Unless of course you invest in TIPS. Or money market. I guess you can invest after all.

tts says

Rich people won’t care since the sheer size of their wealth gives them opportunities that the non-rich wouldn’t have, but the poor and the middle class will just get poorer and poorer since if they can’t save then the only way to increase their wealth is through investments (risky) or improving their wages (which is unlikely to say the least, most can never improve their wages and are essentially stuck in the same “class” for the rest of their lives*).

Wrong again. Inflation hurts the rich more than the poor.

tts says

You need a balanced approach to inflationary forces to have a long term stable economy which is what allows people to grow their wealth at a reasonable pace, and we don’t have that and probably won’t for a very long time. Maybe even decades. The ugly truth of the matter is that if you aren’t rich right now the deck is stacked against you and has been for quite some time.

Finally, something you have right. But, it's not for the reasons you outlined.

MarkInSF says

You’re forgetting the flip side. If citizens that hold money pay through inflation, then citizens in debt are getting an equal benefit through inflation, as their debt is inflated away. And since money supply and debt are equal, the benefit/taxation to citizens is nil.

This is incorrect. If you have high inflation it becomes impossible to save, you have to spend all your money almost as fast as you get it otherwise you're screwed. Assuming of course you have any excess funds to invest/save at all of course. Rich people won't care since the sheer size of their wealth gives them opportunities that the non-rich wouldn't have, but the poor and the middle class will just get poorer and poorer since if they can't save then the only way to increase their wealth is through investments (risky) or improving their wages (which is unlikely to say the least, most can never improve their wages and are essentially stuck in the same "class" for the rest of their lives*).

*http://www.nytimes.com/2006/05/25/business/25scene.html?_r=2

Consider the evidence uncovered by Paul Oyer, a Stanford Business School economist, in his recent paper, "The Making of an Investment Banker: Macroeconomic Shocks, Career Choice and Lifetime Income" (National Bureau of Economic Research Working Paper 12059, February 2006. http://faculty-gsb.stanford.edu/oyer/wp/mba.pdf). Dr. Oyer tracked the careers of Stanford Business School graduates in the classes of 1960 to 1997.

He found that the performance of the stock market in the two years the students were in business school played a major role in whether they took an investment banking job upon graduating and, because such jobs pay extremely well, upon the average salary of the class. That is no surprise. The startling thing about the data was his finding that the relative income differences among classes remained, even as much as 20 years later.

The Stanford class of 1988, for example, entered the job market just after the market crash of 1987. Banks were not hiring, and so average wages for that class were lower than for the class of 1987 or for later classes that came out after the market recovered. Even a decade or more later, the class of 1988 was still earning significantly less. They missed the plum jobs right out of the gate and never recovered.

And as economists have looked at the economy of the last two decades, they have found that Dr. Oyer's findings hold for more than just high-end M.B.A. students on Wall Street. They are also true for college students. A recent study, by the economists Philip Oreopoulos, Till Von Wachter and Andrew Heisz, "The Short- and Long-Term Career Effects of Graduating in a Recession" (National Bureau of Economic Research Working Paper 12159, April 2006. http://www.columbia.edu/~vw2112/papers/nber_draft_1.pdf), finds that the setback in earnings for college students who graduate in a recession stays with them for the next 10 years.

These data confirm that people essentially cannot close the wage gap by working their way up the company hierarchy. While they may work their way up, the people who started above them do, too. They don't catch up. The recession graduates who actually do catch up tend to be the ones who forget about rising up the ladder and, instead, jump ship to other employers.

Dr. Oyer himself never bought into the view that young people today are slackers. "Kids today," he said in an interview, "are harder working and more programmed than any kids in history." Although he is a Stanford Business School star, Dr. Oyer said, laughing, "I don't even know if I could get into college if I were competing with kids today."

You need a balanced approach to inflationary forces to have a long term stable economy which is what allows people to grow their wealth at a reasonable pace, and we don't have that and probably won't for a very long time. Maybe even decades. The ugly truth of the matter is that if you aren't rich right now the deck is stacked against you and has been for quite some time.

Edit: this is a timely article too, more recent then the other one: http://www.huffingtonpost.com/2010/03/17/social-immobility-climbin_n_501788.html?ref=patrick.net#title_permalink

Social Immobility: Climbing The Economic Ladder Is Harder In The U.S. Than In Most European Countries

Is America the "land of opportunity"? Not so much.

A new report from the Organization for Economic Co-Operation and Development (OECD) finds that social mobility between generations is dramatically lower in the U.S. than in many other developed countries.

So if you want your children to climb the socioeconomic ladder higher than you did, move to Canada.

The report finds the U.S. ranking well below Denmark, Australia, Norway, Finland, Canada, Sweden, Germany and Spain in terms of how freely citizens move up or down the social ladder. Only in Italy and Great Britain is the intensity of the relationship between individual and parental earnings even greater.

For instance, according to the OECD, 47 percent of the economic advantage that high-earning fathers in the United States have over low-earning fathers is transmitted to their sons, compare to, say, 17 percent in Australia and 19 percent in Canada.

Recent economic events may be increasing social mobility in the U.S. -- but only of the downward variety. Harvard Professor Elizabeth Warren, for example, argues that America's middle class had been eroding for 30 years even before the massive blows caused by the financial crisis. And with unemployment currently at astronomical levels, if there are no jobs for young people leaving school, the result could be long-term underemployment and, effectively, a lost generation.

@tts

The poor have debt. Credit card debt, car debt, school debt. Debt that probably hurts a lot. If inflation destroys that debt, how does that hurt them? They can't save, but they can sure get out of debt fast.

Middleclass home owners - Now inflation is eating away at their mortgages. They can pay off their mortgage way faster.

Rich - If they have money, they have to dump it fast! If they have investments holding mortgages, they have to get rid of those fast, and get assets! If they have homes, those homes go up in value, and nothing else. If they have homes with LOTS of debt, that debt starts getting erased.

If banks collapsed, new ones could take their places easily. Bankers would have a field day! If the market is empty, it's easy to create a new business. If you're competing with wells fargo/citi/boa, it's not that easy. These banks were saved, but not given much. They've been hurt by mortgages, and they'll be hurt more in the future when everything comes off their books. If inflation kicks in, they'll be hurting even more as all their hard earned good mortgages turn less and less profits.

As far as letting everyone fail and start over and "perhaps" it wouldn't have been any worse. Why take that risk? Destroying a world currency, destroying the confidence that lenders give us? Destroying consumer confidence? Why take that risk? Save things, get a black eye for doing it, but it's better than risking everything for a possible "better" solution. I'm sure you're one of those people who criticized these "risk" taker home owners for getting in over their heads, but when it comes to a risk that could hurt the country again, you're all for it, as long as it helps you. I see very little difference between your approach and the home owners who create the mess in the first place.

tatupu70 says

Unless of course you invest in TIPS. Or money market. I guess you can invest after all.

You're assuming they account for inflation properly, I don't believe they do. Money market has similar issues of manipulation.

tatupu70 says

Wrong again. Inflation hurts the rich more than the poor.

The rich have the resources to avoid the effects of inflation. At worst they'll loose a few per cent of their assets, but so what? If you've got tens or hundreds of millions of dollars you won't even notice it.

tts says

The rich have the resources to avoid the effects of inflation. At worst they’ll loose a few per cent of their assets, but so what? If you’ve got tens or hundreds of millions of dollars you won’t even notice it.

Not really. Most wealth is held in the form of debt instruments (deposits, money market funds. bonds), which have their value eroded by inflation. Stock do not perform particularly well in high inflation, since it wreaks havoc on an economy. Gold on a very long time frame holds up to inflation, but in any given decade may be out of favor, and is thus not a very good store of value. e.g. gold lost real value during the 80's and 90's.

Real estate is probably the best place to hide from inflation, but then you have to take notice that among the non-rich, real estate is their biggest asset class, so they are more protected than the rich. Throw in the fact the non-rich have more debt than the rich, and they fare even better.

You'll get no argument from me on the Huffpost article.

Speaking of deflation: my auto mechanic's hourly rate fell from the bubble peak.

EBGuy says

Speaking of deflation: my auto mechanic’s hourly rate fell from the bubble peak.

Speaking of inflation; my McD's breakfast went up since the bubble peak.

I think we’ll see a recovery when we get some real job and wage growth and when prices on homes drop to something much more reasonable vs. those wages (say around 3x or less local avg. income).

Even in 2000 the avg. income in my area (orange county) was about 58K, the house in my are sold for $280K thats 5x. Now it's probably about 75K, houses average 400K so again 5x. At least locally I don't think we will see that happen any time soon.

MarkInSF says

Not really. Most wealth is held in the form of debt instruments (deposits, money market funds. bonds), which have their value eroded by inflation.

That is where their money managers come in. If their wealth is tied up in risky debt instruments they just have them sell it and move into other assets. It could be commodities (doesn't have to be gold, oil or nat. gas or wheat will work just as well), it could be foreign investments, whatever.

MarkInSF says

Real estate is probably the best place to hide from inflation, but then you have to take notice that among the non-rich, real estate is their biggest asset class, so they are more protected than the rich. Throw in the fact the non-rich have more debt than the rich, and they fare even better.

Mortgage debt is not wealth, particularly when it is against a declining asset. Most non-rich have little to no savings (why try to save when debt was so easy to get during the bubble, especially when things like homes were too expensive anyways without massive levels of debt, trying to save for a 20% down payment on a $300K+ home when you only make $50K or so a year is too difficult for many these days anyways), and they're also saddled with huge amounts of credit card debt (just how are those interest rates now anyways?), school debt, car debt, and maybe even some medical debt.

Those who are non-rich also have declining wages, and prices are slowly edging up for most everything (still high for oil...very alarming IMO), and getting more credit is almost impossible for them now.

Even if you inflate away half that debt these people are still screwed. They're still going to lose their homes, they're still going to have massive declines in their standard of living, and they'll be stuck like that for years at a minimum. Almost certainly for the remainder of this decade. Possibly even decades.

The rich on the other hand....lets say they do horrible, and somehow lose 50% of their wealth. What if they started out with 10's of million, hundreds of millions, or even billions? How about if it was "only" a million or "just" a half a million?

By any reasonable measure these people will _still_ be rich. They'll still have hundreds of thousands, tens or even hundreds of millions of dollars.

Oh they might have to sell or go into foreclosure on one or two of their homes, or maybe even just the one home they've got, but they won't have to worry about not having a roof over their heads period.

They might have to sell the Bentley or Porsche, but they won't have to worry about downgrading to a Mercedes Benz much less a Camry, or even wether they'll be able to afford a car at all anymore.

And they almost certainly will not be able to afford to make it rain Cristal in the club every other night or week end like they used to, oh no, they'll only be able to afford that once a month or so tops.

What a heavy burden it is to be rich, makes you wonder why any one would bother right?

pkennedy says

They can’t save, but they can sure get out of debt fast.

Even if their debt is effectively cut in half or less many still are well over their heads in debt.

Even worse, though their total debt load is decreased their ability to pay is reduced to via inflation without a proportionate increase in wages, at the same time goods go up in cost. Its debt serfdom all over again. This disproportionately effects the poor BTW.

pkennedy says

Middleclass home owners - Now inflation is eating away at their mortgages. They can pay off their mortgage way faster.

Only if their wages go up, otherwise they're worse off.

pkennedy says

Rich - If they have money, they have to dump it fast! If they have investments holding mortgages, they have to get rid of those fast, and get assets!

All of which is easy for them since they can afford competant and experience money managers. But lets say they don't move fast for what ever reason and lose half their money. So what? Sure you lost half, but if you started out with 10's of millions or even a "mere" million you're still doing a whole lot better than the average Joe or Jane Sixpack who if the Fed and government has their way will not raise wages while trying to inflate away debt and reducing entitlements and reduce services and raising taxes. Bear in mind that for most of your average Joe and Jane Sixpacks nearly all their wealth is tied up in their home value, and their sole way to extract that "wealth" was via more debt, and they were generally encouraged to do so during the bubble. They are going to be left twisting in the wind by the actions of our elites and government.

pkennedy says

If banks collapsed, new ones could take their places easily. Bankers would have a field day!

Not if they ended up in prison or were specifically barred from opening up new banks due to unethical business practices.

pkennedy says

If the market is empty, it’s easy to create a new business. If you’re competing with wells fargo/citi/boa, it’s not that easy.

The only reason its difficult to compete against these big banks is because its been decided that they shall not fail.

pkennedy says

If inflation kicks in, they’ll be hurting even more as all their hard earned good mortgages turn less and less profits.

When inflation kicks in they'll just get bailed out again. Too big to fail remember.

pkennedy says

As far as letting everyone fail and start over and “perhaps” it wouldn’t have been any worse. Why take that risk? Destroying a world currency, destroying the confidence that lenders give us? Destroying consumer confidence? Why take that risk?

Its not a risk, its necessary to have a recovery, you can't hide your losses forever. As for confidence from lenders and consumers, that has already been destroyed, no one with any sense believes what the government or the Fed says these days. They can Jawbone til' the cows come home, but when push comes to shove they'll act to save the entrenched interests at the expense of the poor and middle class every time.

chrisw says

Even in 2000 the avg. income in my area (orange county) was about 58K, the house in my are sold for $280K thats 5x. Now it’s probably about 75K, houses average 400K so again 5x. At least locally I don’t think we will see that happen any time soon.

I would view that as a sign that even then your market may have been in a boom.

I know that prices in CA have always tended to be higher than other states but that is still just too much IMO.

The rich care if they lose 50% of their wealth. Those mistakes hurt them over the long run. Someone who's house inflates in value due to inflation doesn't lose anything. Real estate is the best place to hide money.

Rich aren't out to make money. They're out to CONSERVE capital. It's really hard to take 50B and try and conserve it. Where do you put that kind of money? Try and find good businesses that you can buy and hold and work with. The rich do hire great money market managers, and their job is to conserve money. Hopefully keeping up with inflation.

Why do you think Warren Buffet stopped investing peoples money, and instead turned to Bershire? He buys companies, because for the most part, he can't own stock in companies anymore. He got to a point where he couldn't buy stock in a company without taking it off the market. When that happened, he dumped managing money and just managed Bershire. He used that company to buy all kinds of companies. He doesn't buy and hold because it's good, he buys and holds because it's the only thing he can do. He said if he had only a little money tomorrow, he could get 50% returns on it, because the market has lots of potential, but not when you're got billions to invest. The game changes.

The rich are playing a totally different game.

When push comes to shove, the chinese are still buying up our treasury bills. When push comes to shove and the US economy looks flaky, people RUN to the USD and buy it up. WHY? Because it's still a better bet than any other country they're currently invested in. If the US is having troubles, the world is about to have them too. Even if the world hasn't been hit, people run to the USD for security.

People say oil is traded in dollars and for how much longer. Until there is a large more stable currency. When will that be? Probably not in our lifetime. No other currency is large enough, or used around the world in sufficient quantities. Look at the euro! Individual countries are needing bailing out. They've got some serious issues over there of their own. The chinese are a big economy, but they need to grow by probably 5X before anyone will take them seriously (yes, thats far larger than the US), and that's because the US has a known history.

YES we might have spent trillions to stop banks from failing, but that is exactly what the rich want. They want an economy that isn't going to wipe them out. They want stability. They want the USD. Other countries want this as well. OIL is in the USD for a reason.

Speaking of inflation; my McD’s breakfast went up since the bubble peak.
Huh? Dollar Menu.

pkennedy says

The rich care if they lose 50% of their wealth.

I'm sure they'll be very upset, I was pointing out that it doesn't really matter since they're still actually rich, and not just a little bit either.

pkennedy says

Someone who’s house inflates in value due to inflation doesn’t lose anything.

Sure, but that isn't what is happening, housing prices are still going down for most if not the vast majority while their ability to pay the debt down is being reduced.

pkennedy says

Rich aren’t out to make money. They’re out to CONSERVE capital. It’s really hard to take 50B and try and conserve it.

I'm sure it is and I'm sure for many that is their goal. What I was trying to point out was they can lose massively yet still come out far ahead of the non-rich, who are the ones who well and truly getting reamed out here. If a rich guy loses a billion dollars but has another billion where that one came from I'm sure he'll be livid, but what really changes for him? Look at the avg. Joe who makes ~$50K, you cut his income effectively in half but leave him strapped with debt and just what exactly do you think happens to his quality of life and his standard of living? What do you think will happen to those who earn even less then that?

I don't hate the rich, but I don't have much sympathy for someone in that position where they have so much wealth that they literally don't know what to do with it and can lose so much of it yet still be rich.

pkennedy says

When push comes to shove, the chinese are still buying up our treasury bills. When push comes to shove and the US economy looks flaky, people RUN to the USD and buy it up. WHY? Because it’s still a better bet than any other country they’re currently invested in. If the US is having troubles, the world is about to have them too. Even if the world hasn’t been hit, people run to the USD for security.
People say oil is traded in dollars and for how much longer. Until there is a large more stable currency. When will that be? Probably not in our lifetime. No other currency is large enough, or used around the world in sufficient quantities. Look at the euro! Individual countries are needing bailing out. They’ve got some serious issues over there of their own. The chinese are a big economy, but they need to grow by probably 5X before anyone will take them seriously (yes, thats far larger than the US), and that’s because the US has a known history.

I'm sorry but I'm just not that confident the ability of our government (or for that matter other governments) to manage things competently or not screw them up further. History is full of instances of catastrophes, I see no reason why we can't have another.

Take average joe, take his 50K, all his stored up credit card debt, a mortgage he can't afford and wipe it all clean for him.

Take average rich guy and cut his wealth in half.

Who walks away, better off? The point is, the rich aren't interesting inflation. It's a nightmare for them. The poor might not be happy right off the bat, but they will be. SOMEONE is paying for all that debt to go away. If the poor aren't, then who is? The rich.

The USD might not make you comfortable, but it makes a lot of people comfortable, and the currency is stable because it makes a lot of people comfortable and they all use it. As long as the majority are happy, it will be stable. We're not going to change to a new currency in the US. China isn't going to try anything, the EU isn't going to try and take over, OIL isn't going to change. There are just idle threats or comments made by people coming up with end of the world scenarios. In reality, no one wants it to change. What you consider a mess, most consider a slow marching path that we're on, and we're deviating up and down a bit from good to better to bad, but we're not swinging wildly up or down like all other currencies out there.

pkennedy says

Take average joe, take his 50K, all his stored up credit card debt, a mortgage he can’t afford and wipe it all clean for him.

But that isn't what is happening, their debt usually isn't being totally wiped out, perhaps reduced some. Also you left out the effective wage decrease that inflation without adjustments brings and rising costs in everything else.

pkennedy says

Who walks away, better off?

Even in your example the rich person would still be better off since he would still be rich. Less rich, of course. But still rich.

pkennedy says

The point is, the rich aren’t interesting inflation. It’s a nightmare for them.

I'm sure they'll be less than thrilled with the few percent or perhaps even 10's of percent that they may lose, but they likely will end up making little or no changes in their lifestyles, quality of life, or standard of living.

pkennedy says

The poor might not be happy right off the bat, but they will be. SOMEONE is paying for all that debt to go away. If the poor aren’t, then who is? The rich.

The non-rich will still be non-rich even if you took away all their debt, which won't happen, but even if that happened without the appropriate increases in wages to accommodate the inflation the non-rich would eventually end up destitute. Go look at what has happened in other countries that have had high inflation without the necessary wage increases like Argentina or Mexico, vast amounts of poor people (and not just a little poor either) with a very tiny middle class and an even smaller amount of rich people. That is our future as I see it at this point.

The rich will end up paying for little or nothing, if anything they'll get even richer and get even more influence over our gov.

http://tinypic.com/r/x276ur/5

pkennedy says

The USD might not make you comfortable, but it makes a lot of people comfortable, and the currency is stable because it makes a lot of people comfortable and they all use it. As long as the majority are happy, it will be stable.

I said government, not dollar. I think you attribute too much to confidence. You're essentially saying (and I've heard this before) that the dollar will be fine because everyone thinks it will be and so the dollar will be fine.

This is circular logic and I mistrust it everytime I see it. Don't get me wrong, confidence can be a good thing, but only when it is backed up by facts and solid fundamentals. If its not, then what you have isn't confidence, its delusion. A fantasy at best.

pkennedy says

but we’re not swinging wildly up or down like all other currencies out there.

http://tinypic.com/r/xclllk/5

pkennedy says

In reality, no one wants it to change.

I'm sure they don't, but no one seemed to want the bubble to pop, or any other catastrophe to happen either. What people want and what actually happens are often two different things unfortunately.

The rich aristocracy won't get wiped out by inflation. They are the ones who are able to move their money in and out of the country in a matter of minutes. Hell, their buddies in the New York Fed probably tip them off on market decisions half the time so they already beat the hordes out.

In the past, the aristocracy used to sell their stocks to the general public before they crashed. This time, they were so stupid that they held on to them while their portfolio crumbled down to zero. Rather than eat the losses, they found a way to force the public to buy them. It was called the TARP. The rich already got wiped out in 2008. The Federal Reserve found a way to make them richer.

ttt--

Your argument makes no sense. The point is inflation is worse for the rich than it is for the poor or middle. Of course it won't bankrupt a billionaire--but that is irrelevant. It will hurt a billionaire more than it will hurt an average Joe with a large mortgage and credit card debt. That is all I'm saying.

And you're forgetting what inflation is like. Housing prices will rise during inflation--that is pretty much the definition. Prices rise. And wages will rise as well. Keep that in mind when you're making your arguments... Neither of these things is happening now, of course, because we're not in a period of high inflation right now. Just the opposite actually--very close to zero inflation. Some even have called it deflation.

tatupu70 says

And you’re forgetting what inflation is like. Housing prices will rise during inflation–that is pretty much the definition. Prices rise. And wages will rise as well.

In economics, inflation is a rise in the general level of prices of goods and services in an economy over a period of time.

Wages rising is not a given. See "stagflation".

As Whitney and others have said, credit and "special assistance" contracting does not forbode an expanding "money supply" in this universe.

tatupu70 says

Of course it won’t bankrupt a billionaire–but that is irrelevant. It will hurt a billionaire more than it will hurt an average Joe with a large mortgage and credit card debt. That is all I’m saying.

How will it hurt them? Oh they may lose (I still doubt they'll lose anything, I was tossing out the 50% as a ridiculous example FYI) lots of money, but how will they be _hurt_? What sacrifices will they have make in their life to accommodate their supposedly dramatic decreases in wealth if they've still got hundreds of thousands, millions, tens of millions, or even billions of dollars?

If they've got that much money they can still afford to live very comfortably to say the least, whereas Joe n' Jane Sixpack will begin to learn the true meaning of the word poverty.

IOW: its not the sheer amount that the rich lose vs. the non-rich, its the effect it has on their lives that matters. If you think losing millions but still having millions (or "just" hundreds of thousands) more lying around is pain or suffering or "hurt" then I shudder to think what going hungry or having to ride the bus to work at a crappy job for $14/hr would do to you.

tatupu70 says

Housing prices will rise during inflation–that is pretty much the definition.

Not if people can't afford the prices they won't, and the definition is monetary but can occur all throughout the economy at large in various and strange ways. They'll have to come down eventually, or wages will have to go up to meet the new prices, otherwise the homes don't sell and just sit there and eventually rot away.

tatupu70 saysPrices would rise.

This would certainly happen, particularly for any foreign goods or commodities since those prices will be dictated to us by external market forces.

tatupu70 says

And wages will rise as well.

The Fed has already stated multiple times that they're going to do everything they can to prevent wage inflation since they believe that is one of the main causes if not _the_ cause of inflation. Mean while wages have been dropping or stagnant for quite a while now in the US, and this has happened while the dollar has lost quite a bit of its value over the last few years.

I've already posted the charts a few posts up...

tatupu70 says

Neither of these things is happening now, of course, because we’re not in a period of high inflation right now. Just the opposite actually–very close to zero inflation. Some even have called it deflation.

Even the Fed's own numbers show CPI staying firmly in the positive range throughout all this deflation. All we had was a drop in the rate of inflation around late 2008 or early 2009, its gone up since then and is likely understated with the QE they've been doing.

Wages will raise, depending on what position a person is in. Minimum wage jobs might not raise by much. But many others will. Eventually others will catch up. Blue collar jobs are still in for a rough time, because there are so many blue collar workers in the world right now. It will take more time to absorb all of them. Eventually they'll start seeing wage increases. Probably in 10-15 more years. Too long for many of todays workers to benefit, but they will go up for the next generation.

aristocracy has normally owned land. Trying to move the kind of money you're talking about doesn't work. People can't up and sell off trillions in assets and expect to find "new" buyers for them, while they're running those assets off to another country. Not to mention they then need to find something in that new country to buy.

pkennedy says

Eventually they’ll start seeing wage increases. Probably in 10-15 more years.

If you seriously believe that and yet think that there is little to no chance of any sort of economic crisis then I don't know what to say. If that comes to pass then the Mexico-ification of the US that I fear will almost certainly occur.

pkennedy says

People can’t up and sell off trillions in assets and expect to find “new” buyers for them, while they’re running those assets off to another country. Not to mention they then need to find something in that new country to buy.

Sure they can, they just have the "friendly" government buy up all the assets at inflated or face value and then have their money managers move it off shore or into other assets that will suffer less or not at all when things fall a part.

10-15 years is a lot to ask for. How much have we changed over the past 10 years alone. Sluggish economy, a workforce of 1.1M down to mid 700K and lots of toxic borrowing hanging out like cancer.

Vicente says

Wages rising is not a given. See “stagflation

Yes, but wages rise in the VAST majority of cases of inflation. Stagflation is a very rare case...

tts--

Are you arguing that the dollar will devalue so much that it will cause foreign goods to rise in price and cause inflation? Fair enough, that's possible--but realize that US goods will then become signifcantly cheaper to export and jobs will suddenly come back to the States. Causing unemployment to decrease and wages to rise...

@tts

There a huge number of people in this world willing to work blue collar jobs, who are qualified for most of them. Often the training for those jobs isn't significant, and the cost benefits are massive to employers who take it upon themselves to train people from the ground up and can pay far less. China, India, Russia, Eastern European countries. Germany was hit hard by this when the berlin wall came down. A massive pool of blue collar workers all of a sudden willing to work for a fracation of what the west germans were working for. We're feeling that now from other countries that are slowly exiting communism. It will take quite a bit longer for many of those people to become employed and to start pushing those jobs wages up again.

You're also giving way too much credit to "evil" practices. Foreign governments aren't going to buy up their "friends" assets and take a fall for them. That would require governments buying up USD backed assets to perform this act of friendship.

1) There aren't many countries who could even think of doing that.
2) There are some 160 odd countries in the world. Assuming they *ALL* help their friends, how many friends do you think each individual country has? How many people can call up these governments and say "buy my stuff before I lose money, friend!!" 5? maybe 10? 10x160 = 1600 people max.
3) This requires having a top level employee in these countries, unless they're the president, they're going to be fired for doing something so stupid the first time they do this. So this becomes a bridge burning business. How well would you need to know someone before you'd burn your entire career helping them out?
4) money is NOT power. Losing money means nothing if you have power. You would never burn a bridge to keep money and lose power. You wouldn't even risk it. If you had a friend who had so much power that they could just redirect large sums of money for you, you aren't going to waste their power on something so stupid as saving some money for you.
5) These falls happen rapidly. There are *MANY* computer programs out there designed to trigger buy or sell orders if anything fishy happens.

Look at Warren Buffet again. He's been one of the richest men in the world for a very long time. He has the best grasp of financials that this world probably has. He's proven over his entire career that he knows what he's doing, and that it's not just pure blind luck. He outperforms the major indexes by large to very large amounts every year. Others might hit a home run for 4 or 5 years, but after that, they strike out, and in this world, a strike out means you're gone. He owned coke when it was going for about $90 per share. He valued the stock at $50, with hype keeping it at $90. It was stupid for him to keep the stock, but he did. Why? Because he had so much of it, that there weren't enough buyers at it for $90. He calculated out that it would drop below $50 before he could sell everything because the knee jerk reaction of investors would pop the bubble and it would fall. He wanted to keep it because even at $50 he knew it was a good deal. He couldn't sell to lock in a profit because it would shatter the price of the stock and bring it down to $50 or less. So he just held it and it slowly came back down on it's own. If someone like warren buffet can't get out of a stock when he knows months in advance that it's way over priced, then there isn't anyone who can escape using your "tactics".

A couple people might get some advance warning tips, but even then, when they try and execute on them, the computer programs instantly see them and pounce. Their pouncing causes others to react and before the person who started it even gets a chance to pull out, he's taken his beating.

tatupu70 says

tts–
but realize that US goods will then become signifcantly cheaper to export and jobs will suddenly come back to the States. Causing unemployment to decrease and wages to rise…

If we get the sort of large and rapid inflation that I think is possible than the future you describe is well over a decade away at best, mean while the nation ends up turning into a 3rd world country. Some parts of it already aren't too far away from that you know, but generally they're in areas that most don't think about like the Ozarks or the fly over states.

pkennedy says

@tts
There a huge number of people in this world willing to work blue collar jobs, who are qualified for most of them.

This isn't in question, indeed I would consider it a big problem. Many other countries can what only we used to now and for less either for their own local economies (so they don't import goods made here) or for exporting goods to other economies (which makes them our competitors). We have to find something to do here that almost no one else can do as well and we have to be able to sell it to other countries. There are lots of really neat things in labs right now, but then that has been true for decades. Some of it pans out, most of it seems to go nowhere.

pkennedy says

We’re feeling that now from other countries that are slowly exiting communism. It will take quite a bit longer for many of those people to become employed and to start pushing those jobs wages up again.

I think this statement would've been true back in the 90's, but no longer. There are almost no truly communist countries left and there hasn't been for a while now, most of the ones that were communist (like China) are now best described as a sort of weird mish mash of communism, capitalism, and totalitarianism.

I think jobs and wages (or benefits) will continue to decline here for a long time, due in part to our governments' policies to fight inflation but also because of the make up of our labor force (heavily concentrated on service and construction jobs, 2 categories that will get absolutely hammered in a prolonged recession, much less an inflationary depression like I imagine will occur), new developments in automation (not so much in robotics, but in doing symbols processing, things like clerical work which once required a human to do can now be mostly automated by machines scanning and processing paperwork and data), even more outsourcing (a problem before the bust, now companies are accelerating the outsourcing to lower costs in any way possible), and finally because of labor costs in this country vs. labor costs in developing nations.

pkennedy says

You’re also giving way too much credit to “evil” practices. Foreign governments aren’t going to buy up their “friends” assets and take a fall for them.

Our government seems to be doing a pretty good job of buying up all the bad assets the banks and Wall St. generated during the boom while lending them even more money and paying them interest to hold it besides. That is why they've been able to rake in the huge bonuses while paying back the TARP money, that is all our money they're playing with. Also none of the people involved in our gov. are going to take the fall for any of this. Look at what has happened to Greenspan or Paulson, nothing at all.

pkennedy says

Assuming they *ALL* help their friends, how many friends do you think each individual country has?

Not all countries are required to be corrupt nor does the entirety of the country in question need to be corrupted, only a few important parts of it. What is that old saying again? "Give me control of a nation's currency and I care not who makes the laws." Or something like that anyways.

pkennedy says

How well would you need to know someone before you’d burn your entire career helping them out?

If the money has already changed hands than they won't really care about losing their career will they regardless of wether or not they know each other.

pkennedy says

If you had a friend who had so much power that they could just redirect large sums of money for you, you aren’t going to waste their power on something so stupid as saving some money for you.

Sure you would. If they have enough money (really the same thing these days) to influence governments heavily than all sorts of crazy things become possible. Look at the sort of stuff that has historically happened in the poorer and more corrupt countries. The governments there are usually in bed with the criminals and quite literally get away with murder or worse all the time with just heaps of money alone.

pkennedy says

These falls happen rapidly. There are *MANY* computer programs out there designed to trigger buy or sell orders if anything fishy happens.

Yes, most of these systems are run by the very same guys who help hide or move wealth around for the rich. There will be no biting of the hand that feeds.

pkennedy says

If someone like warren buffet can’t get out of a stock when he knows months in advance that it’s way over priced, then there isn’t anyone who can escape using your “tactics”.

These people don't have to be right all the time, just most of the time, to get most or all of their wealth out of a country or currency. Again, even if you assume they lose half of everything they've got they're still head and shoulders above most anyone but other rich folks who are a teeny tiny portion of the world's population.

tts says

If we get the sort of large and rapid inflation that I think is possible than the future you describe is well over a decade away at best, mean while the nation ends up turning into a 3rd world country. Some parts of it already aren’t too far away from that you know, but generally they’re in areas that most don’t think about like the Ozarks or the fly over states.

The Ozarks? How about East LA. Or Oakland.

It's not going to happen, but I think it wouldn't take nearly that long if it did. The world moves pretty fast these days...

tatupu70 says

It’s not going to happen, but I think it wouldn’t take nearly that long if it did. The world moves pretty fast these days…

It would take a long time because the gov. would do everything they could to slow it down in order to prevent really crazy stuff like mass rioting or starvation from occurring, but everything has its price.

It took germany a long time to incorporate all of their blue collar workers, and they were living next door to them.

China/India and other communist countries might have given up all but the communist name, but they are still integrating all those people into their society, which in turn we need to compete with. Even china slows down the number allowed to join the blue collar ranks. We still are incorporating all of those workers, and will be for at least another decade.

There is nothing we can do "here" that others can't do. We don't have some super human gene that others don't have. It's a global world, a global economy. When those countries push up their standards, we'll be pushed up as well. The US has had a head start on many countries, and thus really just considers itself better. In actuality, it's most likely many of this centuries policies and wars that helped it. Communism really hurt many countries economically. World war 1&2 decimated Europe. They had to recover completely before they could start building new and improving technologies. The US on the other hand, didn't get blown up. Was selling en mass to Europe while Europe rebuilt. The US had a massive lead onn the rest of the world, but that lead is closing, not because others are doing better than us, but because they're learning from us how to do it. It's natural. We built up processes that sped us up 10% a year lets say. We got so far ahead of every one else that we were just cruising. Now that they are starting the build up process, they're looking at the US and saying "Ah! that is a good corporate idea.." and jumping 30-50% a year, they might still be 500% slower than us, but instead of requiring 50 years to get to where we are today, they will require only 10-15. Eventually they will only be shortly behind the US. At which point they will have to create their own ideas to push productivity, or live off our ideas. At that point we'll all be on nearly equal footings.

Power is far better than Wealth. I would far rather be as popular as Paris Hilton with $0, then be no one, with 5M in the bank.
Not only could I earn way more than a person with 5M could ever earn, I would be able to get into places and talk to people I could never do with just pure money. People don't trade power for money. If you think some dimwit in another country is going to buy up our rich peoples assets to save those rich peoples asses, so they can get a kickback, and lose their jobs in the process, you're insane. Someone who could "save" a rich person, is either going to use it on their direct families, OR keep the power. They aren't going to risk it for a small kickback from a rich person. If a person sits at the top of a country, they aren't going to risk their country to save some rich persons bank account. If they were that great of friends, they would be living in THAT country, not the US, and they wouldn't have a need for money.

Your ideas that people could hide this kind of activity are absurd. Your talking about a conspiracy that spans thousands upon thousands of people in the US, having contacts en mass with others who would willingly sacrifice their wealth or their position of power to save these rich idiots. If the president can't hide a simple blow job, there's no way thousands can conspire in your described methods.