For Peter Schiff

[Reub]

What are we, fifth graders here?

P.S. I will not engage someone who has proven to be less than civil in the past. Sorry.

[Pointedstick]

8. As the budget deficits increase, the money supply will continue to increase, driving more inflation.

If the inflation target is met, doesn't that imply more prosperity, which in turn implies more taxable income the government can skim? I don't think you can neglect increased tax revenue. It's fully half of the puzzle.

9. The money supply growth and inflation rate eventually become unsustainable, resulting in default through either currency collapse or (more likely) effective default by high inflation rates.

What does this mean, exactly? What's a high interest rate? Are we talking 10% on a T-bill? 15%? 20%? 50%? This is the part that I've never really seen a thorough explanation of how it would come to pass.

[MachineGhost]

1. The money supply (M2) is rising at a faster rate than GDP

M2 includes cash from money market funds and goes up from selling financial economy instruments in a downturn or when confidence is low.  It doesn't imply inflation.

2. Inflation is low, around 1.5-2.0%. This is because the Money supply isn't chasing goods, it's sitting in demand deposits.

This is because there is slack demand for goods and services, not because the money supply isn't chasing goods and services.  If anything, hot money is busy chasing financial economy assets.

3. The Fed is continuing to buy treasuries across the yield curve, to lower the entire yield curve.

Yes, the ivory tower morons manning the Fed believe there is a transmission mechanism from the financial economy to the real economy.

4. The reason the Fed wants to lower the yield curve is two-fold: A. to reduce the cost of borrowing, thereby stimulating borrowing and consumption; and B. to drive investors into the equity markets to increase the wealth effect, thereby stimulating consumption.

See above.  Except in case of B the effect to the real economy is laughably minuscule.  A is arguable, but housing prices have risen double digits in the past 12 months, so it appears the Fed has managed to reflate the real estate bubble all over again despite poor borrower balance sheets.  Is this a real economy or just another Game?

5. At some point, the Fed's actions, along with deficit spending, could result in increased inflation rates.

Deficit spending doesn't result in increased inflation.  That's seriously out of date economic hookum.  Even that quadruple bypassed, dumb old fart Cheny said, "Deficits don't matter." although Republicans really don't have any proper context for understanding modern fiscal and monetary policy.

6. If the Fed's unemployment targets are met, and inflation begins to increase, the Fed will begin to sell treasuries to reduce the money supply, which will increase interest rates.

The Fed doesn't have to sell its Treasuries.  It can let them retire and return 95% of its profits back to the Treasury.  Inflation is not automatically baked in the cake unless and only unless the Fed screws up or doesn't act.  History is not encouraging for either.

7. If interest rates increase, the Federal budget deficit would increase (neglecting increased tax revenue).

Deficits don't matter.  The inflation equation is far more complex than simplistic sound bites.

8. As the budget deficits increase, the money supply will continue to increase, driving more inflation.

See above.

9. The money supply growth and inflation rate eventually become unsustainable, resulting in default through either currency collapse or (more likely) effective default by high inflation rates.

Or more likely both at once, which is what happened between 1965 and 1980 and we survived just fine.  We're not a banana republic are we?  Is Japan who is leagues ahead of us on the spending and debt curve?

For those of you who have spent more time studying MR and such, what parts do you agree or disagree with?

I only agree on the possible end-game; its your means to that end that are faulty.

[rocketdog]

Some would have you believe that a country that has 100 TRILLION dollars in liabilities with tepid growth and an aging population is a responsible, solvent country. Some also live near a river called denial.

D'OH!  I see what you did there. 

[MachineGhost]

D'OH!  I see what you did there. 

Not that I'm advocating for it, but Deflationary Doom doesn't seem all that bad to me if Japan's experience is any indication.  And they are a far more statist, socialist-controlled and anti-immigrant, xenophobic economy than we are.  I'm not worried.  But obviously, if Congress doesn't get some economic sense knocked into them by muppet angst instead of regulatory capture, nothing could change for decades.  That is the true fix, not austerity on the backs of the working poor.

[rocketdog]

D'OH!  I see what you did there. 

Not that I'm advocating for it, but Deflationary Doom doesn't seem all that bad to me if Japan's experience is any indication.  And they are a far more statist, socialist-controlled and anti-immigrant, xenophobic economy than we are.  I'm not worried.  But obviously, if Congress doesn't get some economic sense knocked into them by muppet angst instead of regulatory capture, nothing could change for decades.  That is the true fix, not austerity on the backs of the working poor.

Um... I was talking about his "living near a river called denial" play on words. 

[melveyr]

I think a major problem with many neoclassical models is the arbitrary definition of money. When the Fed buys a T-Bill they apparently have increased the amount of "money" in the financial system. However, in my mind a T-Bill is most certainly money. It is simply an interest bearing form of money. The Fed's actions change the relative value of interest bearing money versus non-interest bearing money, but I don't think it is accurate to say that they increased the amount of "money."

Do you feel richer when you transfer funds from your savings account to your checking account? You converted your money from an interest bearing form of money to a non interest bearing form of money. Does this cause you to go on a spending spree that causes inflation? Treasury bonds are like a savings account (an interest bearing government liability that you hold as an asset) and Federal Reserve notes are like a checking account (a non interest bearing government liability that you hold as an asset).

When you really dive in to the details, "money" is not a nice and neat concept with clear lines that can be drawn around it. Just look at all of the classifications of M0, M1, M2.. etc.

[moda0306]

I think a major problem with many neoclassical models is the arbitrary definition of money. When the Fed buys a T-Bill they apparently have increased the amount of "money" in the financial system. However, in my mind a T-Bill is most certainly money. It is simply an interest bearing form of money. The Fed's actions change the relative value of interest bearing money versus non-interest bearing money, but I don't think it is accurate to say that they increased the amount of "money."

Do you feel richer when you transfer funds from your savings account to your checking account? You converted your money from an interest bearing form of money to a non interest bearing form of money. Does this cause you to go on a spending spree that causes inflation? Treasury bonds are like a savings account (an interest bearing government liability that you hold as an asset) and Federal Reserve notes are like a checking account (a non interest bearing government liability that you hold as an asset).

When you really dive in to the details, "money" is not a nice and neat concept with clear lines that can be drawn around it. Just look at all of the classifications of M0, M1, M2.. etc.

Well we basically know the reserve requirement is a bit of a myth in modern banking... I wish the government would simply pass a law that overtly made t-bills and bonds legal tender, thereby instantly adding it to the "money suppy" charts and watching the market do a collective shrug and go back to business as usual... even though certain players would freak out about hyper inflation because "look at the chart!"

I've come to the conclusion that all QE does is help adjust a price floor below which private lending will not occur (who would loan money to the pivate sector for less than what you could loan to the entity that can print to pay you back).  Adjusting that rate above and below the rate of expected inflation, and doing so in coordination with employment and inflation targets, is what keeps the users of credit (good and bad) creating demand for loanable funds, which is what increases the credit money supply, obviously.

Obviously, when the fed buys MBS's, it's playing a different kind of game... but these moves are the exception, not the rule.