I've read about a bit trying to understand this; where did all the rescue money go?
As in, supposedly "billions and billions" of new money was created (i.e. printed) to bail out banks and (here) whole countries. I'm here in Europe but the scenario was the same over the ocean. Three years ago inflation was going to devalue everyone's currency by 2015 due to all the money being printed as bailout. So far, nothing of the sort has happened and Europe is even eyeing anti-deflation measures.
Even though I don't partake in everyone around me's "inflation is coming, inflation is coming" cries, I am left wondering, where did it all go? To the best of my understanding, either there was no actual "new" money, since bailouts are essentially a sort of guarantee (hence the word bail). That or the money fueled the current bull market, or a combination of both.
I'm frustrated because I feel like I'm missing a crucial part, which points towards my financial education being still somewhat lacking. Hence I would appreciate some discussion on this point.
So where is the much-touted inflation?
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SilverElephant
- Posts: 130
- Joined: Mon Jul 22, 2013 12:40 pm
Re: So where is the much-touted inflation?
I am not any kind of economics and I do not imagine to or claim to understand this.
But one place I believe the money went is to other countries (and/or to people in other countries).
The U.S. works VERY hard to ensure that the $USD is the primary currency used for many international purchases (like oil). Thus, the money is getting spread out all over the world and as the net worths or GDPs of the world are increasing, many USD are being used as a medium for that.
I'm curious myself about how much more money the US Government has created in the last decade, compared to the total amount of $USD and their rate of money creation in previous decades. I don't have much of any idea how much that is. I do hear about QE and it sounded like a lot of money, but in relation to what was happening before, I have no idea how much it is.
But one place I believe the money went is to other countries (and/or to people in other countries).
The U.S. works VERY hard to ensure that the $USD is the primary currency used for many international purchases (like oil). Thus, the money is getting spread out all over the world and as the net worths or GDPs of the world are increasing, many USD are being used as a medium for that.
I'm curious myself about how much more money the US Government has created in the last decade, compared to the total amount of $USD and their rate of money creation in previous decades. I don't have much of any idea how much that is. I do hear about QE and it sounded like a lot of money, but in relation to what was happening before, I have no idea how much it is.
Re: So where is the much-touted inflation?
The illusion that we can understand this complex world is important to maintain for our sanity.I'm frustrated because I feel like I'm missing a crucial part..
My personal illusion is that the money all went to already-wealthy bankers who are padding their nests with newly fabricated bills.
Re: So where is the much-touted inflation?
Inflation is not only tied to the supply of money available, but also how quickly that money changes hands. This is called the velocity of money.
Consider a small economy of Al, Bob, and Chuck. Al has the only dollar bill in this economy. Al pays Bob for some goods, Bob pays Chuck for some services, and Chuck pays Al for some other services. This routine happens daily. For this small economy, the GDP would be $1095.
Now, same participants, different scenario: Al just keeps his dollar for the whole year. The GDP of the economy would be $0. Bob and Chuck would say "money is tight", although there are the same number of dollars in existence.
You can see how even when no new money is added to the economy, the participants themselves influence the availability of money.
So is that what has happened? Partly. Compare the money supply with the velocity of money over time (charts are US-centric, but the concept applies elsewhere too).
In other words, what anomie said (-:
Consider a small economy of Al, Bob, and Chuck. Al has the only dollar bill in this economy. Al pays Bob for some goods, Bob pays Chuck for some services, and Chuck pays Al for some other services. This routine happens daily. For this small economy, the GDP would be $1095.
Now, same participants, different scenario: Al just keeps his dollar for the whole year. The GDP of the economy would be $0. Bob and Chuck would say "money is tight", although there are the same number of dollars in existence.
You can see how even when no new money is added to the economy, the participants themselves influence the availability of money.
So is that what has happened? Partly. Compare the money supply with the velocity of money over time (charts are US-centric, but the concept applies elsewhere too).
In other words, what anomie said (-:
Re: So where is the much-touted inflation?
Yes, you won't have inflation (defined as increasing prices for this discussion) regardless of the money supply if the velocity of money is low.
Much of the newly created money is simply sitting on central bank balance sheets or shoring up moribund financial institutions. Japan has had that problem for two decades That money has almost no velocity. Couple that with aging populations, declining energy prices and fear factors like ebola and terrorism and you get deflation.
Much of the newly created money is simply sitting on central bank balance sheets or shoring up moribund financial institutions. Japan has had that problem for two decades That money has almost no velocity. Couple that with aging populations, declining energy prices and fear factors like ebola and terrorism and you get deflation.
Re: So where is the much-touted inflation?
In the US, there was low inflation because little new money has been created since 2008.
The Fed bought long-term Treasury bonds and government-backed mortgage bonds. These bonds are US Treasury liabilities.
The Fed used short-term reserves to buy the bonds. Federal reserves are also US Treasury liabilities.
Treasury-backed bonds and Treasury-backed reserves are perfect substitutes for banks for regulatory purposes. Banks with more excess reserves hold fewer bonds. If bonds and reserves are substitutes, QE doesn't increase the money supply. Instead, the purpose of QE was to lower long-term interest rates by reducing the supply of long-term bonds.
Banks always want to make good loans, since that is the product that they sell. Banks couldn't create many new loans, because loan demand was weak. Lower rates are supposed to raise the demand for loans. Unfortunately, loan demand was weakly correlated with interest rates. Few people wanted to borrow, even at low interest rates.
Bank loans are how new money is created in a fractional reserve monetary system, and loan growth has been very weak. Weak money growth has kept inflation down.
Consumer deleveraging (negative loan growth) ended in the US just a few quarters ago, and loan demand is slowly recovering. Soon, core inflation will pick up in the US. Don't worry, the Fed is ready.
Europe is still dis-inflating. The ECB made a second funding offer to banks six months ago, but the banks had to increase loans (increase the money supply) in return. Here's how that went:
http://www.economist.com/blogs/freeexch ... ding-offer
The Fed bought long-term Treasury bonds and government-backed mortgage bonds. These bonds are US Treasury liabilities.
The Fed used short-term reserves to buy the bonds. Federal reserves are also US Treasury liabilities.
Treasury-backed bonds and Treasury-backed reserves are perfect substitutes for banks for regulatory purposes. Banks with more excess reserves hold fewer bonds. If bonds and reserves are substitutes, QE doesn't increase the money supply. Instead, the purpose of QE was to lower long-term interest rates by reducing the supply of long-term bonds.
Banks always want to make good loans, since that is the product that they sell. Banks couldn't create many new loans, because loan demand was weak. Lower rates are supposed to raise the demand for loans. Unfortunately, loan demand was weakly correlated with interest rates. Few people wanted to borrow, even at low interest rates.
Bank loans are how new money is created in a fractional reserve monetary system, and loan growth has been very weak. Weak money growth has kept inflation down.
Consumer deleveraging (negative loan growth) ended in the US just a few quarters ago, and loan demand is slowly recovering. Soon, core inflation will pick up in the US. Don't worry, the Fed is ready.
Europe is still dis-inflating. The ECB made a second funding offer to banks six months ago, but the banks had to increase loans (increase the money supply) in return. Here's how that went:
http://www.economist.com/blogs/freeexch ... ding-offer
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methpearice
- Posts: 14
- Joined: Sun Nov 09, 2014 3:06 am
Re: So where is the much-touted inflation?
There are two reasons why money printing by central banks has not resulted in hyperinflation: hoarding and deleveraging.
1. Banks are hoarding the cash and are not lending it out. This reduces the amount of cash in circulation in the economy and has a deflationary effect.
2. Deleverage means that consumers and businesses, after GFC, sudden lose confidence and start to save up more rather than go into debt. The money supply is influenced not only by central banks printing money but also by retail banks generating cash on their computers and lending it out to borrowers (fractional reserve banking). The more banks lend, the more money there is in circulation, creating an inflationary effect. If consumers and businesses deleverage, i.e. pay off their debts, then the demand for debt decreases and the amount of "fake money" that banks create goes down and this has a deflationary effect.
1. Banks are hoarding the cash and are not lending it out. This reduces the amount of cash in circulation in the economy and has a deflationary effect.
2. Deleverage means that consumers and businesses, after GFC, sudden lose confidence and start to save up more rather than go into debt. The money supply is influenced not only by central banks printing money but also by retail banks generating cash on their computers and lending it out to borrowers (fractional reserve banking). The more banks lend, the more money there is in circulation, creating an inflationary effect. If consumers and businesses deleverage, i.e. pay off their debts, then the demand for debt decreases and the amount of "fake money" that banks create goes down and this has a deflationary effect.
Re: So where is the much-touted inflation?
I agree that inflation is generally a function of supply of money and its velocity of distribution.
Here is a short Austrian Economics overview of "where the inflation is". They argue along the same lines that inflation has not yet reached Average Joe because the 'distributors of money' are sitting on it, because of exporting inflation via export deficits (like it's the case for most American countries while Europe is divided) and because of technological advances.
Just having finished John Pugsley's Alpha Stragegy, inflation was one of his favorite topics as well.
I like to summarize the key takeaways of books I read and I found his approach to provide some refreshing viewpoints on economics that is lost to many standard textbooks.
He argues that as a solution to escape government plunder and inflation that industrial commodities provide a good protection against inflation as they advance with the cost of production (as would any good in a free market). Just to be precise - before investing in raw materials he suggests to invest in personal education and tools as well as consumables first.
About investing in industrial commodities he summarizes (emphasis added):
Here is a short Austrian Economics overview of "where the inflation is". They argue along the same lines that inflation has not yet reached Average Joe because the 'distributors of money' are sitting on it, because of exporting inflation via export deficits (like it's the case for most American countries while Europe is divided) and because of technological advances.
Just having finished John Pugsley's Alpha Stragegy, inflation was one of his favorite topics as well.
I like to summarize the key takeaways of books I read and I found his approach to provide some refreshing viewpoints on economics that is lost to many standard textbooks.
He argues that as a solution to escape government plunder and inflation that industrial commodities provide a good protection against inflation as they advance with the cost of production (as would any good in a free market). Just to be precise - before investing in raw materials he suggests to invest in personal education and tools as well as consumables first.
About investing in industrial commodities he summarizes (emphasis added):
I would like to see long-term charts of commodity indices against the CPI (or other inflation benchmarks) ...Raw industrial commodities offer the safest, soundest opportunity for preserving wealth that exists in the world today. The saver of these forms of real wealth forgoes the dream of immense speculative profits, but is assured of protection against the risks of inflation, volatile markets, and speculation. Properly purchased and stored, raw industrial commodities are a near-perfect inflation hedge. Perhaps the only one that exists.
Re: So where is the much-touted inflation?
Favorite topic. I'm personally not sure I even understand what inflation is.
Velocity arguments make sense. I think there are many different economies in the US. Access to money has a lot to do with it. Look at college tuition, kids get access to low interest loans for large sums. College becomes a requirement so you don't become one of the toilers. Prices rise.
On the other hand, manufactured goods and ag products have stayed affordable. Robots, oil prices, etc. complicate the equation between labor rates and goods. Food raised the old way costs a lot at my local farmers market but Safeway has plenty of processed trash to fill you up cheap.
Homes in my neighborhood have gone up fast recently. People will argue asset appreciation and not inflation, but it looks to me like too many dollars chasing too few assets. Like in 1999 the techies have rediscovered how to print stock certificates. They may not be creating greenbacks but the money is sure rushing into the SFBay area right now.
Weimar republic Germany wasn't so much like the above (though it had elements of it). It seemed there was a loss in confidence that led to a market stampede away from paper to hard assets...which required the printing of more paper.
Confusing stuff to me. I like to think that there are two major economies right now. Main St. and Wall St.(though an oversimplification). Somewhat separated in that the nice folks I see at Walmart getting rollabacks tonight cannot participate in capital markets. This is like a wall on the velocity of money highway. Some people just cannot get on. Their world of Walmart, Netflix downloads, data contracts, plastic stuff is still cheap. Silicon Valley housing sits between the two economies because it's a consumable and a financial vehicle. Somehow I notice the areas where the two economies meet because it creates a discontinuity in the Main st. Wall st. Fabric of the economies.
Main St. Gets 0.1% interest while Wall St. has been taking double digit returns. That looks like inflation to me...or at least is the result of ...or cause of?
Ok enough rambling.
Velocity arguments make sense. I think there are many different economies in the US. Access to money has a lot to do with it. Look at college tuition, kids get access to low interest loans for large sums. College becomes a requirement so you don't become one of the toilers. Prices rise.
On the other hand, manufactured goods and ag products have stayed affordable. Robots, oil prices, etc. complicate the equation between labor rates and goods. Food raised the old way costs a lot at my local farmers market but Safeway has plenty of processed trash to fill you up cheap.
Homes in my neighborhood have gone up fast recently. People will argue asset appreciation and not inflation, but it looks to me like too many dollars chasing too few assets. Like in 1999 the techies have rediscovered how to print stock certificates. They may not be creating greenbacks but the money is sure rushing into the SFBay area right now.
Weimar republic Germany wasn't so much like the above (though it had elements of it). It seemed there was a loss in confidence that led to a market stampede away from paper to hard assets...which required the printing of more paper.
Confusing stuff to me. I like to think that there are two major economies right now. Main St. and Wall St.(though an oversimplification). Somewhat separated in that the nice folks I see at Walmart getting rollabacks tonight cannot participate in capital markets. This is like a wall on the velocity of money highway. Some people just cannot get on. Their world of Walmart, Netflix downloads, data contracts, plastic stuff is still cheap. Silicon Valley housing sits between the two economies because it's a consumable and a financial vehicle. Somehow I notice the areas where the two economies meet because it creates a discontinuity in the Main st. Wall st. Fabric of the economies.
Main St. Gets 0.1% interest while Wall St. has been taking double digit returns. That looks like inflation to me...or at least is the result of ...or cause of?
Ok enough rambling.
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sterlingarcher
- Posts: 57
- Joined: Wed Dec 03, 2014 4:48 am
Re: So where is the much-touted inflation?
As far as I can tell, USA has been consuming food, energy and entertainment for decades and paid for it through national deficits. This is a bill that has to be paid, and I can't see it coming through production and saving (the national debt is simply too big) but inflation and printing money. The money printing started with QE 1, continued with QE 2 and 3, and will continue until the dollar becomes worthless. Because once they stop QE, the stock market and real estate market will plummet along with the bond market. The US government will avoid this at all cost (who wants another stock market crash?) and thats why they wont stop QE until inflation starts running and the dollar becomes worth alot less. When the dollar goes down, every imported product in the US will become expensive. Thats when you know inflation has hit the roof.
What adds to the mix is that alot of other countries are doing the same, e.g. Japan. So comparing USA to Japan its hard to tell who will be worst off 2 or 10 years down the road, but there's no doubt the US debt is in its own league in terms of proportional size.
I think the losers will be those who are holding assets (stocks or real estate) when the money printing stops, and the winners will be those who either hold gold or a currency that isn't being printed an mass. The best stock bets will be in countries from emerging markets, countries with low debt and good production, and companies with customers from the same type of markets (this includes American/international companies like McDonalds). This is where you will find currency growth (purchasing power) and stock value.
Peter Schiff explains everything in further detail: https://www.youtube.com/watch?v=hShLu2xInSg
What adds to the mix is that alot of other countries are doing the same, e.g. Japan. So comparing USA to Japan its hard to tell who will be worst off 2 or 10 years down the road, but there's no doubt the US debt is in its own league in terms of proportional size.
I think the losers will be those who are holding assets (stocks or real estate) when the money printing stops, and the winners will be those who either hold gold or a currency that isn't being printed an mass. The best stock bets will be in countries from emerging markets, countries with low debt and good production, and companies with customers from the same type of markets (this includes American/international companies like McDonalds). This is where you will find currency growth (purchasing power) and stock value.
Peter Schiff explains everything in further detail: https://www.youtube.com/watch?v=hShLu2xInSg
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sterlingarcher
- Posts: 57
- Joined: Wed Dec 03, 2014 4:48 am
Re: So where is the much-touted inflation?
Let me also add this.
The money printing isn't money that is being printed and put into peoples hands and all of a sudden the national debt is gone and a piece of bread costs $200.
I actually don't think the money will ever end up in consumers hands like this, like it did in Germany some 100 years ago. Instead, the money printing will directly affect the currency with time. Currency is again affected by interest levels, imports/exports, psychology and alot more. The important point here is that the more you weaken the currency, the more expensive stuff will get. The only reason the US dollar is strong is that it has the privilege of being the world reserve currency but there must surely be limits as to how much you can take advantage of this.
The much touted inflation will start coming for real once the rest of the world realize that the US currency is infact not worth its current value, and that USA is unable to pay off its national debt without weakening it even further.
The money printing isn't money that is being printed and put into peoples hands and all of a sudden the national debt is gone and a piece of bread costs $200.
I actually don't think the money will ever end up in consumers hands like this, like it did in Germany some 100 years ago. Instead, the money printing will directly affect the currency with time. Currency is again affected by interest levels, imports/exports, psychology and alot more. The important point here is that the more you weaken the currency, the more expensive stuff will get. The only reason the US dollar is strong is that it has the privilege of being the world reserve currency but there must surely be limits as to how much you can take advantage of this.
The much touted inflation will start coming for real once the rest of the world realize that the US currency is infact not worth its current value, and that USA is unable to pay off its national debt without weakening it even further.
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Riggerjack
- Posts: 3191
- Joined: Thu Jul 14, 2011 3:09 am
Re: So where is the much-touted inflation?
I don't know jack about Europe, so I'll talk about US.
When TARP was announced, the M0 money supply was about a trillion dollars. This is the actual number of physical printed dollars estimated to be in circulation. Adding a trillion to that number seems a strong case for hyperinflation. This is where the people shouting fire were coming from(I was one of them).
Yet what really happened was a trillion was added to M3, the supply of loaned money. M3 is approx 30 trillion.
Adding a trillion dollars to a trillion dollar pool is going to cause 50% inflation, all things being equal (they never are). Adding a trillion dollars to a 30 trillion dollar pool only pushes for a 3.3% inflation.
Where did inflation go? Into mortgages. We are still stuffing that turkey. What happens when we stop? Nobody knows. There are a lot of folks with opinions, but really, nobody knows. There is no temple grandin to channel the herd mind. So maybe a stampede, maybe nothing.
Japan started down this path, and seems the best indicator of where it leads.
All I know for sure is that with federal debt at six times federal revenues, our tolerance for higher interest rates is very limited.
When TARP was announced, the M0 money supply was about a trillion dollars. This is the actual number of physical printed dollars estimated to be in circulation. Adding a trillion to that number seems a strong case for hyperinflation. This is where the people shouting fire were coming from(I was one of them).
Yet what really happened was a trillion was added to M3, the supply of loaned money. M3 is approx 30 trillion.
Adding a trillion dollars to a trillion dollar pool is going to cause 50% inflation, all things being equal (they never are). Adding a trillion dollars to a 30 trillion dollar pool only pushes for a 3.3% inflation.
Where did inflation go? Into mortgages. We are still stuffing that turkey. What happens when we stop? Nobody knows. There are a lot of folks with opinions, but really, nobody knows. There is no temple grandin to channel the herd mind. So maybe a stampede, maybe nothing.
Japan started down this path, and seems the best indicator of where it leads.
All I know for sure is that with federal debt at six times federal revenues, our tolerance for higher interest rates is very limited.
Re: So where is the much-touted inflation?
They have already stopped QE:sterlingarcher wrote:Because once they stop QE, the stock market and real estate market will plummet along with the bond market. The US government will avoid this at all cost (who wants another stock market crash?) and thats why they wont stop QE until inflation starts running and the dollar becomes worth alot less.
http://www.bloomberg.com/news/2014-10-2 ... ledge.html
They are now preparing to begin slowly raising rates, as the economy seems to be starting to having a positive impact on wages. It will be interesting to see if the low oil price will force them to speed this up or not.
Also, careful with Schiff, as he has been wrong forever. His "advice" is kind of like the old saying, "Even a broken clock is right twice a day."
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sterlingarcher
- Posts: 57
- Joined: Wed Dec 03, 2014 4:48 am
Re: So where is the much-touted inflation?
If they have truly stopped it, they will start QE4 once markets start to crumble. Which should happen within half a year.They have already stopped QE:
http://www.bloomberg.com/news/2014-10-2 ... ledge.html
They are now preparing to begin slowly raising rates, as the economy seems to be starting to having a positive impact on wages. It will be interesting to see if the low oil price will force them to speed this up or not.
If they don't, markets will plummet and you will see 2008 all over again.
They can't stop QE unless they are willing to see markets crash (which would be a good thing long term imo). And they can't continue forever because it will crush the dollar.
Re: So where is the much-touted inflation?
Yup -- you would have lost a lot of money listening to that guy in the past few years. Fortunately, its much easier to examine track records with the internet than it used to be.Chad wrote:They have already stopped QE:sterlingarcher wrote:Because once they stop QE, the stock market and real estate market will plummet along with the bond market. The US government will avoid this at all cost (who wants another stock market crash?) and thats why they wont stop QE until inflation starts running and the dollar becomes worth alot less.
http://www.bloomberg.com/news/2014-10-2 ... ledge.html
They are now preparing to begin slowly raising rates, as the economy seems to be starting to having a positive impact on wages. It will be interesting to see if the low oil price will force them to speed this up or not.
Also, careful with Schiff, as he has been wrong forever. His "advice" is kind of like the old saying, "Even a broken clock is right twice a day."
The essential problem with analyses that only look at government debt is that they only look at government debt, which will always give you an analysis that is incomplete at best and completely misleading at worst. You have to analyze the expansion or contraction of debt in the entire economy, which includes both public and private. Minsky/Kindleberger is one of the better approaches.
I think the Fed is likely to put off raising rates if oil and the markets continue to decline. Interesting analysis by C. Icahn re the crashing of a debt bubble related to oil drilling. If he is correct, you have a debt contraction and everything continues to go south for awhile. And yes, QE4 is not out of the question given the dollar's relative strength.
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Riggerjack
- Posts: 3191
- Joined: Thu Jul 14, 2011 3:09 am
Re: So where is the much-touted inflation?
Yes. QE is over, except that pesky last 100B/yr or so. True, that is comparatively small, but it is still 10 times the pre-2008 average.
http://www.pbs.org/newshour/making-sens ... ink-again/
http://www.pbs.org/newshour/making-sens ... ink-again/
Re: So where is the much-touted inflation?
It will be interesting to see how they handle this at some point. They will probably leave it alone for now. They seem to be focused on raising rates some time next year.Riggerjack wrote:Yes. QE is over, except that pesky last 100B/yr or so. True, that is comparatively small, but it is still 10 times the pre-2008 average.
http://www.pbs.org/newshour/making-sens ... ink-again/
Re: So where is the much-touted inflation?
Over the past few years I would have completely agreed. Now, the bigger variable seems to be wages. Yellen seems laser focused on wage increases right now. Not that a major market downturn wouldn't initiate more action from the FED, but a normal 5-10% correction with upward wage pressure would make the Fed's decision interesting. This seems to be an odd possibility, but it's really not ridiculously far fetched. Good economies don't always have good stock markets.Dragline wrote: I think the Fed is likely to put off raising rates if oil and the markets continue to decline. Interesting analysis by C. Icahn re the crashing of a debt bubble related to oil drilling. If he is correct, you have a debt contraction and everything continues to go south for awhile. And yes, QE4 is not out of the question given the dollar's relative strength.
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Riggerjack
- Posts: 3191
- Joined: Thu Jul 14, 2011 3:09 am
Re: So where is the much-touted inflation?
"Yellen seems laser focused on wage increases right now."
But what can he do about it? That's like a guy with a sledge hammer laser focused on machining. Best case, his focus does no harm.
Look, I want a solid economy, luke everyone else. And if the fed can end QE without a major meltdown, great. But I think we will continue stealth QE, and when the chickens come home to roost, we will have a nice separation between the end of QE and the meltdown, opening us up for another round of QE. That separation will help distance QE from the effects of QE.
Distancing cause from effect is always good science in experimental macroeconomics.
But what can he do about it? That's like a guy with a sledge hammer laser focused on machining. Best case, his focus does no harm.
Look, I want a solid economy, luke everyone else. And if the fed can end QE without a major meltdown, great. But I think we will continue stealth QE, and when the chickens come home to roost, we will have a nice separation between the end of QE and the meltdown, opening us up for another round of QE. That separation will help distance QE from the effects of QE.
Distancing cause from effect is always good science in experimental macroeconomics.
Re: So where is the much-touted inflation?
Yeah, she can only impact wages indirectly. She is using it as a major indicator of when to begin increasing interests rates and based on some of her comments, it might be the prime variable she is using.
We are on different sides of the QE argument, as we both know
We are on different sides of the QE argument, as we both know