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View Full Version : Does Poom HAVE to result in higher prices?



aps1087
10-05-08, 03:42 AM
I have been thinking about Ka-Poom theory and how it might play out. What I am curious about is whether poom HAS to result in higher prices, or could it possibly just slow down the falling of asset values and prices.

Here is my thought process:

- Foreign CBs start selling off bonds to provide stimulation to their own economies.

- Bond prices drop resulting in less dollars received than was paid for the original purchase. (sold for a loss)

- At the same time in the US, there is a huge demand for dollars as unemployment rises, wages decrease, and debt stays high.

- The supply of dollars from overseas comes back home; however, the supply is not as large as originally thought since the bonds were sold at firesale prices.

- Demand for dollars at home exceeds the supply of dollars coming home.

- At this time we are already in a depression, w/ skyhigh interest rates, with prices continuing to FALL.

- This decline in prices continues longer than expected due to the dollar being the reserve currency. (keeps value/strength)

- Once the dollar begins to sell off (if it does), it gets tied to gold in one way or another to stabilize it at a price similar to today's.


So, where in my thinking process am I missing something? I realize that tax revenues would drop as well, and that the government would have to borrow to stay afloat, but I don't think that monetizing debt necessarily HAS to result in a weaker dollar if at the same time supply is decreasing and demand is increasing for dollars.

Help me out people.

bam
10-05-08, 06:20 AM
I'm not sure why anyone would think prices would be rising at all. Is there an asset class other than USD that is not deflating?

If demand for goods is falling, the price for those goods falls as well. But for those without cash, credit or a source of income, prices are high relative to their circumstance. Eventually prices and demand achieve equilibrium. But people in the worst circumstance can starve to death waiting for "eventually" to arrive.

VIT
10-05-08, 03:13 PM
In "fiat" currency system price is pure monetary phenomenon.
That is my simplistic view:
Price = money / goods.
But money in the numerator are not the same. If you are able to put some of this money in a pit (reserves) effectively your reduce your circulation money and your numerator. In the reverse process you add this money so your price level goes up and up.

c1ue
10-05-08, 07:46 PM
APS,

You're missing several key points:

1) The reason why POOM would occur is that the US government chooses to print money to counteract deflation. In the process of doing so, it is easy to overshoot - once this occurs the overhang of extra money causes inflation. The created depreciation also helps by devaluing existing debts.

2) Tying the dollar to gold counteracts the point of the depreciation. Why do so when it both solidifies the debt that must be repaid, and furthermore prevents additional printing to counteract deflation?

3) The present deflation is occurring due to panic. However, the incoming supply of repatriated dollars is not infinite. Don't confuse short term behavior with long term.

aps1087
10-05-08, 09:43 PM
APS,

You're missing several key points:

1) The reason why POOM would occur is that the US government chooses to print money to counteract deflation. In the process of doing so, it is easy to overshoot - once this occurs the overhang of extra money causes inflation. The created depreciation also helps by devaluing existing debts.

2) Tying the dollar to gold counteracts the point of the depreciation. Why do so when it both solidifies the debt that must be repaid, and furthermore prevents additional printing to counteract deflation?

3) The present deflation is occurring due to panic. However, the incoming supply of repatriated dollars is not infinite. Don't confuse short term behavior with long term.

1 - I understand that government printing is just ONE reason why POOM would occur. Other reasons include political, and economic (they need the money)

2 - They may not have the option of not tying to gold if people stop accepting dollar or lose faith in them.

3 - I realize the incoming supply of dollar is not infinite. That is what I am saying. What is to prevent a "controlled" POOM from happening and preventing inflation at all?

That is what confuses me...why does POOM HAVE to result in inflation? Can the supply of dollars coming home be less than the demand for the dollar at home?

friendly_jacek
10-06-08, 12:54 AM
I would not be surprised if you were actually correct on this.

People often forget that money is mostly credit and not the paper from printing presses (the fractional reserve banking principle). So, if banks are failing left and right, loosing deposits, and afraid to lend (like right now!), the amount of government intervention could be too little, too late.

BTW, currency accounts only to 5% of money supply according to http://en.wikipedia.org/wiki/Fractional-reserve_banking

And finely, this should be a mandatory course in high school but curiously is little known (Money as Debt):
http://www.youtube.com/watch?v=vVkFb26u9g8&eurl=http://themessthatgreenspanmade.blogspot.com/2008/01/money-as-debt.html

*T*
10-06-08, 05:44 AM
@ VIT: The velocity of money is important too.

VIT
10-06-08, 07:46 PM
@ VIT: The velocity of money is important too.

Yes, that is correct. I said money in numerator are not the same. This was simplistic view. Some money are small velocity, some low liquidity so it all reduces the numerator. My idea was if you convert (by bail outs, printing) all different money in real-power money - here you are with inflation :D

metalman
10-06-08, 10:27 PM
not necessarily. depends on what you are talking about re 'higher price'.

before the dollar shits the bed like the icelandic krona, say a gallon of water from the local reservoir costs 1 penny per gallon. during the recession, 50 cents per gallon. deflation! but if the dollar falls 50% a gallon of gasoline will go from $4 to $10 because it is imported. everything made with oil goes up, too. or the producers stop making them because every unit of production is a loss.

most things are made with oil as an input cost vs water that is going down.

inflation or deflation?

duh.

these 'inflation is always a monetary phenomena' guys are morons.

VIT
10-07-08, 12:05 AM
not necessarily. depends on what you are talking about re 'higher price'.

before the dollar shits the bed like the icelandic krona, say a gallon of water from the local reservoir costs 1 penny per gallon. during the recession, 50 cents per gallon. deflation! but if the dollar falls 50% a gallon of gasoline will go from $4 to $10 because it is imported. everything made with oil goes up, too. or the producers stop making them because every unit of production is a loss.

most things are made with oil as an input cost vs water that is going down.

inflation or deflation?

duh.

these 'inflation is always a monetary phenomena' guys are morons.

The falling domestic prices means that somebody earns today less then yesterday. So it is no gain in economy. In closed system it would not matter but when you need to import something you have inflation in that terms that your money loosing overall purchasing power.

We can look on this from different angles and everybody can find opposite examples. From individual standpoint somebody could experience deflation or inflation at the same time.

metalman
10-07-08, 12:23 AM
The falling domestic prices means that somebody earns today less then yesterday. So it is no gain in economy. In closed system it would not matter but when you need to import something you have inflation in that terms that your money loosing overall purchasing power.

We can look on this from different angles and everybody can find opposite examples. From individual standpoint somebody could experience deflation or inflation at the same time.

not so. declining purchasing power does not hit all things the same way. inflation is a composite of all the prices of things in the economy and labor and goods input costs vary. oil is up 400% since 2001, as are items that rely on oil. checked your dry cleaning bill lately? not hamburgers. yet we buy both with the same $$$. hamburgers are produced domestically and are not exposed to foreign price competition as oil.

raja
10-07-08, 08:42 AM
not necessarily. depends on what you are talking about re 'higher price'.

before the dollar shits the bed like the icelandic krona, say a gallon of water from the local reservoir costs 1 penny per gallon. during the recession, 50 cents per gallon. deflation! but if the dollar falls 50% a gallon of gasoline will go from $4 to $10 because it is imported. everything made with oil goes up, too. or the producers stop making them because every unit of production is a loss.

most things are made with oil as an input cost vs water that is going down.

inflation or deflation?

duh.

these 'inflation is always a monetary phenomena' guys are morons.

metalman,

I am probably in the "stupid" category, because I'm having lot's of trouble wrapping my head around this inflation/deflation issue. I understand you're getting weary of talking about this, but beg your indulgence once again . . . .

It seems to me that there are a few sources of inflation: the gov't printing presses, the rising value of other currencies, commodity price increases.

The value of fiat money is worth whatever the buyer and seller agree upon. If the Saudis want to charge 25 cents or $200 for oil, they can. The question is, with the world entering global recession, will they be able to get $200? If they can't find buyers, they'll have to lower their price . . . or they won't be able to sell as much . . . or may even risk war.

From my admittedly inexperienced perspective, it appears that this coming depression is affecting all countries -- daily we're seeing other economies in trouble.

So my question is, in addition to the Fed's printing presses, what is the dollar inflating against? Other currencies? Oil? Commodities?

If the Saudis charge less for oil, and that lowers input costs for commodity producers, and that lowers costs for manufacturers, and the Chinese lower prices in order to sell to poorer American consumers, doesn't that make the dollar hold it's value?

Plummeting home prices are making everyone poorer, and the gov't in going to inject money into the economy to try and keep it all going. I understand how that is inflationary -- more dollars = less purchasing power. But what if consumers don't want to spend it. If I were J6P, and I saw people losing jobs left and right, and the gov't sent me a check for $10,000, I'd pay off debt. Two months ago he might have spent it on a big-screen TV, but now he's scared. So that stimulus doesn't really stimulate the economy.

I'm wondering about mcgurme's idea . . . what if the gov't efforts don't stop the downward spiral to global depression? POOM fizzles and deflation takes hold. Gold tanks. I agree with EJ's thinking about inflation, as far as I can understand it, but wonder if it applies should the situation become so dire that the government's actions are inadequate?

I'm making some big investments right now, and I'm wondering whether to sell off some gold or TIPS . . . so this is an important question for me. :eek: Any input would be appreciated . . . . .

VIT
10-07-08, 07:27 PM
not so. declining purchasing power does not hit all things the same way. inflation is a composite of all the prices of things in the economy and labor and goods input costs vary. oil is up 400% since 2001, as are items that rely on oil. checked your dry cleaning bill lately? not hamburgers. yet we buy both with the same $$$. hamburgers are produced domestically and are not exposed to foreign price competition as oil.

Let me bring my last argument in this thread.
The inflation is a choice - it is not the must be type of thing, right ?

Look on US: the net trade is negative and US borrows the money. It says that US spend more then supported by its productivity. You need to equalize it somehow. You can hold the value of USD - it means high unemployment, cutting the expenditures and etc. The second choice devalue the dollar via inflation thus decreasing the purchase power. You still going to see cutting in expenditures - demand. This would result in new lower equilibrium price between demand and supply. You can call it deflation but in entire economy scale I would call it loosing purchasing power and inflation.

c1ue
10-08-08, 09:29 AM
Raja,

You're not reading what Metalman is saying.

Saudi Arabia is not like Campbell's soup.

Campbell's has obligations: it has to pay a long chain of suppliers of materials (chicken, pasta, vegetables, cans, labels). It has to go through a distribution chain: wholesalers, grocery stores, Wal Mart. It competes in a crowded market both with other soup makers and with other purveyors of food - from fresh/raw to frozen to DIY pasta, etc.

Saudi Arabia does have to pay its oil drillers. And oil tankers. But the amount of oil SA sells yielded a $148B trade surplus in 2007.

SA doesn't have to have this surplus. They've got plenty of cash and oil doesn't spoil sitting in the ground.

SA and its GCC cohorts historically have just been seeking an equilibrium of oil pumped vs. purchasing power received.

As for lower prices - again what's the big picture?

$90 oil is much much higher than 3 years go, yet SA/OPEC is cutting supply.

Could it be perhaps that what SA/OPEC is looking at isn't the dollar price of a barrel of oil per se but at an optimum purchasing power equivalent?

So a fall in oil price from $147 is not going to be to 2003 prices, but to 2003 prices with inflation added in.

Or do you think $25 oil is coming back?