This is Part 3 of a four part article that deals with what I feel is the primary question investors must now answer: is our future to be inflation or deflation? The answer has vast implications to our investment planning and decisions for the near term, and possibly for our long term. It is a very complex question with a lot of moving parts involving economics and politics.
Like it or not, it is economic theory that is driving macroeconomic policies and political decisions that determine whether we will have inflation or deflation. Since not all of my readers are sophisticated traders I have tried to present the issues in a direct and hopefully understandable way. To those sophisticated readers, please bear with me.
Part 3
What Factors Will Drive the Economy?
This is the point where we need to look at some long-term trends in the economy to see how they will impact a recovery.
If our economy is based on consumer spending (70% of GDP) then GDP will see a decline in the second half of 2010.
In my article, Economic Megatrends That Will Drive Our Future, I point our seven megatrends that will impact our economy for the long term:
- The culture of consumption is broken and won’t return to former levels. This is the key to everything.
- Consumers will continue to increase savings to prepare for retirement.
- Declining U.S. consumer demand will continue to negatively impact the world economy.
- Deflation (deleveraging) will continue for some time.
- Home ownership rates will decline to more historical levels of, say, around 66%, down from the high of 69% during the boom, which will keep a lid on home prices.
- Government stimulus and recovery programs only delay recovery and deepen the pain for workers.
- Massive federal deficits will double the national debt, result in higher taxes, and will act as a permanent drag on the economy.
I wrote this article in September, 2009, and it still stands. The significant things to note are No. 1 and No.2. Consumers are over-indebted and are doing their best to pay down debt. This article from the Wall Street Journal defines the issue:
After years of bingeing on debt, U.S. households are paring back. Those not doing so by choice are often being forced, because lending standards remain tight.
[T]he household sector’s debt level, which includes both consumer credit and mortgage loans, remained at about 20% of total assets in the first quarter.
In the mid-1990s that ratio was around 15%, compared with a peak in the first quarter of 2009 of about 22.5%.
Just getting debt down to 18% would require households to shed an additional $1.4 trillion of debt.
The way to pay down debt is to decrease spending and increase savings, especially when unemployment is at 9.7% and when real wages (inflation adjusted) have been essentially flat:
J. M. Keynes referred to the phenomenon of increased savings and reduced spending as “hoarding” by consumers and believed it harmed the economy, which is why, he said, the government needs to spend in their stead. In fact, what consumers are doing is very rational economic behavior in light of uncertainty. Savings will actually lead the economy out of the recession by creating new capital to fund an economic expansion.
The main point here is that the consumption cycle for the majority of big spenders, the Baby Boomers, has changed, in my opinion, permanently. Boomers now realize that they need to save for retirement because Social Security won’t be enough, they don’t have enough financial assets, their home values will not regain their former highs, and they won’t inherit enough from their parents to help them in their old age.
This has significant impacts on the recovery and the inflation/deflation issue. That is because the politicians making policy decisions believe that Keynes is right. I’ll discuss this later.
Is Credit Unfreezing?
Recently lending has increased and excess reserves have decreased. Some have suggested that this is the beginning of the end of the credit freeze but I disagree.
This chart (TOTLL, YoY) reveals an increase in lending by commercial banks in Q1 2010:
This corresponds to a like decrease in excess reserves (EXCRESNS) during the same period:
This lending is evidenced by an increase in consumer loans in Q1 2010 (CONSUMER):
What happened was that consumers went on a mild spending spree. I believe that almost all of the increase in consumer spending had to do with government fiscal stimulus: Cash for Clunkers, Cash for Appliances, and the home buyer credit which has spurred sales in home improvement goods.
New car sales have been doing better as a result of dealer incentives. The data show that nonrevolving loans (NREVNCB), the measure for (mainly) auto loans (up 7.1% in April), went up dramatically in Q1 2010:
Retail sales increased during that period, but now it is declining, much to the concern of the Fed.
The latest Fed Flow of Funds report showed renewed declines in total credit as well as consumer credit. For Q1 overall household debt decreased for the seventh consecutive month (-2.4%). Consumer credit contracted 1.5%. Nonfinancial business debt was flat after four months of declines.
The Report said revolving credit, or credit-card use, fell a 19th straight time in April, down 12.0%. Further, personal savings are increasing again after the drawdown.
It appears that the temporary increase in consumer spending was not related entirely to money supply increases. Nonrevolving loans for autos increased, but a significant portion of general spending was fueled by personal savings of consumers. The following chart reveals that the rate of consumer savings (PSAVERT) declined in response to government incentives which favored certain industries (mid-2009 to Q1 2010). It appears that personal savings is starting to rise again, but we will need to watch the data to confirm such a trend.
The Fed’s Problem
The Fed has a dilemma.
On the one hand, if they believe we are in a strong recovery, then they are worried about inflation.
There was a lot of talk about recovery and the problem of what will happen when banks start lending again: banks will use their huge excess reserves which would cause money supply to explode, thus fueling “inflation” which they define as rising prices. This is what has been popularly referred to as the “draining the pond” or the “exit strategy” problem: how can the Fed sop up excess reserves before they hit the economy and cause rising prices? It is a very serious issue.
The Fed closely monitors CPI and, as shown before, prices are growing at the rate of 2% YoY. (I’ll discuss signs of a decreasing CPI rate below.) If they decide to decrease the money supply by raising the Fed Funds rate from nearly zero percent, they believe they run the risk of jeopardizing the nascent recovery.
For many months now most of the discussion by the Fed and most economists concerned exit strategy. Now the discussion has changed almost 180°: the buzz is now all about the possibility of deflation and economic decline. (See discussion below.)
For these reasons, I don’t think they are that concerned with inflation for the near term.
The Implications of a Double-Dip Decline
Temporary Effects of Stimulus
I think the economy is headed for a decline commencing at some point in the second half of 2010. I believe the Fed is concerned about this as well. Evidence of this is starting to show up in the numbers. The reasons for this are complex, but:
- Most of the economic gains have been the result of fiscal stimulus which is running out of steam.
- There has not been sufficient deleveraging in the economy by which banks have repaired their balance sheets.
- The remaining huge real estate debt hanging over banks, especially commercial real estate, has not been dealt with because of various government policies that postpone the inevitable write-downs (mark-to-make believe, extend and pretend, housing credits, and delay and pray) and will restrict lending.
- Monetary stimulus has failed to create viable economic growth.
- These facts inhibit the creation of credit and will act like an anchor on the economy.
- The long-term megatrends mentioned before will reduce economic activity and cause major shifts in the economy.
There is no question that consumer spending has been stimulated by government programs. Those programs are now coming to an end. Recent data showing a decline in retail sales surprised most economists.
The Wealth Effect
Another factor is that the stock markets have had a positive impact on families’ perceived wealth which has helped consumer spending. But, it appears that most of such spending has been from the wealthier segment of the economy. A recent Gallup poll showed that consumers earning more than $90,000 accounted for the bulk of that spending increase. A market stock decline will reduce this wealth effect.
Manufacturing Recovery
I believe our manufacturing recovery has been a result of cyclical factors unrelated to stimulus programs. As nervous retailers and wholesalers cleared out inventories in the early stages of the recession, at some point they had to restock. While unemployment is high, the fact is that at least 80% of the work force have jobs and, even though they may feel insecure, they still spend on what is necessary. That boosted manufacturing. But manufacturing without renewed consumer demand and a revival of credit will not lead us out of the recession.
Also, manufacturing has been benefited by the cheap dollar which has boosted exports. Other countries, especially developing countries, have been buyers of US products. But I think this is changing because of:
- The dollar’s rise caused by Europe’s deep economic problems will reduce our cheap dollar advantage; and
- China’s economy is based on exports and declining US and EU economies will impact its growth. Further they are facing a serious housing bubble that will burst the hard way. China needs an American economic recovery to save them, not vice versa.
It is clear that the American economy headed for a double dip decline, which I believe will occur in the second half of 2010.
Deflation Fears
I have noticed in the mainstream media that with increasingly weak numbers coming out recently there is a lot of talk about deflation. This is important because it is a reflection of mainstream economic thinking, which includes the Fed. Ben Bernanke reads the same headlines as you and I do.
Here are some recent headlines and the issues they raise:
The consumer price index dropped 0.2% last month, the Labor Department said. The “core” rate of inflation–underlying consumer prices, which strip out volatile energy and food items and are closely watched by the Fed–rose 0.1% in May. …
This concerns shows up in Core CPI YoY (CPI less energy and food):
Deflation Fears Stir in Developed Economies
Deflation makes it harder for consumers, businesses and governments to pay off debts. Principal repayments on debt are fixed but deflation is marked by falling incomes, so as deflation sets in the burden of paying off old debts gets greater. …
That’s an acute worry today. In addition to government debt, U.S. households are still trying to work off large debt burdens built up in the last two decades. A Federal Reserve report Thursday [Flow of Funds report] showed households cut their borrowings in the first quarter to $13.5 trillion, down from a peak of $13.9 trillion in 2008.
Deflation isn’t a concern at moment
Bernanke Calls for Deficit Plan
Advancing a theme he has emphasized in the last few months, Mr. Bernanke said that if Congress pursued more fiscal stimulus to sustain the recovery, it should be accompanied by a concrete plan to bring the deficit back into line in the long run. Without a fiscal “exit strategy,” he said, the U.S. could, “in the worst case,” see financial instability like in Greece.
The Congressional Budget Office projects the U.S. deficit will hit $1.4 trillion this year, or 9.4% of gross domestic product. Even as the economy recovers, it projects deficits in excess of $400 billion a year later this decade.
At a moment when many economists warn that the American economic recovery is likely to be imperiled by prolonged high unemployment and slow growth, President Obama is discovering that the tools available to him last year — a big economic stimulus and action by the Federal Reserve — are both now politically untenable.
But fiscal woes in Europe, stock-market declines at home and stubbornly high U.S. unemployment have alerted some officials to risks that the economy could lose momentum and that inflation, already running below the Fed’s informal target of 1.5% to 2%, could fall further, raising a risk of price deflation.
Martin Wolf on the Danger of Deflation
There is no world economy big enough to offset renewed contraction in Europe and the US. Concerted fiscal tightening could, in current circumstances, fail: larger cyclical deficits, as economies weaken, could offset attempts at structural fiscal tightening. …
Policymakers must recognise that deflation is a risk, too, and that tighter fiscal policy requires effective monetary policy offsets, which may be hard to deliver today, above all in the eurozone.
Premature fiscal tightening is, warns experience, as big a danger as delayed tightening would be. There are no certainties here.
S&P Warns of Rising Corporate Defaults
Small banks are big problem in government bailout program
Business Hold Record Amounts of Cash
The Federal Reserve reported Thursday that non-financial companies had socked away $1.84 trillion in cash and other liquid assets as of the end of March, up 26% from a year earlier and the largest increase on records going back to 1952. Cash made up about 7% of all company assets including factories and financial investments, the highest level since 1963.
You get the drift: the economy is not going as the Fed and most economists have predicted so naturally they talk about deflation. They are worried about the possibility of experiencing deflation similar to what occurred in the Great Depression.
Why Most Economists Have it Wrong
Most economists believe that more fiscal stimulus is needed now and that Bernanke’s cries for fiscal sanity must not be heeded or we will sink into a depression. This is a normal Keynesian reaction to the world. In fact the arch knee-jerk Keynesian of our time, Paul Krugman’s last three editorials have spoken to this issue. Across the pond Martin Wolf of the Financial Times has been beating the same drum.
I wish they would explain why all the fiscal and monetary stimulus the government has done since October, 2008 hasn’t worked yet. Krugman would just say government hasn’t spent enough. But then he always says that. Perhaps he should read some of Rogoff and Reinhart’s research on what government debt does to a country’s ability to recover. The fact is fiscal stimulus never works and never has. But it will leave us saddled with huge debt.
It would be a mistake to credit government spending on fiscal stimulus projects for any lasting economic gains. Since the government can ultimately only obtain money from taxpayers, it is only a shift of capital from individuals (i.e., the folks that make the economy function) to the government to fund projects it deems politically beneficial.
Government fiscal stimulus projects do not create any lasting economic benefit. While it is true that new roads and safe bridges benefit the economy, that is not the purpose of fiscal stimulus. The purpose of fiscal stimulus is to create “jobs” and stimulate consumer spending. Such stimulus is wasteful and never creates a viable economic enterprise which would continue after the money dries up.
One must ask what the private economy would do with the $62 billion already spent through the American Recovery and Reinvestment Act ($202 billion contracts, grants and loans awarded to date). I urge anyone who believes the spending through ARRA would stimulate the economy to check out the various contracts and grants that are being awarded. The main web site is Recovery.gov. You will see that most are repairs to federal facilities or grants for federal programs. I recommend you hold your nose while doing this. They are outrageous wastes of your tax money and they will damage the ability of the economy to recover and will place a great burden on future generations to pay them.
If government spending were the key to economic wealth then we should all be rich.
Tomorrow, Part 4. The Fed’s response to a decline, money supply, and the likely outcome.
After Part 4, I will publish the entire article as one downloadable PDF.
excellent so far…
Still enjoying this article. Not to nitpick, but twice on this blog you’ve referred to “Romer and Reinhart”. Carmen Reinhart’s co-author on her highly influential book “This Time is Different” is Kenneth ROGOFF. Let’s give credit where credit is due (pardon the pun).
Whoops. Thanks Louis for spotting that. I haven’t read the book but I did read their original paper upon which the book is based.
I’ve enjoyed the article so far; I lean toward Austrian economics myself, which I am learning more about every day, but I also like to play devil’s advocate and research opposing viewpoints. What is your take on MMT’s (modern monetary theory) stance regarding the economic crisis and debts? You can read more about it by searching “billy blog”, but I can extract a few points right here:
1) Government deficits, via the injection of money into the economy, which finds its way into private hands, funds private savings. In fact, if the government sector is in surplus, then it holds that the private sector must be in deficit.
2) The government, with a sovereign fiat currency, does not need to borrow to spend. This is simply a self-imposed constraint.
3) Inflationary policies increase real wealth by reducing unemployment and increasing the production of real resources.
I personally feel that MMT is too utopian and that Austrian economics better reflects reality, but it is interesting nonetheless, especially regarding the first point, which they derive from an accounting tautology.
MMT is junk economics so far from reality it’s not worth considering. As you learn more about Austrian theory the answers will be obvious to you. Deficits don’t do anything from the economy. Since the government can only get money from the taxpayers, why is their spending a better solution than market transactions? Printing money isn’t wealth; just more pieces of paper. It makes people poorer by destroying real capital.
Great series so far, though I must admit I am waiting for the inflation part (unless it’s simply that the Fed’s keynesians will do another round of QE–which I think they will do, eventually, but not yet).
Hi Jeff,
I think MMT’s take on it is that taxation actually serves to drive demand for the money and reduces inflation, and that deficits are how the private sector gets money to spend. Therefore, deficits are actually simply an accounting of private sector savings. If the government was in surplus, then that means that the private sector would have to be in deficit (in nominal terms).
Again, these are simple explanations but whenever something sounds too easy and utopian, my feeling is that there has to be a catch somewhere. I believe that the proponents also want more prosperity for all, but may be confused by the simplicity of their mathematical models. Austrian economics, on the other hand, derives from the study of human action, rather than reducing all of society into a few base mathematical terms. By dealing with the reality that humans act and that the structure of capital and production is complex, it already feels more authentic to me.
Jeff, would you ever consider posting a devastating refutation of the main points of MMT? I would do it myself, but I am not yet well-versed enough in Austrian economics to really deliver a well-thought out critique, but after reading some of your posts, I think that you would be.
Kevin:
I wish I had the time to take this on. I think your first paragraph is self-explanatory in that it is absurd on its face. Again, it confuses pieces of green paper with wealth. Wealth can only stem from the production of private enterprise; the government creates nothing. The government gets money two ways: it taxes it from us (or it borrows it and we eventually have to pay the tab) or it prints it. Neither creates wealth. If the government is in surplus it means that it has spent less than it has taken from us and has nothing to do with money. If the government is in deficit, then it means they are borrowing money to spend (i.e., taking out of the private economy to fund government projects) and have deferred repayment to the future through future taxes.
I suggest two thing. Go to Reading List and start reading some of the books, starting with Henry Hazlitt’s Economics in One Lesson. It is the best little book ever written on economics. In fact, I recently re-read it and enjoyed new insights that abound in it. In the meanwhile, please read my article on money if you haven’t already done so: Money: A Semi Fictional Fable which explores what is money and what is wealth (capital).
Then after a bit of reading you can write the article.
Thanks for reading!
Jeff:
It’s disheartening to hear your casual dismissal of MMT, in total, as “so far from reality it’s not worth considering.” It is suggested that familiarization with your selected books/articles will make the reasons self-explanatory to anyone. Perhaps; perhaps not.
With all due respect, the manner by which you have chosen to refuse addressment, to me reeks of the same smugness you so recently and eloquently criticized. As irony would have it, it was your response to Athreya that brought me to your site in the first place (via ZH).
In the spirit of full disclosure, I am not an academically trained PhD economist. I am not a financial blogger. I am a voracious and thoughtful reader, and so I have read Hazlitt’s classic (agreed, it’s great) and a good deal of the others on your list. If pressed, I would likely describe myself as ‘staunchly Austrian’. If someone called me a ‘goldbug’, I’d thank them for the compliment. I’ve been following the inflation/deflation debate and for whatever its worth, I find Keene’s work very compelling.
Considering my ‘background’ as a relatively like-minded individual, I find it curious that ideas I would at least warrant tentative ‘consideration’, you lambast as “absurd on its face”. Considering MMT’s focus on the ‘operational realities’ as its foundation, it cannot, in my mind, be so easily jettisoned without a reasoned review. Maybe we interpret differently what exactly it is that MMT even says.
I wish you had the time to take this on, too.
Sincerely,
Buck
Buck:
If you do understand what money is (wealth), how can the government just create it? Or am I missing something.
Jeff
Jeff:
My understanding is that money is a medium of exchange, a store of value, and a unit of account. Money is but one of many varieties of wealth. Therefore I can have vast wealth absent ‘money’.
If you are suggesting that fiat does not function as ‘money’, as per the definition commonly accepted, then I suppose we are at an impasse. “Gold is money because people value it as a medium of exchange.” Exactly, therefore US Dollars are certainly also money. What am I missing? That fiat currencies can (or not) ‘necessarily’ become debased? This is understood.
I have a hard time understanding your question as phrased, or what you’re driving at (exactly), but I guess what we should be examining is the political aspect of money, since money cannot ever exist in a political vacuum. How can government just create “it”? By way of what boils down to a monopoly on violence, government can create a very real demand for a currency that it alone issues, which translates into a call on labor. This monopoly ‘power’ is a government’s intrinsic, usually unique (within its sphere of influence), form of ‘wealth’. If you accept that government can literally ‘command’ labor by way of ‘investing’ its unique form of ‘wealth-capital’, then it takes little imagination to answer your question (as posed) re: creation. My guess is that you are begging the question of inflation/debasement of currency. Again, I understand.
Maybe our disconnect is that my thoughts on ‘wealth’ still remain always grounded in the underlying dynamics of power/ownership/land as the bedrock base of real wealth which, by many orders, predate ‘money’. I’ll go so far as to say that you could call economics the evolved study of modern feudalistic operations, if it helps you understand how I think about things. Insofar as ‘Austrians’ might decry the departure of a sound, commodity based money or gold-standard (but note central banks still hold gold reserves), I could bemoan the fact that we left the war-standard (but note, armies are still standing) or the feudal system, etc. The fact is, we never left the lower-order systems entirely. Each system is higher orders of sophistication and/or abstraction along a continuum. MMT, in my limited understanding, appears to be taking the next logical step.
Again, maybe we interpret differently what exactly it is that MMT even says, because as it stands we are still avoiding proper addressment of it altogether.
Buck
Buck, please read: Money: A Semi Fictional Fable. Paper money can money. Fiat money can and is accepted as money, but it is not truely “money” in the economic sense of what real money represents. If money is a store of value, then what is the value it is storing? I hope my article helps clear up what I mean by this. As I understand MMT, the government can just create “money” at will, but that is fiat money and it loses its economic meaning that way. That is, it isn’t wealth or capital in the economic sense. Let me know what you think.
Jeff:
I’ve read your fable (I quoted it!) and many others similar. My personal favorite is “Earth Plus 5%” which does a thorough indictment of a fractional reserve, debt-based money system and the full gamut of its political/societal implications. Definitely a must-read if you haven’t come across it already.
How can fiat fit the definition of money, be accepted as money, (in the case of USD’s almost universally), but not be ‘real’ money? What does ‘real’ even mean in this context?
Fiat enables its owner to literally ‘command’ the labor of others, at a price. You need to meditate on what allows ‘worthless paper’ to ‘move’ all host of economic actors to action. What gives it that power? Even better, what gives gold a better claim on that power? If as an Austrian, you view the nature of fractional reserve debt based fiat as a con, then examine deeply how the con operates, instead of claiming it’s not ‘real’. At least, that is my feeling. Keep asking ‘how’ this rubbish paper can have ‘value’, because by its ability to turn people into my working slaves (if I had enough), it clearly has much value! As “absurd on is face” as it is (and believe me I understand where you are coming from, as I tried to point out in my first post), it is the reality that we live in; a reality that has been evolving for some time.
I understand that reduced consumption equals real savings, and this is the ‘value’ that money stores. The question is why can gold store it and not ‘scarce notes’? (Note: a fiat currency does not necessarily have to be a leveraged reserve currency) I think you may be making assumptions in your fable and/or philosophy a gold supply somehow enjoying a 1:1 (or close to?) relationship with increased wealth. How will you determine how much gold to produce? What if you cannot keep up with your bustling economy, thus causing deflation? Further, who is controlling the production of gold, and why are they allowed production of a public good?
MMT does not purport to be able to create infinite money, at will, as a means to purchase prosperity. It starts with an examination of how government finance ‘actually’ operates, and flows from there. That’s why, on initial examination, its ‘interesting’ to me. Its ideas were formulated by people actually working in the operations trade, not ivory tower quacks. They are simply reporting how things really operate, and developing the theory from there. So for example, government always spends first (often with impunity, as we see), and imposes tax and/or borrowing only ever after the fact. In this manner it is not revenue constrained, as are households or state governments, who must budget diligently, and painfully. Does this not accord the reality you witness? Government does not “get its money from taxpayers” to operate, it issues dollars to the private sector first by spending, then regulates demand for those notes by levying tax and or selling interest bearing bonds. One interesting question it does raise, is if the government is not revenue constrained, why not employ spending to utilize all the idle capacity (i.e. record unemployed) that we see today? Given the complete lack of aggregate demand and deflationary winds already blowing, how could it be inflationary?
Look, I don’t want to do their ideas a disservice, as I don’t claim to have a deep grasp of its nuances. I am merely saying that rejecting it out of hand is costing you…. some decent blogging material, at the very least.
Sincerely,
Buck
Buck, with all due respect, and I am sincere about this, you do not grasp the essential elements of money. I’m not saying that money can’t be pieces of green paper since people accept it as currency. But by printing money you cannot just create wealth, which as you have read is real savings. You also need to understand that gold is a better “store of value” of wealth because you can’t go out and print it and debase this kind of money. That is the problem with fiat money: it isn’t really a store of value because it loses its value constantly because of the printing press. Money is a commodity in one sense because it relies on supply and demand to fix its “price” relative to goods. Gold supply is never fixed, and the market determines prices of gold vs. goods. Market forces tells us how much to produce. And it isn’t easy or cheap to do. Gold can also be infinitely (almost) divisible and prices will adjust to it. Yes, it can have more purchasing power if supply doesn’t increase, but then you can buy more. I am quite aware of how the government finances its operations: taxation is its only means other than printing money. Money just doesn’t reach the economy through government spending. This would be equivalent to monetizing government debt which even the Fed is loathe to do (but does it somewhat). The FF rates, discount windows, and bank capital/leverage rates are the main tools. That doesn’t pass through the hands of government. And the government is restrained from spending by the market. If the bond market thinks the dollar is going to crater because the government prints too many, the bond interest rate goes up and thus the burden on taxpayers who complain. The economy declines because taxes are too high, etc., etc. Government spending doesn’t help aggregate demand: it suppresses it. This is pure Keynesian nonsense. It doesn’t work now, and it has never worked anywhere.
Theory isn’t just a musing of ivory tower quacks. Ideas have meaning and just looking at the “real world” as you put it doesn’t necessarily yield truth. Read Rothbard “What Has the Government Done to Our Money” and more Austrian texts and you will see the error of your ways.
Buck, I don’t have time to continue this conversation, but I appreciate your interest.
Jeff:
For the record, I think I understand the essentials of money just fine, thank you. Before parting however, I am compelled to clear up some (obvious) mischaracterizations:
I never said anywhere that by the simple act of creating more fiat, governments can “just create wealth”, especially as per your definiton. This a straw argument you keep repeating.
I never imply fiat moeny was a superior store of value to gold. In case you missed it, I told you I was a ‘goldbug’. I acknowledge a fiat currency’s ‘potential’ to be debased over, and over, and over, but you insist on reminding me. Fiat and gold are both ‘stores’. They both fluctuate.
I never said that money “just”, i.e. only, reaches the economy via government spending.
Also:
I’m quite aware that gold is ‘divisible’ and prices can ‘adjust’; right along with profits, employment, wages, and real debt-loads.
Buck
I like you thought that banks were once again lending, of course this would not be something I would expect to see. After some research I notice a small accounting change released from the Fed as follows:
As of the week ending March 31, 2010, domestically chartered banks and foreign-related institutions had consolidated onto their balance sheets the following assets and liabilities of off-balance-sheet vehicles owing to the adoption of FASB’s Financial Accounting Statements No. 166 (FAS 166), Accounting for Transfers of Financial Assets, and No. 167 (FAS 167), Amendments to FASB Interpretation No. 46(R). Domestically chartered commercial banks consolidated $377.8 billion in assets and liabilities.[...]
I would argue that the increases in lending you refer to has been inflated by 377 billion due to off balance sheet loans being but back on the banks balance sheet.
I do not think it changes your arguement, however this would be a more accurate explanition of why you saw a sudden increase in bank lending.
Someone else pointed this out to me at Zero Hedge. You may be correct, but …
My understanding of these was that they applied mainly to securitized off-book assets and had the most impact on GSEs. It is also my understanding that most of the banks which do consumer lending, mostly regional and local banks, were not holders of these assets on-book or off-book, so I thought there would be little impact.
Regardless, I still think there was a blip in consumer lending during this period but that it was due to fiscal stimulus and is now continuing to decline. I think the data bears me out.
Thanks for this very astute observation.
[...] From: Will We Have Inflation, Deflation, or Hyperinflation? Part 3 [...]