patrick.net

http://www.ncbi.nlm.nih.gov/pubmed/26403842

It's really sad there are some people with so little going for them that they feel compelled to create alts just to post to a conversation they were kicked out of. I've always wondered if maternal neglect was the cause of people becoming trolls. landtof has just confirmed this theory.

Yep, it's science.

attention-conflict seeking, low self-confidence, viciousness, uneducated

The perfect description of trolls like landtof.

45 Tampajoe 2016 Sep 23, 5:05am

Monetary policy causes the savings and wages of productive members of society, the actual workers, to decrease. Merely by not getting a raise, your salary is being lowered. Merely by saving money in the bank, even in bonds that have 1% interest, you are losing money. Monetary policy forces you to gamble with your money simply to maintain its purchasing power. This is not just and it does not promote healthy finances for the masses.

That's not really true and should be clearly proven during the time period between WWII and the late 1970s. For 25-30 years, wages and salaries showed nice real gains despite monetary policy and inflation. In fact, there is a slightly positive correlation between real gains and inflation---workers did better during times of moderate to high inflation than during times of low inflation.

Banks will never pay more than the inflation rate for savings accounts, regardless of what that inflation rate is. If inflation were zero, banks would charge a fee to keep your money. They are providing a service for you, so of course they won't do it for free.

46 mell 2016 Sep 23, 8:00am

-workers did better during times of moderate to high inflation than during times of low inflation.

That was real or natural inflation due to economic boom times. The artificial inflation in asset prices driven by ZIRP/NIRP or generally suppressed rates correlates negatively with the status quo of the middle class worker.

47 Tampajoe 2016 Sep 23, 8:31am

mell says

That was real or natural inflation due to economic boom times. The artificial inflation in asset prices driven by ZIRP/NIRP or generally suppressed rates correlates negatively with the status quo of the middle class worker.

You're attributing it to the wrong causes. Asset inflation is due to inequality, which is due to the mechanism Dan described earlier. Corporations no longer pay wages to their workers, but instead pay dividends to their owners. This has caused inequality to rise steadily over the last 30-40 years. Money is hoarded by a relatively small number of people who have nowhere to spend it so they buy assets.

There may be a correlation there because as inequality increases, interest rates will fall as there is more money chasing fewer and fewer investments. But it's certainly not a causation.

48

Dan8267 2016 Sep 23, 8:35am

That's not really true and should be clearly proven during the time period between WWII and the late 1970s. For 25-30 years, wages and salaries showed nice real gains despite monetary policy and inflation.

This is not proof. The amount by which currency is based affects how much real wages are adjusted. It's not a binary system that can be measured by "are real wages going up or not". You have to compare and contrast how much real wages are adjusting as a function of currency debasement. What would real wages be if currency purchasing power remained constant? What would real wages be under 1%, 2%, 5%, and 10% debasement? There is no data on this, thus there is no evidence, nonetheless proof, that currency debasement has no effect on real wages.

Banks will never pay more than the inflation rate for savings accounts, regardless of what that inflation rate is.

Irrelevant. Merely maintaining purchasing power would financially empower hundreds of millions of middle class and poor Americans. Furthermore, above zero interest rates under zero currency debasement would be widely available in the form of short and long term bonds.

If inflation were zero, banks would charge a fee to keep your money. They are providing a service for you, so of course they won't do it for free.

And you are providing a loan to the bank which is necessary for them to make money by loaning to others. If capitalism fails at making an efficient banking system, which is necessary for commerce and economic growth, then simply don't use capitalism as the basis of your banking system or at least place heavy restrictions on it. For example, make the cost of having a banking license providing completely free checking. Cost-free access to electronic money is essential for facilitating efficient commerce and driving both consumption and GDP. Any costs for simply performing monetary transactions imposed by a bank on the consumer has all the disadvantages to the economy of a sales tax but without any of the public revenue generating advantages. Why should our laws encourage such waste and drive down economic activity?

49 freespeechforever 2016 Sep 23, 8:41am

NIRP/ZIRP merely creates artificial asset inflation in mainly financial assets as it pressures investors (speculators) to go further and further out on the risk curve to chase returns.

NIRP/ZIRP is much like heroin or other powerful drugs in that the longer their use, the more tolerance develops.

At this point, NIRP/ZIRP are close to becoming, if not already so, diminishing-return monetary policy tools of central banks, which have created a massive financial asset class bubble in (oddly) stocks AND bonds (not historically normal correlation), and commercial & residential (especially rental) real estate.

QE got this latest round of dope-peddling central bank insanity bubble party started, however, and loss of faith in the ability of the monetization of government (sovereign) and now private debt (in Japan and Europe by BOJ and ECB) to stimulate real, sustained aggregate demand by tampering with the short and long yield curve will prove absolutely catastrophic.

Artificially inflating values of financial assets is not a winning solution to stoke real, sustained aggregate demand, because it benefits the wealthy (maybe top 4% of society) in a highly skewed and disproportionate manner.

This 4% WILL MORE LIKELY SAVE rather than SPEND any accumulated wealth, whereas monetary stimulus/transfers that makes it to the middle class and working class will be used to consume (nearly immediately), rather than saved.

To make matters worse, the asset appreciation created in an unnatural way by QE, NIRP/ZIRP will not last, as those assets are merely rising due to monetary policy, mainly, and when they deflate, it will only exacerbate the depth and the duration of the next economic crisis, as even the top 4% will reign in whatever marginally-increased spending (trickle down voodoo) they had been engaging in (watch for crash in high beta stocks, artwork, luxury goods, high-end real estate, travel, etc.).

The only path to long term, sustained aggregate demand and consumption and GDP growth is through rising productivity and wages for the bulk of the population.

Central banks have merely blown yet another massive bubble. They've blown 4 major ones since 1981, to hide or temporarily salve fundamental, structural macroeconomic problems.

Central bank policy now exists to intentionally inflate bubbles after their last inflated-ones pop.

50 mell 2016 Sep 23, 8:48am

You're attributing it to the wrong causes. Asset inflation is due to inequality, which is due to the mechanism Dan described earlier. Corporations no longer pay wages to their workers, but instead pay dividends to their owners. This has caused inequality to rise steadily over the last 30-40 years. Money is hoarded by a relatively small number of people who have nowhere to spend it so they buy assets.

There may be a correlation there because as inequality increases, interest rates will fall as there is more money chasing fewer and fewer investments. But it's certainly not a causation.

Disagree here. The argument that the wealthy don't know what else they could spend their money on doesn't hold. There is at any given time an infinite amount of services you can pay for and fairly quickly spend a lot of your money. The wealthy buy assets because they hope to make a return like everybody else and they stand a good chance since they can borrow more at lower rates, approaching a point where they can easily roll over their debt and risk owning or investing in the asset for longer periods of time than with normalized rates. Inequality results from the artificially low rates as the wealthy are the first at the trough and they get maximum leverage out of it while all the tail risk is taken away from them. If the Fed never intervened the housing prices in the aftermath even in the bay area would have been affordable for the teachers here, and rich individuals and companies would never have snapped up properties left and right with natural interest rates and without the Fed backed buying of MBS because the math wouldn't have worked for them.

51 mell 2016 Sep 23, 8:49am

NIRP/ZIRP merely creates artificial asset inflation in mainly financial assets as it pressures investors (speculators) to go further and further out on the risk curve to chase returns.

NIRP/ZIRP is much like heroin or other powerful drugs in that the longer their use, the more tolerance develops.

At this point, NIRP/ZIRP are close to becoming, if not already so, diminishing-return monetary policy tools of central banks, which have created a massive financial asset class bubble in (oddly) stocks AND bonds (not historically normal correlation), and commercial & residential (especially rental) real estate.

QE got this latest round of dope-peddling central bank insanity bubble party started, however, and loss of faith in the ability of the monetization of government (sovereign) and now private debt (in Japan and Europe by BOJ and ECB) to stimulate real, sustained aggregate demand by tampering with the short and long yield curve will prove absolutely catastrophic.

Absolutely.

52 Tampajoe 2016 Sep 23, 9:00am

This is not proof. The amount by which currency is based affects how much real wages are adjusted. It's not a binary system that can be measured by "are real wages going up or not". You have to compare and contrast how much real wages are adjusting as a function of currency debasement. What would real wages be if currency purchasing power remained constant? What would real wages be under 1%, 2%, 5%, and 10% debasement? There is no data on this, thus there is no evidence, nonetheless proof, that currency debasement has no effect on real wages

OK fine. Neither of us know what would happen under a theoretical situation, but there is data showing that real wages performed better during times of moderate inflation.

Irrelevant. Merely maintaining purchasing power would financially empower hundreds of millions of middle class and poor Americans. Furthermore, above zero interest rates under zero currency debasement would be widely available in the form of short and long term bonds.

No, it's very relevant. Maintaining purchasing power assumes you can guarantee that people's wages would increase at the same rate as now. Which you can't. What would likely happen is that their wages would decrease and they would be worse off. And what makes you think that above zero interest rates would be available for short and long term bonds under such a scenario?

For example, make the cost of having a banking license providing completely free checking. Cost-free access to electronic money is essential for facilitating efficient commerce and driving both consumption and GDP.

I think you'll end up with a National Bank then. Not that it would be a bad thing, but I don't think the free market will be a good solution under these rules. And I think a safe store of money that allows unlimited access is a valuable service. Not just a waste.

53 Tampajoe 2016 Sep 23, 9:12am

mell says

The argument that the wealthy don't know what else they could spend their money on doesn't hold

It's not that they don't know. It's that they are sated. They need nothing. They want nothing. They would prefer to save.mell says

The wealthy buy assets because they hope to make a return like everybody else and they stand a good chance since they can borrow more at lower rates, approaching a point where they can easily roll over their debt and risk owning or investing in the asset for longer periods of time than with normalized rates. Inequality results from the artificially low rates as the wealthy are the first at the trough and they get maximum leverage out of it while all the tail risk is taken away from them. If the Fed never intervened the housing prices in the aftermath even in the bay area would have been affordable for the teachers here, and rich individuals and companies would never have snapped up properties left and right with natural interest rates and without the Fed backed buying of MBS because the math wouldn't have worked for them.

Sure they like to make money. But, come on. Enough with the first at the trough nonsense. It's idiotic and has been shown to be hogwash many, many times. And please take the moral hazard arguments out of here with it. Housing prices in the Bay Area would never have fallen much further because they were already way below equivalent rent in most areas. Investment companies were buying the foreclosures in bulk along with some of the posters here. More banks may have folded, which may or may not have been a good thing, but housing prices weren't going to fall much further.

And what is "natural" rate? Is that a term you made up? Because it's nonsense. Rates are determined by the free market, and always go way down during recessions and financial crises because the expectation for inflation is very low.

54 freespeechforever 2016 Sep 23, 9:18am

Natural rate of interest would be what a loan maker & loan taker would voluntarily agree on absent any externalities (whether central bank manipulation or mafia/loan shark manipulation).

55

Dan8267 2016 Sep 23, 9:55am

Neither of us know what would happen under a theoretical situation

The lack of direct physical evidence does not mean we have to be completely ignorant of causality changes. Einstein predicted many physical phenomenon using just pure mathematics. Observational evidence later confirmed his theory, but his theory was based on math and logical consistency. It is possible to understand how a system works without observational evidence by understanding the mathematics driving the system. We can do this for currency debasement.

The biggest fallacy in most people's thinking of currency debasement is the false assumption that currency debasement must either be the sole cause of prices or must not affect prices at all. This simply is not true.

The price (nominal or real) is a function of several factors including supply, demand, technology, and currency debasement. For example, when the last housing bubble crashed and caused a depression, many people lost their incomes and consumer spending plummeted. This drop in demand was a factor that lowers the prices of goods and services relative to what those prices would be if this drop in demand did not occur. Simultaneously, the Federal Reserve massively increased the money supply, which is a factor that raises the price of goods and services relative to what those prices would be in the absence of the currency debasement.

The Federal Reserve's goal was to use currency debasement to exactly offset the drop in demand so that prices would be relatively constant. This is like trying to balance a pencil on its tip. It's possible with active management, but unstable in the long run. Eventually the pencil will fall to one side or another. Eventually the same will happen with the Fed's strategy.

In any case, the net change in price is the sum of the changes caused by each factor. This means that currency debasement does, mathematically, cause a rise in prices relative to where prices would have been without the debasement. Just because this effect is masked by another factor does not mean that currency debasement has no impact on the common man. It has a huge impact.

The typical worker, by mathematical necessity, will have lower real wages as the result of currency debasement even if asset deflation -- which quite frankly affects different assets at vastly different rates -- raises the real wages of workers. In the case of real estate, a lot of responsible savers would have been able to purchase houses and live in them had it not been for quantitative easing. These responsible people would also then be generating demand for furniture, lawn services, etc. thus driving consumer demand and job and GDP growth. Instead of this happening, quantitative easing caused houses to be left unoccupied and deteriorating destroying real wealth as frozen pipes burst and mold infested the buildings. This was a massive loss of real wealth, both in terms of assets and opportunities, cause by the attempt to prevent the loss of speculator's paper wealth. This is an epic economic fail.

The entire Second Great Depression could have been avoided if interest rates were kept at reasonable levels, the currency was not debased, and housing prices would have been allowed to fall. Yes, a lot of people would strategically default, and in fact they did anyway, but had housing prices been allowed to fall to levels supported by natural demand, those same people would have simply bought bigger houses for less money than they paid for the houses they defaulted on. Furthermore, other people would have bought houses instead of renting because of the new affordability. Had housing prices been allowed to fail instead of debasing our currency, there would be more home owners today, and when I say home owners, I mean people owning equity in their houses rather than simply counting mortgage debt.

Maintaining purchasing power assumes you can guarantee that people's wages would increase at the same rate as now.

In the absence of currency debasement, the purchasing power of wages is maintained as long as the nominal wages do not decrease. Under currency debasement, every worker must get a sizable raise every year in order to simply maintain their real wages. This is a hell of a lot harder to do. Most workers don't get raises every year, especially those with little bargaining power regardless of how productive they are or how much profit they generate for their employers. And generating profit for your employer does not give you bargaining power if others can also generate that profit. Just look at farm workers.

Similarly currency debasement is an attack on the life savings of families which is why Americans save damn little. 40% of Baby Boomers have nothing saved and one in three Americans have zero retirement savings. These statistics should make you shit your pants if you truly understand it's significance.

And I think a safe store of money that allows unlimited access is a valuable service.

The best way to provide a safe store of money, as well as to satisfy the government's interest of stopping tax evasion and money laundering, is to completely automate banking. Banks' don't actually add value to the industry anymore. The mechanics of banking that have value to the consumer -- things like saving, checking, transferring funds, using electronic money -- are all done completely by software. Having a single, non-profit national bank to handle all these basic and standardized functions would be far more efficient and better for the economy as a whole. It would eliminate wasteful drags on the economy like the per transaction fees and percent transaction fees that debit cards impose. These fees have all the negative effects of sales taxes but none of the positive effects. They are a drain on the economy and reduce growth.

Banks should only be rewarded with profit for adding value. What value the banks do add today mostly involve risk taking. There is no reason to marry basic everyday banking, which costs essentially zero dollars and in fact saves the government massive amounts of money in terms of loss tax revenues and tax and laundering enforcement, to risky investments. In fact, those two banking functions should be completely separated as they were under Glass-Steagall .

56 freespeechforever 2016 Sep 23, 10:05am

I agree 100% that banking, as it once was known in terms of a value-added economic contributor/actor, belongs on the ash heap of historical relics, for much of the same reasoning as Dan states above.

Moreover, there's a truly toxic factor adversely affecting the American Economy, and that has adversely impacted most other economies, since its advent, and has also caused massive taxpayer transfers to be "gifted" to the financial sector, to wit:

The Grammâ€“Leachâ€“Bliley Act (GLBA), also known as the Financial Services Modernization Act of 1999, an act of the 106th United States Congress (1999â€“2001).

The GLBA has had a devastating impact on middle class in developed nations, true value-added economic producers (manufacturers such as Boeing or Alcoa versus parasites such as JP Morgan), and the bulk of the population in emerging economies.

It may be one of the most pernicious economic acts ever passed into law in history.

It literally allowed the pricing of commodities from A to Z to become fundamentally, mostly detached from true supply/demand forces.

57 Tampajoe 2016 Sep 23, 10:55am

The Federal Reserve's goal was to use currency debasement to exactly offset the drop in demand so that prices would be relatively constant. This is like trying to balance a pencil on its tip. It's possible with active management, but unstable in the long run. Eventually the pencil will fall to one side or another. Eventually the same will happen with the Fed's strategy.

Perhaps, but the pencil won't always be balanced on its tip. Eventually, the economy may recover naturally and the pencil is raised so it is no longer balancing on its tip. And you've completely eliminated the period of time where the pencil had fallen.

In any case, the net change in price is the sum of the changes caused by each factor. This means that currency debasement does, mathematically, cause a rise in prices relative to where prices would have been without the debasement. Just because this effect is masked by another factor does not mean that currency debasement has no impact on the common man. It has a huge impact

This is where I disagree. I maintain that the impact is negligible. History has shown that real wages perform slightly better during periods of inflation. You can argue arbitrarily about which "kind" of inflation was at work during different time periods, but the point is that inflation has very small effects. All that matters is real wages. If real wages are going up, who cares if something costs $5 or $50? Savings rate will always be inflation rate - some constant x. It will never be higher than inflation. Bond rates will always be a function of inflation (and risk). Whether inflation is 1% or 5%, the real rate will be pretty close to the same.

The typical worker, by mathematical necessity, will have lower real wages as the result of currency debasement even if asset deflation -- which quite frankly affects different assets at vastly different rates -- raises the real wages of workers

False. I hope I've explained that already.

In the case of real estate, a lot of responsible savers would have been able to purchase houses and live in them had it not been for quantitative easing.

Also false, as I explained to Mell earlier.

The entire Second Great Depression could have been avoided if interest rates were kept at reasonable levels, the currency was not debased, and housing prices would have been allowed to fall.

All (mostly) false. First, rates are set by the market with an influence by the Federal Reserve. But low rates didn't cause banks and S&Ls to make crappy loans. They could just as easily have done so at 8% or 10%. The housing bubble was caused by the abandonment of underwriting standards.

Had housing prices been allowed to fail instead of debasing our currency, there would be more home owners today, and when I say home owners, I mean people owning equity in their houses rather than simply counting mortgage debt.

Actually, sans intervention, there would be more renters paying high rents to investment companies. More people would have been foreclosed and more houses would be owned by private equity companies that were snatching up foreclosures wherever they could.

58 Tampajoe 2016 Sep 23, 10:58am

In the absence of currency debasement, the purchasing power of wages is maintained as long as the nominal wages do not decrease. Under currency debasement, every worker must get a sizable raise every year in order to simply maintain their real wages. This is a hell of a lot harder to do. Most workers don't get raises every year, especially those with little bargaining power regardless of how productive they are or how much profit they generate for their employers. And generating profit for your employer does not give you bargaining power if others can also generate that profit. Just look at farm workers.

The dynamic between owner and worker exists with or without inflation. Workers want as much as the can get and owners want to pay as little as possible. It's independent of inflation.

Having said that, empirically it can be seen that workers tend to have more power to force higher raises during periods of moderate to high inflation.

59 Tampajoe 2016 Sep 23, 11:02am

Similarly currency debasement is an attack on the life savings of families which is why Americans save damn little. 40% of Baby Boomers have nothing saved and one in three Americans have zero retirement savings. These statistics should make you shit your pants if you truly understand it's significance.

That is scary, but you have not tied it to inflation. People save too little because they make too little and spend too much.

The best way to provide a safe store of money, as well as to satisfy the government's interest of stopping tax evasion and money laundering, is to completely automate banking. Banks' don't actually add value to the industry anymore. The mechanics of banking that have value to the consumer -- things like saving, checking, transferring funds, using electronic money -- are all done completely by software. Having a single, non-profit national bank to handle all these basic and standardized functions would be far more efficient and better for the economy as a whole. It would eliminate wasteful drags on the economy like the per transaction fees and percent transaction fees that debit cards impose. These fees have all the negative effects of sales taxes but none of the positive effects. They are a drain on the economy and reduce growth.

Banks should only be rewarded with profit for adding value. What value the banks do add today mostly involve risk taking. There is no reason...

Agreed. Any profits should go to pay down the debt.

60

Rew 2016 Sep 23, 11:03am

http://www.telegraph.co.uk/business/2016/09/21/un-fears-third-leg-of-the-global-financial-crisis-with-epic-debt/

That was a good read. Thanks. Some choice sections below.

""If policymakers fail to mitigate the negative impacts of unchecked global market forces, then a turn to protectionism could trigger a vicious downward spiral for everyone," it said."

The report puts the advocates of globalisation (as practiced) in a quandary. They - or we, perhaps I should say - typically argue that it has vastly raised the living standards of hundreds of millions of people across Asia.

It allegedly "works" for emerging nations, and this is cited as the paramount moral justification even if free flows of capital have regrettably allowed multinationals to fatten on 'labour arbitrage' and play off western wages at against low-pay hubs abroad.

But what UNCTAD shows is that globalisation has not in fact worked for these countries, bar a few exceptions. One starts to suspect that it works for nobody except the owners of capital and their close allies.

... snip ...

"What is clear is that the world will soon need a massive and coordinated spending push by governments to create demand and bring the broken global system back into equilibrium. UNCTAD is entirely right about that."

------------

My take on our choices in the US are ...

Trump = Hasten the day : protectionism, embrace the deflationary cataclysm, greatly increased odds of major world conflict
Hillary = Everything's fine! Keep on swimming, keep on swimming, la la la

... if the choice even matters much for where this coaster is headed.

#LogansSwan

61

Rew 2016 Sep 23, 11:12am

History has shown that real wages perform slightly better during periods of inflation.

There is no major threat of inflation right now in the US. For over 4 years we have been dumping accelerant on the fire trying to create it. The Fed and central banks would love to have that as a worry. They don't.

I believe Dan is talking about actual uncontrolled inflation caused by an over abundance of currency, in spenders hands. Unless trickle down works, I don't think we are in danger of that.

That is scary, but you have not tied it to inflation. People save too little because they make too little and spend too much.

Dan already said that above. Much of your criticism looks like cross talk, or just being contrary. At the macro level, at-least in my read, you and Dan agree.

62 Tampajoe 2016 Sep 23, 11:17am

At the macro level, at-least in my read, you and Dan agree.

I think we agree on most things. Just disagree on the impact of inflation and monetary policy.

63 exfatguy 2016 Sep 23, 11:32am

If they hear you talking about a bubble, they'll raise prices even more. Stop it!

64 freespeechforever 2016 Sep 23, 11:40am

Rew, TJ, Dan -

As an attorney who advises construction/development firms AND also operates as a developer, I have a view that inflation is currently understated by the BLS, as the basket of goods methodology they use to weigh inflation, particularly given what I view as their disingenuous "hedonic adjustments," in deeply, deeply flawed.

To state it succinctly, the BLS & Fed Reserve under-state inflation as they overemphasize the prices of flexible goods, such as electronics, furniture, etc., which aren't purchased every day or even every year, and the prices on those items are either not inflationary and may even be deflationary, while the BLS & Fed underemphasize the prices of INFLEXIBLE GOODS & SERVICES such as housing/rent, medical costs, tuition, food, utilities, etc., which are purchased monthly or even daily, and are necessities (inflation via labor rates for skilled trades and professionals has also been running extremely high).

I see this is real time as prices are quoted to me in my field and as a consumer.

We are in a period of stagflation that will grow worse, IMO, in a similar rhyme with the 1978 to 1982 period.

This stagflation is now beginning to choke the economy, and serve to further crimp aggregate demand (in addition to other crimping factors such as malinvestment caused by artificially low rates and distorted yield curves).

This stagflation will serve to further reduce aggregate demand regardless as to what central banks do with monetary policy, especially now that they are all at the zero-bound already (in 2008, they had a cushion from 5.5% in the fed funds rate to cut, which they did all the way down to 0.25%; they have no such cushion now with the fed funds rate at 0.5%).

This stagflation, causing decreasing aggregate demand, will ultimately result in businesses beginning to lay off employees (labor is the highest cost portion of most businesses, and typically the 1st place they cut to deal with slowing revenue and profits and margins).

65 mell 2016 Sep 23, 12:11pm

As an attorney who advises construction/development firms AND also operates as a developer, I have a view that inflation is currently understated by the BLS, as the basket of goods methodology they use to weigh inflation, particularly given what I view as their disingenuous "hedonic adjustments," in deeply, deeply flawed.

To state it succinctly, the BLS & Fed Reserve under-state inflation as they overemphasize the prices of flexible goods, such as electronics, furniture, etc., which aren't purchased every day or even every year, and the prices on those items are either not inflationary and may even be deflationary, while the BLS & Fed underemphasize the prices of INFLEXIBLE GOODS & SERVICES such as housing/rent, medical costs, tuition, food, utilities, etc., which are purchased monthly or even daily, and are necessities (inflation via labor rates for skilled trades and professionals has also been running extremely high).

I see this is real time as prices ar...

Perfectly stated. Have been pointing out stagflation as result of the Fed policies for a while. The inflation in inflexible goods is exactly it, any good that cannot easily be outsourced/globalized has been experiencing high inflation. That's why there is also the EPI as a better (not flawless but better) CPI.

66 missing 2016 Sep 23, 12:24pm

Two types of inflation:
http://blog.yardeni.com/2016/09/inflation-healthy-unhealthy.html?m=1

Some observations along the lines of what freespeechforever wrote

67

Rew 2016 Sep 23, 12:57pm

Inflation isn't being caused by monetary supply. The inflation we see for the inflexible goods is all due to local market conditions. (Food : major disruptions in environment and growing. Also, 20% of our food is imported itself. Housing : this is a supply demand issue coupled with the low interest rate monetary stance, and all the other crazy that is our current housing market/regs.)

The monetary expansion done never reached the pockets of the consumer in a very direct or impactful way. Right now, it is safely in stocks, bonds, and banks. The dollar is extremely strong against the other currencies at the moment. It only looks to be getting stronger. This all appears deflationary not inflationary.

The only sites claiming stagflation that I see are goldbug related, zero-hedge, etc.

The fed wanted asset inflation itself, to bulge out main street's wallet. They know they have to get money in a controlled manner to people. The problem is the chosen method is slow, un-even in distribution, and just plain inefficient. If you have been lucky enough to own stocks in the past 10 years, you have felt the tingly warmth in the wallet. People not so fortunate have been waiting for stock holder average joes to cash out and spend so they get some too.

This stagflation, causing decreasing aggregate demand, will ultimately result in businesses beginning to lay off employees

Said a different way, simply people are going to become more frugal, to the point that demand will plunge, business will be affected, and more people will become frugal ... on and on ... viscous cycle. I agree with you on the stag, portion, but it's stag-deflation. Prices at the super market are up (yes 'inflation'), but it isn't because too much money is chasing lettuce and oranges. It's because there have been droughts, floods, freezes, and heat waves. It's not because people are so flush with cash that the dollar is debased.

Stag-Deflation article ...
http://seekingalpha.com/article/3958309-age-stag-deflation-part-1-understanding-times

68

Dan8267 2016 Sep 23, 1:18pm

Perhaps, but the pencil won't always be balanced on its tip.

That's my point.

I maintain that the impact is negligible.

Not in my experience. The only reason I haven't lost hundreds of thousands of dollars of purchasing powers is that I have money in stocks rather than cash savings or bonds. The real value of my stock portfolio isn't affected by currency debasement, although I get taxed more on nominal gains due to currency debasement.

However, if I kept my savings in cash in the bank for a year or several, I would have lost enough wealth to buy a house. That's not negligible.

So the only reason I'm not losing purchasing power to currency debasement is because I'm assuming risk in the form of stock ownership and sacrificing liquidity. Again, that's not a negligible cost.

History has shown that real wages perform slightly better during periods of inflation.

In contrast to what? Periods of deflation? In any case, that does not imply that currency debasement or CPI increases -- which are not the same thing -- causes real wages to rise. In fact, such a conclusion defies logic.

which "kind" of inflation

I don't use the word inflation anymore. It's pointless since the word has been poisoned with deliberately misleading and inconsistent usage.

I use the term cost of living increases when talking about the nominal rise in living expenses. I use the term CPI increases when talking about increases in the Consumer Price Index. I use the term currency debasement when talking about increases in the money supply and the resulting decreasing purchasing power of a currency because of printing money. All three of these things are completely different phenomenon. It is bad to confuse them.

If real wages are going up, who cares if something costs $5 or $50?

Someone who has significant savings. Let's say Bob saves for 30 years to buy his dream house. Currency debasement reduces the values of his savings by 50%. It does not help Bob if his nominal wages are increased such that his real wages have neither gained nor loss value. That prevents Bob from losing income. It does not prevent Bob from losing his savings and not being able to buy his dream house.

Savings matters. Savers should not be punished. If savers are punished, people will choose to be debtors and to depend entirely on Social Security for their retirement.

Dan8267 says

The typical worker, by mathematical necessity, will have lower real wages as the result of currency debasement even if asset deflation -- which quite frankly affects different assets at vastly different rates -- raises the real wages of workers

False. I hope I've explained that already.

It does not matter if you explain something if your explanation is contradicted by mathematics. No theory inconsistent with mathematics is valid, no matter how appealing.

www.youtube.com/embed/S-xUjmJkO8g

Dan8267 says

In the case of real estate, a lot of responsible savers would have been able to purchase houses and live in them had it not been for quantitative easing.

Also false, as I explained to Mell earlier.

I did not purchase a house because of the quantitative easing of 2007-2015. I would have bought a house in cash, no mortgage, had massive currency debasement not happened. In order for the above statement to be false, I would have to not exist. That puts a bit of a hole in your theory. I'm pretty damn sure I exist.

Of course I can't be sure that you exist because the only evidence I have of your existence is my sensory input which is just data and that can be faked. Hmmm, let there be light.

The housing bubble was caused by the abandonment of underwriting standards.

You forgot cheap money created by currency debasement. Writing standards could have been completely abandoned and the house bubble would have never happened if interest rates were at 12%.

Actually, sans intervention, there would be more renters paying high rents to investment companies

The total number of people living in houses, renters plus "owners", is a zero-sum game. During the housing bubble there were entire neighborhoods and entire condo buildings with only one or two people in them. The housing bubble was not caused by a shortage of inventory. In fact as the bubble inflated, housing inventory skyrocketed.

The dynamic between owner and worker exists with or without inflation.

Yes, but that does not imply the dynamic is not affected by currency debasement.

Workers want as much as the can get and owners want to pay as little as possible. It's independent of inflation.

Having said that, empirically it can be seen that workers tend to have more power to force higher raises during periods of moderate to high inflation.

First off, what you are trying to imply in your last statement directly contradicts you explicitly say in the previous sentence. If currency debasement or cost of living increases or CPI increases (whichever you mean by inflation) causes worker's real wages to rise, then by definition, worker's real wages are NOT independent of inflation (again, whatever you mean by inflation).

Of course, it does not logically follow that because employers always try to squeeze their employees that currency debasement is irrelevant to how much employers can exploit.

Think about the psychology of real human beings. If currency debasement is 3.5% per year, then every worker must convince his manager, and typically that manager must convince others, to give that worker a 3.5% raise, and this must happen every single year without fail. Wages are negotiated and it's a hell of a lot easier to negotiate keeping your existing salary than getting a larger one even if it's only larger in nominal terms. The fact is that currency debasement allows companies to lower wages simply by doing nothing, which is politically a hell of a lot easier than announcing across the board wage cuts. Employees tend to strike when that happens, but they don't strike when they simply don't get a raise even though with currency debasement it's the exact same thing.

Human psychology causes lots of irrational and sub-optimal behavior especially in groups.
Tampajoe says

That is scary, but you have not tied it to inflation. People save too little because they make too little and spend too much.

It's strongly affected by currency debasement. Again, I don't know what you mean by inflation because you haven't stated that and the term is used highly inconsistently.

People are stupid, but they aren't so stupid they can't survive. Evolution guarantees a certain minimum intelligence level in any species that survives.

People know that they get screwed by savings and that currency debasement helps debtors, particularly those who get in when the rates are low (i.e. when debasement is high). Currency debasement both directly discourages savings by punishing it and indirectly discourages it by lowering real wages and thus what money people have to save and to invest. Currency debasement ultimately transfers wealth from savers to bankers. It's a hidden tax.

Wealth can only be created through productivity. Zero-sum games like currency debasement are, by definition, non-productive. The only way banks can get richer in lending debased currency is by extracting the wealth they gain from others. Printing money does not increase wealth. It can only transfer it, and it does transfer it in socially unjust and unwise ways.

I believe Dan is talking about actual uncontrolled inflation caused by an over abundance of currency, in spenders hands.

My point is that currency debasement is unjust and bad regardless of cost of living increases or CPI increases.

www.youtube.com/embed/jaED2ErdIv8

At the macro level, at-least in my read, you and Dan agree.

I think that is true, also, but I'm not sure because of the vagaries of the word inflation. However, I do think that he and I are in disagreement over the impact of printing money on the middle class. He seems to follow the false religion of Keynesianism which believes that aggregate demand is the only thing that really matters in an economy. This is a testable theory, but testing it would be extremely costly.

According to the theory, if our government spent as much money in real terms as it did during WWII on something completely frivolous like fighting a fictitious alien invasion, then our economy would be better off. After all, spending money on a completely non-productive venture, war, worked in the 1940s.

Or did it?

It's always foolish to generalize from one example. You miss lurking variables.

Sure, WWII increased employment, and that had an impact, but was it really the cure-all Keynesian believe it was? After WWII all the factories in Europe were destroyed. America had no competition. It's easy to be economically successful when you have a world monopoly on production.

But that environment does not hold true today. According to Keynesian theory, if the U.S. government spent as much money in real terms that it did during WWII, about four times what we wasted in the Middle East wars, fighting fictional aliens then our economy would boom like the 1940s and 1950s. We'd enter a new era of prosperity.

I say bupkis. All those wasted resources would have a devastating effect on our economy regardless of how many times a dollar exchanges hands. There is no real productivity and it's real productivity and wealth, not paper wealth, that matters. Aggregated demand is not the most important thing in an economy by far. The two most important things in any economy is per capita productivity and how the wealth generated by the productivity is distributed.

If we wasted all those resources and spent all that money fighting a fictional alien invasion, then our economy would still suck because we wouldn't have a monopoly on production like we did after WWII because everything would still be made in China for cheap. No amount of money spent on non-productive activities like digging and filling up holes or, even worse, counter-productive activities like war and destroying infrastructure is going to increase our real wealth or our real GDP.

And yes, Keynesians actually believe that spending money on fighting a fictional alien invasion would be an economic boom. Even really smart Keynesians like Paul Krugman believe this.

Please realize that it's not the alien invasion part that's silly. If Keynesian theory was accurate, Krugman would be right. The silly part is thinking that spending limited resources in a completely wasteful manner is the path to prosperity.

Side note... The only productive aspect of war -- and I hate even saying that -- is the advancement of technology. However, technology can be advanced far more efficiently and cheaply without war. War only provides a political will to spend the resources on advancing technology. There are better ways to get his political will.

69 freespeechforever 2016 Sep 23, 1:19pm

Rew - I disagree entirely.

Fed & other central bank monetary policy has broker the relationship between supply & demand, and poisoned investment & consumption actions and decisions, damaging the very nature/foundation of the fundamental economy to a severe degree.

Deflation in prices will come, and the assets deflating the most will be the ones that Fed Reserve and other central bank monetary policy re-flated the most during the last 6 years (look for equities and bonds - again strange historical paradox that both reflated in lockstep, as they usually have diverse moves in ordinary, less manipulated times - , commercial and residential - especially rental - real estate, less liquid assets such as art, etc. to deflate).

There has been a malinvestment splurge for 7 years now due principally to ZIRP/NIRP.

Look to see many foreclosures and bad loan write-offs on structures and developments undertaken during the last 4 years, especially, as these were speculative, yield chasing projects, not undermined by real, fundamental demand.

As it stands 80%+ of residential mortgages to purchase homes are being backed by the taxpayer via FHA/ Fannie & Freddie, and those GSEs have essentially allowed BlackRock and others like it to unload their MBSs at extraordinarily high profits and shifted risk of loss to taxpayers.

Also, on a less macro important note, there are bumper crops of food stuffs now and have been for years. Prices on food have skyrocketed due to what I referenced above, to wit the GLBA, as anything that becomes traded on commodity markets becomes manipulated greatly, and its price detached significantly from true underlying supply/demand forces.

z

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Dan8267 2016 Sep 23, 1:24pm

One final thought. If Keynesian economics was right, the solution to every depression would always be the same thing: smash everyone's car and burn down everyone's house. The resulting demand for automobiles and construction would immediately end the depression and bring prosperity to everyone.

And the ridiculousness of this idea just never seems to be grasped by economists.

71 freespeechforever 2016 Sep 23, 1:55pm

Dan, true Keynesians would shriek in horror at what neo-Keynesians such as "Space Man" Krugman have done to their name.

I'm no Kenynesian (I don't label myself or constrict myself, because economics is a dismal science and humans are fundamentally irrational, but I do ebb closer, though not even that closely, towards the Austrian school), but will testify that Krugman is full-tilt batshit crazy, and we're witnessing Abenomics (as advised by Krugman's batshit-crazy radical recklessness) literally destroy Japan in real time.

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Rew 2016 Sep 23, 2:45pm

And the ridiculousness of this idea just never seems to be grasped by economists.

We could always build a big beautiful wall, and invest in things that go "boom". That will fix us too, right? I mean ... "jobs" ... and stuff.

;)

73 Tampajoe 2016 Sep 23, 2:58pm

In any case, that does not imply that currency debasement or CPI increases -- which are not the same thing -- causes real wages to rise. In fact, such a conclusion defies logic.

Not really. If, and this won't always be the case, increasing money supply increases demand then it will create more jobs and more demand for labor. More demand for labor = higher real wages.

Someone who has significant savings

Rates earned on savings also increase with inflation. Unless you put it under your mattress, it doesn't matter. The delta between savings rate and inflation is pretty constant.

I did not purchase a house because of the quantitative easing of 2007-2015. I would have bought a house in cash, no mortgage, had massive currency debasement not happened. In order for the above statement to be false, I would have to not exist. That puts a bit of a hole in your theory. I'm pretty damn sure I exist.

Incorrect. You believe that prices would have fallen further absent the easing. Which is false. Your existence is true.

First off, what you are trying to imply in your last statement directly contradicts you explicitly say in the previous sentence. If currency debasement or cost of living increases or CPI increases (whichever you mean by inflation) causes worker's real wages to rise, then by definition, worker's real wages are NOT independent of inflation (again, whatever you mean by inflation).

Not at all. The dynamic is independent of inflation. But, the power of workers tends to be stronger during inflationary times whereas the power of owners tends to be stronger during deflationary times. In the most generic terms.

He seems to follow the false religion of Keynesianism which believes that aggregate demand is the only thing that really matters in an economy. This is a testable theory, but testing it would be extremely costly.

It's not polite to post what others think. Better just to post what you think. Keynes is so often misunderstood that it's almost comical to discuss his theories anymore. He has been so distorted by the right wing propaganda machine that his very name is used to scare children. I won't go through and debunk your later writings on WWII other than to say that there are many papers that show that US exports were not significantly higher than usual for more than 2-3 years. The US economy was actually recovering quite well even before WWII.

But you're right about the importance of productivity. The key point to remember was that in 1929, inequality was at all time highs (like now). What Keynesian policies did was redistribute wealth, which increased demand and productivity. An economy with 30% unemployment is not productive. Reducing inequality increases demand which decreases unemployment. Which increases productivity.

And yes, Keynesians actually believe that spending money on fighting a fictional alien invasion would be an economic boom. Even really smart Keynesians like Paul Krugman believe this.

True Keynesians believe that the correct solution depends on the situation. Keynesians believe we should be saving money during good times. And if there is high unemployment and high inequality--taking money from the 1% and giving it to the poor absolutely will improve the productivity of the economy.

74 Tampajoe 2016 Sep 23, 3:01pm

One final thought. If Keynesian economics was right, the solution to every depression would always be the same thing: smash everyone's car and burn down everyone's house. The resulting demand for automobiles and construction would immediately end the depression and bring prosperity to everyone.

And the ridiculousness of this idea just never seems to be grasped by economists.

I think you need to read up a bit more on Keynes.

75

Rew 2016 Sep 23, 3:04pm

There has been a malinvestment splurge for 7 years now due principally to ZIRP/NIRP.

There has been recapitalization of banks and FIRE action only ...

has broken the relationship between supply & demand, and poisoned investment & consumption actions and decisions, damaging the very nature/foundation of the fundamental economy to a severe degree

... because, again, actual 'common people' don't have money. The fight is against deflation, in which the battle itself feels inflationary to us on the street, but that's not the underpinning power. There is a massive effort to get inflation and weaken currency. There is no price/wage spiral here and I don't see one coming.

Try as we might, the mighty dollar will rise, and freeze us in world trade exports increasing our trade deficit. It's death by ice and economic inactivity, not death by fire.

http://www.ers.usda.gov/data-products/food-price-outlook/summary-findings.aspx

Also, on a less macro important note, there are bumper crops of food stuffs now and have been for years.

"In 2016, ERS now predicts food-at-home (supermarket) prices to change between -0.5 and 0.5 percentâ€”a rate of inflation (or possibly deflation) that would again fall below the 20-year historical average of 2.5 percent. The forecast has been lowered due to recent declines in prices for beef and veal, poultry, and eggs. Lower transportation costs due to deflated oil prices as well as the strength of the U.S. dollar have placed additional downward pressure on food prices in the first half of 2016.

The drought in California has raised concerns about rising produce prices at supermarkets or grocery stores. Farm-level fruit prices decreased 0.1 percent in August but are 8.2 percent higher than in August 2015. Farm-level vegetable prices decreased, falling 11.5 percent, and prices are 7.6 percent lower than at this time last year. ERS predicts farm-level fruit prices to increase between 4.5 and 5.5 percent in 2016 but to decrease 6.0 to 5.0 percent in 2017. Vegetable prices are also expected to increase in 2016â€”between 2.0 and 3.0â€”but to decrease 7.0 to 6.0 percent in 2017. "

Oil falling in price, dollar gaining strength ... no inflation in sight. Read any of the rest of the report and the findings are very supply demand with forecasts of cheaper prices.

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Rew 2016 Sep 23, 3:21pm

All food CPI: http://www.ers.usda.gov/data-products/food-price-outlook.aspx

2014 = 2.4%
2015 = 1.9%
2016 = forecast -0.5% to 0.5% (from the current report in previous post ... ie updated number)
2017 = forecast 1.5% to 2.5%

With a 20 year historical average of 2.5%. That doesn't seem to indicate rampant inflationary trend in food. If anything, that looks like declining inflation to me.

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neplusultra57 2016 Sep 23, 4:40pm

Dan8267 says

Had housing prices been allowed to fail instead of debasing our currency, there would be more home owners today, and when I say home owners, I mean people owning equity in their houses rather than simply counting mortgage debt.

Actually, sans intervention, there would be more renters paying high rents to investment companies. More people would have been foreclosed and more houses would be owned by private equity companies that were snatching up foreclosures wherever they could.

So true. Anyone worried about inequality and the onrush of feudalism should recall non-intervention would have predicated the greatest transfer of wealth any of us have witnessed in our lifetimes. Why it is that the typical GOP elitist was so enraged?: the buying opportunity that zero-sum vultures dream of was diverted. Instead, those with some cash, some credit and some nerve were able to make good stakes a couple of years after the crash. What the Aristocracy really wanted did not transpire. We would have had a much differently structured recovery, if, in fact, we had survived it.

"What is clear is that the world will soon need a massive and coordinated spending push by governments to create demand and bring the broken global system back into equilibrium.

There are not enough intelligent Republicans in our country to accept this. In this deflationary condition they will advocate austerity.

Trump = Hasten the day : protectionism, embrace the deflationary cataclysm,

He'll give the elites a second bite at the "blood in the streets" apple. If that moron is elected I'm going to increase my cash/liquidity to 75% and wait for it.

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Dan8267 2016 Sep 23, 7:41pm

increasing money supply increases demand

No it doesn't. Increasing the purchasing power of people's money increased demand. Increasing the money supply simply shifts the purchasing power and thus the demand from one set of people to another. There is no net gain. If Joe has more money due to the printing of money, then Bob effectively has less. Joe can buy more only to the amount that Bob can buy less. It's called a zero-sum game for a reason.

Rates earned on savings also increase with inflation. Unless you put it under your mattress, it doesn't matter. The delta between savings rate and inflation is pretty constant.

Not true at all. People had lots of money in money market accounts back in the 1990s because interest rates were well above inflation. Today they don't because interest rates are less than inflation.

Your statement is empirically false.

Incorrect. You believe that prices would have fallen further absent the easing. Which is false.

Now you are just contradicting with offering no justification.

The bottom line is that absent extreme measures, all markets revert to the mean. This is a universal law. Read Common Sense on Mutual Funds, one of the best books on investing ever written. The author, John Bogle, the founder of Vanguard, is very insightful.

Not at all.

More unjustified contradiction.

It's not polite to post what others think. Better just to post what you think.

That's exactly what I did. I posted what I thought the points you were trying to make, and I phrased it thusly. Understanding and confirming whether or not you understand the opposing point of view is an important part of a discussion.

True Keynesians believe that the correct solution depends on the situation.

A No True Keynesian Argument. That's sort of original.

inequality was at all time highs (like now).

Currency debasement increases inequality by transferring wealth from the middle class to banks and financial firms, neither of which produce any wealth.

Dan8267 says

One final thought. If Keynesian economics was right, the solution to every depression would always be the same thing: smash everyone's car and burn down everyone's house. The resulting demand for automobiles and construction would immediately end the depression and bring prosperity to everyone.

And the ridiculousness of this idea just never seems to be grasped by economists.

I think you need to read up a bit more on Keynes.