The Fed's Maginot Line

[marvenger]

Re: The Fed's Maginot Line

Isn't it only rich bankers who have money now?

[ThePythonicCow]

Re: The Fed's Maginot Line

We are working on an update to this article. The demand for money could collapse as the economy improves. Then the Fed has to find ways to withdraw liquidity very quickly. This may be easier said than done.

Antal Fekete has an excellent discussion of inflation, deflation and the fallacies of the Quantity Theory of Money.

A couple of his more recent efforts can be found at

• A Critique Of The Quantity Theory Of Money, and
• Hyperinflation or Hyperdeflation?.

I recommend this work to your consideration.

[FRED]

Re: The Fed's Maginot Line

We are working on an update to this article. The demand for money could collapse as the economy improves. Then the Fed has to find ways to withdraw liquidity very quickly. This may be easier said than done.

[DrYB/C]

Re: The Fed's Maginot Line

Cointegration and Cagan's model of hyperinflation under rational expectations

by Tom Engsted

WHEN MONEY AND PRICES ARE INTEGRATED of order two, I(2), and shocks to money demand or velocity are stationary, then the Cagan (1956) monetary model of hyperinflation has the implication that real money balances cointegrate, in the sense of Engle and Granger (1987), with the rate of inflation. As a result, one can estimate the interesting parameter in the model, the semielasticity of the demand for real balances w.r.t. expected inflation, super-consistently in a cointegrating regression without having to specify the exact expectations formation process....

1. Iceland Cuts Key Interest Rate to 12% From 15.5% (Update2) http://www.bloomberg.com/apps/news?p...d=azrp3E_O4HNE

As expected: first the price, then the aggregates (as they attempt to monetize the increasing economic costs of currency price disequilibrium during the process of disequilibrium reversion to equilibrium).

As stated in my first itulip.com post, dtd 2/29/2008, our current malaise will end in hyperinflation and war.

[Rajiv]

Re: The Fed's Maginot Line

You can embed the broadcast by using the Big M tag as below

[MEDIA]http://shout.lbo-talk.org/lbo/RadioArchive/2008/08_10_04.mp3[/MEDIA]

[GRG55]

Re: The Fed's Maginot Line

It won't happen because the ultimate cause of the problem: securitized lending, is broken and a replacement has yet to be found.

The actions of the US and other G7 governments will temporarily alleviate the consequences of the securitization debacle, but the fundamental securitization mechanism must be replaced for the free credit to again flow. Unless you think Europe will buy crap MBS bonds again?

Even a return to the 1985 model of banking won't do; that would still mean losing 2/3rds of the previously available credit (or more).

If you think things are bad now - just wait to see what happens when government guaranteed loans are being made by banks capitalized with government capital.

That will be a very short but spectacular bubble.

I'm waiting for the day we see a government owned bank foreclose on a government loan to a delinquent government employee who bought the house from the RTC [and remortgaged it one too many times]...

[donalds]

Re: The Fed's Maginot Line

In the above, I failed to add that one needs to click on to the October 4th broadcast.

[donalds]

Re: The Fed's Maginot Line

For those of you who would like to expand your understanding of inflation and Volcher, or at least gather in a differing perspective, listen to this audio of an interview with York University, Toronto, Political Economy professors:

http://www.leftbusinessobserver.com/Radio.html

[vinoveri]

Re: The Fed's Maginot Line

The point is - every 1$ of debt the US piles up must be matched by a Treasury or corporate or some type of bond sale to someone. Even before this latest crisis, more than half of purchases were from foreign central banks.

Why again will the foreigners continue to purchase?

I can see some purchasing as a quid pro quo to retire some of the bad MBS debt, but I still cannot fathom a reason beyond that.

Neither can I unless they have no where else to go or to avoid economic MAD?

What I don't understand is if the gov with fiat money system can create money out of thin air why does this newly created money need to be associated with a creditor? What is the significance of the fed's balance sheet for instance, if it can get new funding at any time from the treasury?
With a nationalized banking system, what's to prevent the gov from asserting anything it wants in reference to it's balance sheet, that of the banks, who owns who what, etc? It's back to the confidence game again. I don't get it.

[DrYB/C]

Re: The Fed's Maginot Line

Cointegration and Cagan's model of hyperinflation under rational expectations

by Tom Engsted

WHEN MONEY AND PRICES ARE INTEGRATED of order two, I(2), and shocks to money demand or velocity are stationary, then the Cagan (1956) monetary model of hyperinflation has the implication that real money balances cointegrate, in the sense of Engle and Granger (1987), with the rate of inflation. As a result, one can estimate the interesting parameter in the model, the semielasticity of the demand for real balances w.r.t. expected inflation, super-consistently in a cointegrating regression without having to specify the exact expectations formation process....

As it plays out in the real-world (?):

1. Icelandic Shoppers Splurge as Currency Woes Reduce Food Imports http://www.bloomberg.com/apps/news?p...d=aVFtDRGwcc50

2. Icelanders Sink Under Foreign-Currency Loans as Krona Plunges http://www.bloomberg.com/apps/news?p...&refer=economy

3. U.K. Used Anti-Terrorism Law to Seize Icelandic Bank Assets http://www.bloomberg.com/apps/news?p...d=aXjIA5NzyM5c

4. The Next World War? It Could Be Financial. http://www.washingtonpost.com/wp-dyn...002441_pf.html

Related:

a. China snaps diplomatic, military contacts with US http://in.news.yahoo.com/20/20081007...tary-cont.html

b. Russia stunned by UN-NATO cooperation deal http://en.rian.ru/russia/20081009/117635210.html

c. Medicines shortage looms as winter approaches http://business.timesonline.co.uk/to...cle4931435.ece

[c1ue]

Re: The Fed's Maginot Line

The national debt can go to the moon as all this happens.

The only check it would seem is the credit-worthiness of the U.S. And by whom and when that will be challenged (if ever) is anybody's guess.

Credit worthiness is exactly how the Alt-A debacle was created.

Some arbitrary score set by a ratings agency whom you pay for said score doesn't mean squat - and this has been fully revealed.

The point is - every 1$ of debt the US piles up must be matched by a Treasury or corporate or some type of bond sale to someone. Even before this latest crisis, more than half of purchases were from foreign central banks.

Why again will the foreigners continue to purchase?

I can see some purchasing as a quid pro quo to retire some of the bad MBS debt, but I still cannot fathom a reason beyond that.

[Slimprofits]

Re: The Fed's Maginot Line

U.S. now in recession, says Volcker

Mr. Volcker was asked by a member of the audience if the massive infusion of liquidity by the Federal Reserve could lead to inflation or stagflation.

“It’s not going to be a problem in the short run. Inflation doesn’t flourish in the face of recession,” he said.

“It’s something we have to worry about when we get out of this recession.”

[vinoveri]

Re: The Fed's Maginot Line

It won't happen because the ultimate cause of the problem: securitized lending, is broken and a replacement has yet to be found.

The actions of the US and other G7 governments will temporarily alleviate the consequences of the securitization debacle, but the fundamental securitization mechanism must be replaced for the free credit to again flow. Unless you think Europe will buy crap MBS bonds again?

Even a return to the 1985 model of banking won't do; that would still mean losing 2/3rds of the previously available credit (or more).

If you think things are bad now - just wait to see what happens when government guaranteed loans are being made by banks capitalized with government capital.

That will be a very short but spectacular bubble.

Now that Fannie and Freddie are nationalized, nothing would seem to limit there ability to buy and hold mortgages, and provide whatever terms they choose. In fact, what's to prevent them from having their charter modified (or another GSE created) to take on other debt,e.g., car loans, credit cards, student loans. Nationalization is a really radical change to the system - it's really difficult to get your arms around the extent of what can now happen.

and the vicious cycle is now a self-fulfilling circle
1) Treasury sells bonds to banks
2) Fed buy bonds from banks and voila credit
new 3) Fed borrows from Treasury

The national debt can go to the moon as all this happens.

The only check it would seem is the credit-worthiness of the U.S. And by whom and when that will be challenged (if ever) is anybody's guess.

[c1ue]

Re: The Fed's Maginot Line

I fall off the planet for 2 years, come back to discover that everything is "back to normal", credits is everywhere, global GDP growing, inflation is <4%, the DJI is 17k AND the U.S. fiscal budget deficit is $1.5 Trillion per year and the total U.S. debt is $20 Trillion.

Why is this not a somewhat probable if not likely scenario? Although the credit/debt game has to end at some point, but what's to prevent it from continuing for another 20 years. All it would seem to take is a major increase in the U.S' credit limit and continued cash advances from the ROW.

It won't happen because the ultimate cause of the problem: securitized lending, is broken and a replacement has yet to be found.

The actions of the US and other G7 governments will temporarily alleviate the consequences of the securitization debacle, but the fundamental securitization mechanism must be replaced for the free credit to again flow. Unless you think Europe will buy crap MBS bonds again?

Even a return to the 1985 model of banking won't do; that would still mean losing 2/3rds of the previously available credit (or more).

If you think things are bad now - just wait to see what happens when government guaranteed loans are being made by banks capitalized with government capital.

That will be a very short but spectacular bubble.

[Andreuccio]

Re: The Fed's Maginot Line

I fall off the planet for 2 years, come back to discover that everything is "back to normal", credits is everywhere, global GDP growing, inflation is <4%, the DJI is 17k AND the U.S. fiscal budget deficit is $1.5 Trillion per year and the total U.S. debt is $20 Trillion.

Why is this not a somewhat probable if not likely scenario?

C'mon, be real.

What are the odds you fall off the planet?