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trade, I think maybe (maybe) you and Batsh maybe correct on this. From a monetarist view the supply of money is everything and describes deflation and inflation succinctly.
What I am questiong is, IS this true AT this time or not.
Money is being printed and released to banks, BUT if the debt/income is going down generally across the society, the money will so to speak "pool" in the banks. If for instance debt/income ratio is going down broadly any extra money release will most likely go into savings or CD's or equivalent.
The above scenario is one of personal "feeling" (on a massive scale) and "breaks" the linear extrapolation between money supply and inflation/deflation.
The Fed can increase the money supply, this is in their power, they cannot go out to Joe blow and say, "please borrow more....please....please....please" or equivalenty "please consume more.....please.....please....please".
So the question is, IF consumers and commercial side of economics have for the rest of this generation life span decided, e.g., to reduce their debt/income by 50%......this is/will be an economic shrinkage, what will the banks do with the "extra" money?
The extra money HAS to get into the system to CAUSE inflation.
There are several ways, I see, the "extra money" will get into this system if the conventional ways DO NOT get it into the system:
1. Foreign countries will start increasing their domestic consumption, i.e, China and India.
2. Banks will turn to international investment and Forex trading to achieve profit.
If the above happens given debt/income is shrinking in the US then, yes we will have inflation......mainly through dollar devaluation and NOT THROUGH CONVENTIONAL INCREASE IN DEMAND.
If the above is TRUE, then the mechanics of inflation ARE important to investors.
My post IMO IS ABOUT HOW WILL THE NEW MONEY GET INTO THE SYSTEM GIVEN debt/income of the TWO LARGEST WORLD ECONOMIES is and probably will for the remainder of this generation's lifetime GET SMALLER.
Psa, Banks balance sheets will not rise, it can’t. The consumers & businesses are: to over-leveraged in debt, saturated by products, in over their heads in an over-competitive market, many are to complacent, while others are to fearful, a lack of education in finance and general diversification of the marketplace, just to name a few; … oh and one more, the system has become to complicated.
Some pooling may occur, but many basins have MAJOR leakage and will end up dry if not plugged up properly, repaired, or made new. Besides, any money returned will be put back into the system by the need to lend and speculate. How else will the banks make money?? Washington-- recently asked the spokesman from JP Morgan Chase, “where is the money going”? The response was “we are declining to disclose this information”. Its suspected the banks are hoarding taxpayer money to pay for the defaulting borrowers and to prop themselves. Consumers/businesses have paid continuously escalating, irrational prices for goods for over a couple decades. What will happen to the generation that overpaid?
Air is being injected into an over-inflated balloon, whereas, the rightful approach would be to release air slowly to reach proper balloon parameters. The Obama Administration has indicated it will do everything and anything it can to prevent the rise in unemployment. Ergo, businesses will continue to need aide from the government to support its low productive, over-consuming, inefficient workers and company outdated technologies.
Certainly, strengthening in the dollar for the short-term is very possible, but in the long-term the dollar is going down. Just as any fiat currency in past history, it will eventually reach zero.
I am bullish on the markets for the next 6 months, but I am holding onto gold and energy regardless if it goes up or down for much of my portfolio.
As for the dollar, I think the dollars rise and fall will be based on how the rest of the world handles its own recession -- which is why I agree with you on, point 1, but I am unclear or lack understanding of point 2.
What do you think about building a generic model of our current economic system? As an example, a board composed of series and parallel circuits…using diodes to represent consumer spending resistance, voltage is money flow, the battery would be the Fed, switches are the financial institutions, capacitors are the central banks, bulbs are the businesses/people, and the paths represent money flowing from one sector to another, etc… This way it would be possible to determine if current liquidity levels are contracting or more is needed.
Trade (FYI), these models already exists many large financial institutions and large companies have these models, see the following article:
In particular note the following comment about half way down the first page:
"Their credibility suffered for it last year. They did not see a recession until late summer. One reason they were blindsided: their computer models do not easily account for emotional factors like the shock from the credit crisis and falling housing prices that have so hindered borrowing and spending."
What is difficult to model are the non-linear behavior of people (emotion such as fear), this is where obixo post who refers to Antal Fekete's teleological space comment comes in.
I enjoy reading these posts. Their is analysis and originality.
Please explain how Forex trading could lead to inflation. Would banks simply sell dollars they hold, short dollars in new positions, etc?
gbolt, yes that is that is what I mean. Buying other currency with dollars which would include gold and silver. Essentially a US carry trade.
Even here there is a way to modulate the entry of these dollars into the market place, for instance if banks would buy mostly foreign country bonds the US, i.e., the Fed could ask the foreign CB to sit on the dollars (to increase foreign US dollar reserves) or swap the US dollars for foreign currency at some agreed upon CB to CB exchange rate. It is highly likely with the present strength of the dollar that the Fed has increased it reserves of Euros, Yen, RMB, gold and silver for future expected rainy days.
I do not know the exact game plan of the Fed but present actions suggest they would be creating some contingency plan/s for US dollar carry trade. They have for instance already created an internal US Fed to bank carry trade, which was VERY clever and accomplished two things, controlled the rate of flow of dollars into the US economy and kept the banks on life support.
Bernanke has been extremely creative in his monetary policy in 2008 (by necessity if you understand the US dollar & economy has to be saved). The criticism is two fold, is it too much such that future stability of the dollar is threatened and has the Fed laid future precedence of gaining too much intervention power into the US market place. The present Fed path established by their actions and words in 2008 generally mean they now will/can enter in ALL phases of the US economy, before 2008 this wasn't true. The extra gained power may not be so much a problem with the present Fed Board of governors, it may though be a problem with future ones if they prove to be either naive or serving self interest. Power once gained historically has been proven to be difficult to abdicate.