patrick.net

gameisrigged says

Uh, yes, it kinda IS true.

No, entries that say "Federal Reserve" are not taxpayer bailouts, that's Fed intervention via money creation. The Treasury portion of that list is well under $1T, and the "Outstanding" column of Treasury bailouts is under $500B it looks like.

Troy says

gameisrigged says

Uh, yes, it kinda IS true.

No, entries that say “Federal Reserve” are not taxpayer bailouts, that’s Fed intervention via money creation. The Treasury portion of that list is well under $1T, and the “Outstanding” column of Treasury bailouts is under $500B it looks like.

Do you not think the creation of money supply that is all given to Wall Street doesn't cost the taxpayers? I understand your point that technically, the money hasn't come out of the Federal Reserve, but certainly you cannot create money out of thin air, give it to one small segment of society, and say there is no cost, can you? Wall Street certainly enriched itself while the wages of workers in all other segments remained stagnant, and the Fed money is part, if not most, of the means Wall Street used to do so, isn't it? Wall Street has resumed paying lavish salaries and bonuses, while homebuyers have only gained the opportunity to place themselves in more debt.

http://finance.yahoo.com/news/Nearly-half-of-US-households-apf-1105567323.html?x=0&.v=1

Troy says

http://finance.yahoo.com/news/Nearly-half-of-US-households-apf-1105567323.html?x=0&.v=1

Doesn't that just prove that there are a lot of poor people? Kind of supports my premise that wealth is being taken away from the middle class and given to the elite, doesn't it?

The poor are along for the ride, yes.

The top 20% -- upper middle class and above -- pay two thirds of the income taxes. They need to pay more, of course, but so does everyone.

There are a lot of moving parts in this puzzle and nobody has all the answers.

"I don't have any solution but I certainly admire the problem."

Everything is f---ed. How to unf--- it would require a PhD thesis or two, not an internet comment.

We've had a progressive tax structure as long as I can remember. I'm not bothered a bit if the top 20% pay a higher percentage of income tax than I do. They can all bite me. Don't forget, though, that sales tax is regressive. But none of that is new. What they're doing is more subtle than just raising taxes. They are increasing the money supply, and giving the new money to Wall Street. Meanwhile, the working man's wages are stagnant, and his savings pays no interest, so he is losing money to inflation. An overly simplistic analysis would be, "I'm not paying any more taxes than I was before, so everything's o.k.". I think that misses what's really happening.

The core problem is that ~60% of this country are idiots at any given time.

Prop 13 including commercial and rental properties is a primary example. It got 65% of the vote back in 1978.

They are increasing the money supply, and giving the new money to Wall Street

It's a little more complicated than that. The money supply has already been done increased:

http://research.stlouisfed.org/fred2/series/MZM?cid=30

2004-2006 was when the system went open-loop. Note that our trade deficit maxed out then, too:

http://research.stlouisfed.org/fred2/series/BOPGSTB?rid=51&soid=19

Commercial lending went through the roof:

http://research.stlouisfed.org/fred2/series/TOTBKCR?cid=101

What is happening now is keeping the system together and not have it fly apart in cross-default event, which by all rights it should since precious little of investment last decade was into actual productive capacity worth a damn.

Meanwhile, the working man’s wages are stagnant, and his savings pays no interest, so he is losing money to inflation

Deflation doesn't really work that way. In the deflation cycle, eventually everybody who works for a living loses their job and ends up homeless as demand is destroyed in chain-reaction layoffs. That was what the 1930s was all about.

I'm no brilliant macro-economist, I barely know the difference between M1 and M2 (and TBH have no idea what M3 is and why the Fed stopped measuring it in 2006), but I do know the system went off the rails in 2002-2006, and I know who the culprits were and what they allowed to happen.

Getting back to the happy days of 1999-2000 is going to be tough, if not impossible. Ideologically, ~40% of this country are idiots, and another 40% are economically helpless, unable to compete with the 500M Chindians who are smarter, harder-working, and have gained access to our mfg and service sectors. Maybe 1 in 5 of us has some actual idea of what's going on, but nobody, especially not me, has any answers.

Troy says

It’s a little more complicated than that. The money supply has already been done increased:

No, that's not more complicated. You're just saying it's happened before, which I never denied. Doesn't mean it didn't happen in 2009 TOO. In fact, look at your own chart; the curve gets steeper around then.

Deflation doesn’t really work that way. In the deflation cycle, eventually everybody who works for a living loses their job and ends up homeless as demand is destroyed in chain-reaction layoffs. That was what the 1930s was all about.

Not sure of your point. Look back up at the chart I posted. The rich are getting richer, the poor are getting poorer, and the middle class is being destroyed. Yes, it DOES work that way. I'm not paying a higher tax rate, but I haven't had a salary increase in 2 years, I'm getting fewer hours of work, and my savings is making less interest than the rate of inflation. And my situation is typical of the middle class right now.

gameisrigged says

No, that’s not more complicated

yes, it is . . .

http://en.wikipedia.org/wiki/Triffin_dilemma

Chinese manufacturing coming online 2000-2002:

oil imports doubling from 1990-2005:

established a very large momentum in global trade, and the world's need for USD. Over half of the USD in the money supply circulates overseas. Here at home, we have been able to cruise on the kindness of our trading partners and their multi-trillion dollar USD hoards. They've got our money now, and they lend it back to us as they can.

And my situation is typical of the middle class right now.

The rich getting richer is a given. $10M throws off $500K/yr in interest @ 5%. The poor getting poorer, likewise.

The 2005-2007 economy was a Potemkin Village economy fully fueled by the temporary and unsustainable run-up in real estate values. OF COURSE everything is going to go to sh-- now. Homeowners were pulling out HUNDREDS OF BILLIONS of dollars a year out of their inflated valuations and either spending it or knocking down card debt:

$500B/yr may not sound like much in a $11T economy, but that injection funded TEN MILLION household incomes.

That hot money is GONE now. No more magic ATM. Without monetary intervention, we wouldn't even have an economy now. THAT was largely why BAC was trading at $3 last March and the S&P 500 was in the 600s.

Worrying about "inflation" now is perverse. While Japan may not be a good model, their history 1992-2010 has demonstrated that macroeconomics is a bizarre beast.

Troy says

gameisrigged says

No, that’s not more complicated

yes, it is . . .
http://en.wikipedia.org/wiki/Triffin_dilemma
Chinese manufacturing coming online 2000-2002:

oil imports doubling from 1990-2005:

established a very large momentum in global trade, and the world’s need for USD. Over half of the USD in the money supply circulates overseas. Here at home, we have been able to cruise on the kindness of our trading partners and their multi-trillion dollar USD hoards. They’ve got our money now, and they lend it back to us as they can.
And my situation is typical of the middle class right now.
The rich getting richer is a given. $10M throws off $500K/yr in interest @ 5%. The poor getting poorer, likewise.
The 2005-2007 economy was a Potemkin Village economy fully fueled by the temporary and unsustainable run-up in real estate values. OF COURSE everything is going to go to sh– now. Homeowners were pulling out HUNDREDS OF BILLIONS of dollars a year out of their inflated valuations and either spending it or knocking down card debt:

$500B/yr may not sound like much in a $11T economy, but that injection funded TEN MILLION household incomes.
That hot money is GONE now. No more magic ATM. Without monetary intervention, we wouldn’t even have an economy now. THAT was largely why BAC was trading at $3 last March and the S&P 500 was in the 600s.
Worrying about “inflation” now is perverse. While Japan may not be a good model, their history 1992-2010 has demonstrated that macroeconomics is a bizarre beast.

Wow, you've really got this muddled now. Are you saying the increasing income disparity is entirely due to the fact that the wealthy get interest on their investments? That's a major oversimplification.

I don't know where you got the idea I'm "worrying about inflation". I said the middle class' wealth is being depleted and transferred to the wealthy, and that the interest on savings is less than the rate of inflation. That's not saying much, as you can only get 1% or so even in a premium savings account. You seem to have twisted my words into something entirely different.

I'm not sure if the rest of your post is supposed to be a response to me or what. It seems as though you agree with most of what I said, although your tone suggests that you don't think that you do.

?

gameisrigged says

Wow, you’ve really got this muddled now. Are you saying the increasing income disparity is entirely due to the fact that the wealthy get interest on their investments? That’s a major oversimplification.

Well, people who have their money managed professionally, and only taxed at 15% if that, are going to get richer, especially given the power of compounding interest. Also, the really big money returns are always in real estate, and since real estate has a cost of production of roughly $0, any profit earned in real estate (excluding use of capital) is pure money transfer from weaker to stronger hands (ie rent collection).

I said the middle class’ wealth is being depleted and transferred to the wealthy

What wealth is being transferred, and how?

and that the interest on savings is less than the rate of inflation. That’s not saying much, as you can only get 1% or so even in a premium savings account. You seem to have twisted my words into something entirely different.

The disagreement here I think is what inflation vs. deflation will do to the middle class.

The average 401K balance is under $100K, yet total household debt is well over $10T still, also just under $100K on a per household basis. The poor has no money, the middle class has no equity anymore.

I don't understand how money is getting destroyed now (I thought only the Fed could do that), but at any rate the previous decade set up the middle class with the necessity of having to increase its real income, given all the debt the middle class was allowed if not encouraged to take on.

This is not going to happen; much of the economic growth of the middle class last decade was simply fueled by this debt expansion (which means the middle class is in a precarious position now). But the bills are beginning to come due anyway, and the PtB have to figure out how to handle a several trillion dollar imbalance -- the trillions of USD our trading partners have, the trillions of dollars the medicare system is going to need this century.

The national fisc is shot to hell. Taxes need to be raised -- that's deflationary. Government spending has to be redirected if not cut by hundreds of billions of dollars a year -- that's deflationary. We need to reduce our dependence on oil, but can't.

Everything we buy is made much cheaper in China than we can make it here.

The Fed -> bankster skim is the least of our problems.

My friends reset was at a lower rate than his original 5/1. Someone here once said rates are headed to 0% like in Japan. I argue the cost of production for fiat is almost nothing so rates could easily head to 0%. As gov/fed continue the fiat bubble then entitlements in real value will continue to drop. So, yep, not only will the middle class be wiped out but the lower class too. The lower class just doesn't see it coming. They've been on the free ride so long they don't realize the train is now going backwards.

A coworker told me rates are still falling. The mortgage company raised an eyebrow when I told them i wanted a 5/1 a few months ago. Unlike them, I'm pretty sure rates will head toward 0%. That's a given when the system is a credit bubble. But it puts mortgage companies/CMO whatevers in a real bind. if they buy these 4% mortgages they will lose money. Inflation is only headed up and the sky is the limit. $1T is the new $1B and $1B govbezzlements are not even worth writing about in the news.

To bring the discussion full circle, we have a quasi government guy stating there was no housing bubble in 2003 and then in 2009 arguing to prevent anyone from knowing what his quasi government group was doing. That was the housing bubble. Now we have a Credit Bubble (Debt Bubble). Assuredly we have some similar to him saying the national debt is sustainable and the derivatives paper trade is sustainable and more. In 2016 will these same men argue to prevent the public from knowing how they blew up the economy?

We are smart guys. We know the only way to ride the inflation is to be on the earning side of it. We've bought hard assets and positioned ourselves so we can sell these at stratospheric prices in a few years. The only issue is with housing this may never materialize. Inflation will wipe out the middle class and stomp the lower class; so, the market for houses might not recover for a much longer time. IMO.

Troy says

Well, people who have their money managed professionally, and only taxed at 15% if that, are going to get richer, especially given the power of compounding interest. Also, the really big money returns are always in real estate, and since real estate has a cost of production of roughly $0, any profit earned in real estate (excluding use of capital) is pure money transfer from weaker to stronger hands (ie rent collection).

That's a great deal different than saying the rich get richer only because they make interest on their investments. You also completely left out the whole real-estate Ponzi scheme - making bad loans based on fraudulent appraisals, driving up prices, selling it off as MBS with inflated ratings, but actually worthless. I feel like you were absent from the planet the last 10 years or something.

I said the middle class’ wealth is being depleted and transferred to the wealthy
What wealth is being transferred, and how?

I don't understand the question. What do you mean by "what wealth"? Do you not know what "wealth" is?

and that the interest on savings is less than the rate of inflation. That’s not saying much, as you can only get 1% or so even in a premium savings account. You seem to have twisted my words into something entirely different.
The disagreement here I think is what inflation vs. deflation will do to the middle class.
The average 401K balance is under $100K, yet total household debt is well over $10T still, also just under $100K on a per household basis. The poor has no money, the middle class has no equity anymore.

And how is this different from what I said?

at any rate the previous decade set up the middle class with the necessity of having to increase its real income, given all the debt the middle class was allowed if not encouraged to take on.
This is not going to happen; much of the economic growth of the middle class last decade was simply fueled by this debt expansion (which means the middle class is in a precarious position now).

Again, isn't that what I said?

But the bills are beginning to come due anyway, and the PtB have to figure out how to handle a several trillion dollar imbalance — the trillions of USD our trading partners have, the trillions of dollars the medicare system is going to need this century.
The national fisc is shot to hell. Taxes need to be raised — that’s deflationary. Government spending has to be redirected if not cut by hundreds of billions of dollars a year — that’s deflationary. We need to reduce our dependence on oil, but can’t.
Everything we buy is made much cheaper in China than we can make it here.
The Fed -> bankster skim is the least of our problems.

Not sure what any of that has to do with my point. I agree trade imbalance is a problem. Did I ever say otherwise?

maxweber says

Inflation will wipe out the middle class and stomp the lower class; so, the market for houses might not recover for a much longer time. IMO.

What Troy and others are saying, if you'll listen, is that the middle class has more debt than savings right now. So, inflation will actually help them. And the poor have no savings so inflation won't hurt them at all.

tatupu70 says

maxweber says

Inflation will wipe out the middle class and stomp the lower class; so, the market for houses might not recover for a much longer time. IMO.

What Troy and others are saying, if you’ll listen, is that the middle class has more debt than savings right now. So, inflation will actually help them. And the poor have no savings so inflation won’t hurt them at all.

If there were WAGE inflation, it would help them, but there is not. Price inflation by itself only makes things worse. Not to mention the humongous moral hazard this philosophy entails. If you reward the irresponsible and punish the responsible, you encourage irresponsibility.

gameisrigged says

If there were WAGE inflation, it would help them, but there is not. Price inflation by itself only makes things worse. Not to mention the humongous moral hazard this philosophy entails. If you reward the irresponsible and punish the responsible, you encourage irresponsibility.

Of course there will be--if you print money there will be wage inflation.

gameisrigged says

I said the middle class’ wealth is being depleted and transferred to the wealthy

What wealth is being transferred, and how?

I don’t understand the question. What do you mean by “what wealth”? Do you not know what “wealth” is?

My working definition of wealth is three-fold: a) "direct wealth" is that which provides utility (ie. satisfies human needs and wants) and b) "indirect wealth" which consists of capital goods and human skills that assist in the production of direct wealth, and c) "tertiary wealth" which is that which we exchange for the more primary forms of wealth.

So the biggest asset the middle class owns is their real estate, which is a leveraged investment for most people still (they own "direct wealth" (the land use rights + their house) but against this they owe a debt that someone else owns as part of their "tertiary wealth" portfolio).

"Inflation" would improve the middle class's wealth position in this asset class by increasing the dollar value of this real estate against the fixed & declining dollar value of the debt against it.

Actually, real estate is the second biggest asset the middle class owns. The biggest asset is their collective (if varied) ability to engage in productive labor. This was entirely inflation-proof in the closed economy of the postwar era (but not so much in our current globalized economy where many productive jobs can be outsourced to lower-cost "developing" economies).

The average 401K is under $100K, and the social security trust fund is under $20K/household. Not much wealth there to lose, really. Public pension funds are a significant locus of middle-class wealth, with per-enrollee wealth currently in the $100K+ range.

The only near-cash investment in this class (susceptible to inflation losses) is the $20K Social Security trust fund position. 401K and public pensions are highly invested in equities, which as an asset class are reasonably inflation-resistant.

The past investment in public-accessible infrastructure is another form of middle-class wealth, if under-appreciated until free access is lost to privatization. http://www.chicagobreakingnews.com/2010/01/privatize-illinois-tollways-voters-say-no.html

I am just not seeing much of an "inflation" threat overall WRT middle class wealth position. Collectively the nation owes $10.2T on its real estate and another $2.5T in consumer credit debt. We'd all love a big round of "inflation" to reduce these burdens (note that we owe more in consumer debt than is in the SSTF!).

Plus the middle-class' exposure to property taxes and income taxes to pay off past state/local debt issues. My mom bought a house in 1981 and the property tax bill is smaller than the gardener's, thanks to inflation and Prop 13. When I inherit the house, who knows, later this century I might be paying the property tax with change I find in the sofa, thanks to Prop 58.

IOW, the middle class isn't sitting on a big cash pile that is going to get inflated away if we get a round of 1970s-style inflation.

By way of reference, the laboring classes, AFAIK, did OK during the Weimar inflation. The people who got really slaughtered were owners of pre-inflated debt, which is not a middle-class thing, by definition.

tatupu70 says

Of course there will be–if you print money there will be wage inflation.

Explain Japan then. Even public sector employees, who have had the most bargaining power for wages, all across the country are facing the cancellation of pay raises, if not outright cuts. I wish we had inflation. A bit of inflation would be a great thing for the country. We're still firmly in a liquidity trap though. "printing money" doesn't do much when the average expected rate of return is negative after accounting for losses. A 0% federal reserve note is just fine. Just because the fed pays you $1000 in freshly printed cash for your mortgage note doesn't mean you're going to spend it or lend it again.

Troy says

My working definition of wealth is three-fold: a) “direct wealth” is that which provides utility (ie. satisfies human needs and wants) and b) “indirect wealth” which consists of capital goods and human skills that assist in the production of direct wealth, and c) “tertiary wealth” which is that which we exchange for the more primary forms of wealth.

That's a good definition.

MarkInSF says

Explain Japan then. Even public sector employees, who have had the most bargaining power for wages, all across the country are facing the cancellation of pay raises, if not outright cuts. I wish we had inflation. A bit of inflation would be a great thing for the country. We’re still firmly in a liquidity trap though. “printing money” doesn’t do much when the average expected rate of return is negative after accounting for losses. A 0% federal reserve note is just fine. Just because the fed pays you $1000 in freshly printed cash for your mortgage note doesn’t mean you’re going to spend it or lend it again.

You're right--I should have better explained my point. I mean to say that if you cause inflation by printing money, then you will also experience wage inflation. Clearly the US printing hasn't caused any hint of inflation to date...

You guys don't understand what inflation it. Inflation is when your paycheck dwindles relative to costs. We have that. Iron Law of Wages implies Steel Law of Pay: lower pay with rising debts is inflation. Rising costs of food, fuel, and more without pay raises is inflation. higher unemployment despite growing population is inflation. Now, if those people worked for lower pay and prices fell then it would be deflation. That's not what is happening. Why is complex but the bottom line is Economics as a science is a century behind reality. Instead of pontificating the economists need to do real work and see what is really happening.

Inflation is when your paycheck dwindles relative to costs

My highest living costs, by far, are taxes and rent. Everything else is noise, including health insurance.

Tell me how the LL determines my rent from his costs.

Hint: the sticker on the built-in microwave says 1989 on it.

maxweber says

You guys don’t understand what inflation it. Inflation is when your paycheck dwindles relative to costs. We have that. Iron Law of Wages implies Steel Law of Pay: lower pay with rising debts is inflation. Rising costs of food, fuel, and more without pay raises is inflation. higher unemployment despite growing population is inflation. Now, if those people worked for lower pay and prices fell then it would be deflation. That’s not what is happening. Why is complex but the bottom line is Economics as a science is a century behind reality. Instead of pontificating the economists need to do real work and see what is really happening.

Actually, I do understand what inflation is--I'm not sure you do. Inflation is quite simply rising prices.

And despite what you may think--wages are already increasing. And if inflation hits, you can be sure that they will rise even faster.

Think of it this way: 41M Americans have food stamps. To them the prices might seem OK. They are not. The government is hocking their future to buy them food. The real price they are paying is inflating and fast!

I think we agree but my argument is not clear. Prices are rising in relation to personal situations. You might argue people are doing better. I don't see it. But you cannot argue the per person debt is not increasing. It is. The fully accounted financial position of every single American reflects high inflation. Extreme perhaps. Simply because you've taken on a debt you may not think you have to pay. You do. It will be paid by someone. The government taking on $T's in debt means YOU and I working Americans will pay. Either through reduced Social Security, War, and/or many other means. We'll pay. Borrowing to live better is not a good financial management strategy. Inflation is there. You are paying more for what you are getting. Much more.

Rising prices with rising salaries is not inflation. It is dollar deflation but it has closer to zero effect on the economy. Yes, it is inflation of prices but that's a meaningless statement. The only situation where inflation matters is in relation to purchasing power. This is what I mean about Economists being in the 19th century. Actually, its probably more like the 1200's. If they cannot understand basic calculations then they really are not able to give any meaningful analysis. The housing bubble and the person referenced originally provide prime examples of Economists and regular folks who fail at math and analysis.

So, we have strong inflation here. Taking on a job while your government takes on a few more $T in debt is not growth.

BTW, some people also still quote "GDP". Measuring the wrong thing is not measuring. Using terms like inflation when they have no meaning to the economy is simply playing crosswords. This is how we got in this mess. Either Greenspan and his compatriates were stupid or corrupt. I read he wrote his Ph.D. dissertation on housing bubbles so he's probably not stupid.

Don't get hogwashed by the government. Unless they fully account their debt position into their statistics then you can be assured they are manipulating everything. Just like your friend who says he's doing fine but is really running up ever higher credit card debt.

Max--

You are very difficult to have a discussion with--you ramble quite a bit. Let's try to stick to a few points at a time.

1. Inflation is defined as rising prices. You can argue that it's more useful to measure a different set of variables--fine. But it needs a new name then. Inflation is already being used.

2. We don't have strong inflation here. It's next to nothing right now.

3. The government debt is high now. It does belong to the public and at some point we will have to reduce entitlements, reduce defense, or raise taxes. Agreed.

Can we agree to that?

max, sorry, but your assertions are just too opaque.

The wage-price spiral of the 1970s was a great reset of the economy that divided pre-Boomer haves from Boomer have-nots, as asset prices rose while the debt that was used to acquire these assets remained uninflated.

The situation has calmed down since then but the buying power of a 1985 dollar has fallen to 50c today.

we have strong inflation here

My thesis is that without wage inflation there can be no net price inflation. This is because there is a whole line of rentiers taking money out of middle America's pockets, and their economic rents are entirely proportional to middle America's disposable income less necessities.

A gallon of gas could easily go to $10 in a few years, but I believe our economy will simply reconfigure itself to accept this new reality, with much of the adjustment coming out of rents and land values of the periphery.

Producer prices rise when producers refuse to lose money on producing and simply withhold creation of new goods and services. Owners of existing real estate can't stop their production, the rental unit has done been built already and the costs of making their "income property" economically available (ie rented) is minimal. This is why I believe the real estate segment of the market lacks pricing power and will get smushed should price inflation occur in energy, food, government taxes, or even health costs.

With 20% underemployment and China still working for $200/mo in wages, India working for $500/mo, I simply fail to see the bargaining position of current wage earners.

This is deflation, very similar to what Japan experienced in the 90s. Once you lose full employment, it's a race to the bottom.