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Jaguar Inflation -- A Layman's Explanation of Government Intervention


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2014 Dec 25, 9:41pm   21,390 views  65 comments

by darlag   ➕follow (1)   💰tip   ignore  

EWI Editorial

I am tired of hearing people insist that the Fed can expand credit all it wants. Sometimes an analogy clarifies a subject, so let’s try one.

It may sound crazy, but suppose the government were to decide that the health of the nation depends upon producing Jaguar automobiles and providing them to as many people as possible. To facilitate that goal, it begins operating Jaguar plants all over the country, subsidizing production with tax money. To everyone’s delight, it offers these luxury cars for sale at 50 percent off the old price. People flock to the showrooms and buy. Later, sales slow down, so the government cuts the price in half again. More people rush in and buy…

http://www.globaldeflationnews.com/jaguar-inflation-a-laymans-explanation-of-government-intervention/

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38   Bellingham Bill   2014 Dec 31, 3:16am  

Heraclitusstudent says

Inflating assets was the key to save the banks balance sheets.

red is corporate and household debt

blue is GDP

the gap is the debt overhang

$5 or $6T worth of extra overhang in 2007, compared to 1990s debt ratios

39   Heraclitusstudent   2014 Dec 31, 3:30am  

Bellingham Bill says

the gap is the debt overhang

$5 or $6T worth of extra overhang in 2007, compared to 1990s debt ratios

That there is a gap is obvious. That is leverage. Note on the graph we went through a period of rapid shrinking of this gap. Nothing impossible there. And this happened without deflation.

If the point is that, sooner or later, deleveraging will happen, I fully agree with this.

If the point is that this implies deflation and authorities have no choice in the matter, then I disagree.

Deleveraging is a matter of real economy. It can be forced by inflation, and happen while the economy is growing, at least nominally growing.

40   darlag   2014 Dec 31, 3:30am  

Heraclitusstudent says

- first credit expansion and money supply expansion are not the same thing.

Sure they are. Why do you think the Fed opted to stop reporting M3, the combined value of credit and money? To determine the monetary valuation of an economy, both must be combined in the aggregate. When the Fed began to pour credit into housing market in 2003 you can see a huge spike in M3 which they had to eventually stop reporting in 2006 because it was going to get so out of control. As this chart indicates, M3 eventually exceeded 18% a year before the bubble eventually, predictably burst.

How can you guys simply ignore this stuff. It's so obvious to see for those that look.

?hl=1

41   Heraclitusstudent   2014 Dec 31, 3:38am  

darlag says

Heraclitusstudent says

- first credit expansion and money supply expansion are not the same thing.

Sure they are. Why do you think the Fed opted to stop reporting M3, the combined value of credit and money? To determine the monetary valuation of an economy, both must be combined in the aggregate. When the Fed began to pour credit into housing market in 2003 you can see a huge spike in M3

You start by "Sure they are" and then proceed to talk of something else. There are several measures of money supply, and which one you use, and how it evolves, is irrelevant to the point I made.

How much is M3 now? $20 trillions? Do you think they couldn't print and distribute $20 trillions tomorrow if they chose to? If not then prove it.

42   darlag   2014 Dec 31, 3:43am  

Bellingham Bill says

yes they are. The monetary authorities in these cases were literally printing money and handing it out to the general public.

This is not helicopter money... geeez. That is inflating the currency supply in an effort to debase it. In a deflationary crisis, which is what Friedman was addressing, you don't inflate the money supply to address a liquidity issue. You can hand out cash, offer tax credits, jubilee loans, etc., anything to reduce the amount of debt (credit) in the system. But you don't debase your currency. That would be completely counter-productive to the aim of the process.

43   darlag   2014 Dec 31, 3:47am  

Heraclitusstudent says

You start by "Sure they are" and then proceed to talk of something else. There are several measures of money supply, and which one you use, and how it evolves, is irrelevant to the point I made.

M1, M2 and M3 - that's all there is. But the Fed won't report M3 anymore, they're too embarrassed. And don't say I forgot MZM - that's just a joke.

Here, maybe this will help you...

http://www.globaldeflationnews.com/inflation-vs-deflation-part-2why-years-of-federal-deficit-spending-has-doomed-a-once-great-nation-and-much-of-the-rest-of-the-world/

44   indigenous   2014 Dec 31, 3:50am  

The M3 is around 72 trillion?

45   darlag   2014 Dec 31, 3:54am  

Heraclitusstudent says

Do you think they couldn't print and distribute $20 trillions tomorrow if they chose to? If not then prove it.

It's not a matter of can or can't -- they won't. It would destroy the credibility of the most sovereign of the sovereign currencies - economic suicide. That's a ridiculous assertion/assumption.

On a lighter note - Happy New Year!
I'm off to party the new year into existence.

46   Heraclitusstudent   2014 Dec 31, 4:01am  

darlag says

It's not matter of can or can't

Ah... now changing the thesis from can't to won't.

Happy new year!

47   Heraclitusstudent   2014 Dec 31, 4:07am  

darlag says

This is not helicopter money... geeez. That is inflating the currency supply in an effort to debase it. In a deflationary crisis, which is what Friedman was addressing, you don't inflate the money supply to address a liquidity issue. You can hand out cash, offer tax credits, jubilee loans, etc., anything to reduce the amount of debt (credit) in the system. But you don't debase your currency. That would be completely counter-productive to the aim of the process.

Why would it be counter productive? Provided the new money is not lent but given to people who spend it. Spent by the government. It means business. It means people get a pay check. It means people pay off their debts. Inflation means the existing debt stock is deflated without any disruption. It is absolutely a productive way to overwhelm a debt problem.

And it absolutely shows deflation is not the risk here.

The main risk is to end-up with a poor real economy, like Zimbabwe did, because the spending decisions will stink.

48   Bellingham Bill   2014 Dec 31, 4:35am  

Heraclitusstudent says

pent by the government. It means business. It means people get a pay check.

no no money given to the government disappears into a bonfire, never to be seen again

49   dublin hillz   2014 Dec 31, 4:39am  

Bellingham Bill says

Heraclitusstudent says



pent by the government. It means business. It means people get a pay check.


no no money given to the government disappears into a bonfire, never to be seen again

http://www.washingtonpost.com/world/luxurious-presidential-house-draws-mexican-press-scrutiny/2014/11/09/33bba1ee-65fd-11e4-ab86-46000e1d0035_story.html

It may not "disappear" but some do benefit disproportionately...

50   indigenous   2014 Dec 31, 5:52am  

dublin hillz says

It may not "disappear" but some do benefit disproportionately...

Not the least of which are public employees.

51   Bellingham Bill   2014 Dec 31, 9:22am  

dublin hillz says

It may not "disappear" but some do benefit disproportionately...

real (2009 dollars) per-capita (age 15-64) gov't spending

we've all got gov't jobs, some of us just don't know it

52   Bellingham Bill   2014 Dec 31, 9:38am  

Heraclitusstudent says

That there is a gap is obvious. That is leverage.

yah my point with the $5T overhang was that with no Fed intervention in 2009-2010, Wall Street and every bank in the country would have looked like the end of Fight Club

Austrians say "great!", but being revolutionaries that's what they would say of course.

the death spiral was halted by the rent yield at that lower price level perhaps, but the one thing the G.D. did was knock rents for a loop, too.

We didn't get that this time...

53   dublin hillz   2015 Jan 2, 1:23am  

indigenous says

dublin hillz says



It may not "disappear" but some do benefit disproportionately...


Not the least of which are public employees.

Regular public employees are not a problem in the grand scheme of things. For every argument that is made how they are "overpaid" a counterargmuent can just as easily be made that their private sector counterparts are underpaid in terms of both pay and benefits. The issue is more from the global perspective how those at the highest echelons of power can abuse the government coffers for their personal pilfering and hook up their friends with the spoils while the rest of the populace rots in poverty.

54   indigenous   2015 Jan 2, 2:41am  

dublin hillz says

Regular public employees are not a problem in the grand scheme of things. For every argument that is made how they are "overpaid" a counterargmuent can just as easily be made that their private sector counterparts are underpaid in terms of both pay and benefits. The issue is more from the global perspective how those at the highest echelons of power can abuse the government coffers for their personal pilfering and hook up their friends with the spoils while the rest of the populace rots in poverty.

Horse Puckey, you are trying to define something without price discovery. To which I will lay you odds the public sector is grossly over paid. Typically twice what the private sector would make, when the worker is at the federal level.

Take a look at these sites, 6 figure salaries are the norm, along with gold plated health insurance and retirement possible at age 50 at 90+ percent of salary.

http://californiapolicycenter.org/public-employee-compensation-data/

You have to be fucking kidding me this complete bullshit.

55   dublin hillz   2015 Jan 2, 2:58am  

indigenous says

price discovery.

The price discovery occurs during negotiations between union and management. The reason for the pay differential vs private sector is simply due to the fact that private sector does not have the leverage if they are non unionized hence the power diffferential in favor of the company/business owner that accounts for lower pay/benefits.

56   indigenous   2015 Jan 2, 3:07am  

dublin hillz says

The price discovery occurs during negotiations between union and management. The reason for the pay differential vs private sector is simply due to the fact that private sector does not have the leverage if they are non unionized hence the power diffferential in favor of the company/business owner that accounts for lower pay/benefits.

That is not price discovery, that is cronyism. The reason for the pay difference is there is no price discovery

57   Heraclitusstudent   2015 Jan 2, 7:16am  

dublin hillz says

price discovery occurs during negotiations between union and management.

In the private sector, unions could never get much more than the market offers: Otherwise the company would be at a disadvantage compared to others, and probably either move to an other country or go bankrupt.

In the public sector, there is no balance in such negotiations: except in times of crisis, government officials have low incentives to not give employees a good salary. They just tax more to compensate. as time passes, public employees can become parasites, taking a lot more money than they deserve from other parts of the economy.

Bottom line, the market is a much better guideline than "negotiations between union and management". You may not like the result, but it represents a truth about what something is worth.

58   tatupu70   2015 Jan 4, 5:58pm  

Heraclitusstudent says

In the private sector, unions could never get much more than the market offers: Otherwise the company would be at a disadvantage compared to others, and probably either move to an other country or go bankrupt.

That assumes that we're in a perfectly competitive marketplace where companies only make true economic profits--which clearly ISN'T the case as corporate profits are at record highs. There is plenty of room for companies to raise wages...

Heraclitusstudent says

Bottom line, the market is a much better guideline than "negotiations between union and management". You may not like the result, but it represents a truth about what something is worth.

Couldn't disagree more. The market is driving the value of labor to zero. Unless you think the worth of labor is zero, the market isn't a good guideline.

59   Bellingham Bill   2015 Jan 4, 7:29pm  

good points, tatupu. I was going to respond similarly to the above reflexive free-marketeerism, but fatigue etc.

(I'm curious who disliked it. That person isn't contributing much to this site, sigh)

"the company would be at a disadvantage compared to others"

I'm hopeful that this decade or next wage-earners will start banding together and we'll get a new Buy Union (or at least Buy USA) movement going, turning the alleged fatal marginal cost of paying labor more into a corporate boon.

"probably either move to an other country"

if only we had extra-market institutions with the power to control corporations!

What would they even look like???

"or go bankrupt"

^ that's really a stupendous graph, 2000 wasn't that long ago!

60   indigenous   2015 Jan 4, 8:03pm  

Call it Crazy says

Why the fuck do you care? You're ignoring 76 people on this site!

That was literally a LOL, funny stuff, you might call it crazy

61   Heraclitusstudent   2015 Jan 4, 10:37pm  

tatupu70 says

There is plenty of room for companies to raise wages...

I'm not sure I understand your point. Companies sell products in 1 market, employees are hired in an other. The room to raise wages is there, but it doesn't mean it's not a competitive situation.

tatupu70 says

The market is driving the value of labor to zero. Unless you think the worth of labor is zero, the market isn't a good guideline.

No it's not driving labor to 0. It's driving labor to costs in low wage countries, because the US made the decision to compete with these countries.

Without trade companies would have to compete for labor in the US and this situation would not exist. The problem is not how the market works. The problem is a situation that was deliberately created this way.

Even with trade, what's going to happen is China's worker will see double digits salary gains, until they are rich enough to be consumers. Companies may move to other countries, but there will be more consumers, and less cheap labor. Over decades wages will move up and corporate profits will be squeezed. Assuming we actually reach that point without revolution.

My point remains: in the meantime it is VERY UNFAIR to ask people who are in competition with foreign workers to pay taxes to subsidize people who aren't, and are paid above US labor market rates.

62   Heraclitusstudent   2015 Jan 5, 12:29pm  

Bellingham Bill says

"probably either move to an other country"

if only we had extra-market institutions with the power to control corporations!

What would they even look like???

"or go bankrupt"

The profits you are showing are for companies that already moved abroad: for example Apple employs (through providers) maybe 10 times more people abroad than in the US. Production is off-shored.
The people remaining in the US are those for which the market dictates a good salary.

However do you think people doing manufacturing in the US can simply ignore foreign competition and raise wages - because they have such good profits they don't care? I think not.

63   tatupu70   2015 Jan 5, 1:08pm  

Heraclitusstudent says

I'm not sure I understand your point. Companies sell products in 1 market, employees are hired in an other. The room to raise wages is there, but it doesn't mean it's not a competitive situation.

Where they sell is irrelevant. The point is that even in a competitive marketplace, corporations are making HUGE profits that used to be paid to workers. It is obviously possible for those profits to be paid out in wages to the workers instead of in dividends to the owners.

64   Heraclitusstudent   2015 Jan 5, 2:26pm  

tatupu70 says

It is obviously possible for those profits to be paid out in wages to the workers instead of in dividends to the owners.

You're asking for the few companies that make huge profits, like Apple, to hire factory workers in the US with wages above market just because they can?

You mean... in an utopic world where people willingly abandon their own interests? Assuming Apple does, would it even make a dent on wages in the US? Probably not unless all companies do. Even more utopic.

Is that your definition of possible?

What about other barely profitable US manufacturers? Would they also be forced to pay more than market? Decided by who?

65   tatupu70   2015 Jan 5, 2:32pm  

Heraclitusstudent says

You're asking for the few companies that make huge profits, like Apple, to hire factory workers in the US with wages above market just because they can?

I'm not asking for anything--I'm simply pointing out that it is NOT the competitive marketplace that is forcing companies to do this. It is because owners want to maximize their profits at the expense of the workers.

I'm also not saying it's the companies responsibility to raise wages--just that it's NOT because they have to--it's because they want to.

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