61–70 of 247 posts
To me the biggest mystery about the 2008 crisis is why so much QE has resulted in so little inflation. The only convincing arguments I have heard so far is that: 1. at the same time banks were forced to significantly deleverage, so while the fed was pouring money into the systems, banks were effectively pouring money out of the system. 2. inflation happened but it was all concentrated into financial assets, real esta…
To me the biggest mystery about the 2008 crisis is why so much QE has resulted in so little inflation. The only convincing arguments I have heard so far is that: 1. at the same time banks were forced to significantly deleverage, so while the fed was pouring money into the systems, banks were effectively pouring money out of the system. 2. inflation happened but it was all concentrated into financial assets, real esta…
1) High powered money supply produced by the central bank 2) Money held in deposits, available to be increased via the fractional reserve multiplier effect 3) The deposit:reserve ratio, which shows the strength of the fractional reserve multiplier effect
The financial crisis seems to have tanked 2 & 3, such that the Federal Reserve would have needed to do much more QE than it did to keep up with demand for money.
They also found that price growth and wage growth are affected by history: a history of slow money growth predicts an increase in money supply will be absorbed by more output. A history of high money growth suggests that more money growth will lead to modest output changes and an increase in inflation.
Scott Sumner echoes your fear about a coming recession, but thinks that appropriate NGDP growth via the right amount of money printing can lead to a soft landing without inflation. Given that this has been his entire career, I think it is very possible that we won't necessarily see renewed high inflation.
Scott Sumner post here: http://www.themoneyillusion.com/the-next-five-years/
To me the biggest mystery about the 2008 crisis is why so much QE has resulted in so little inflation. The only convincing arguments I have heard so far is that: 1. at the same time banks were forced to significantly deleverage, so while the fed was pouring money into the systems, banks were effectively pouring money out of the system. 2. inflation happened but it was all concentrated into financial assets, real esta…
That's not an "argument", it's an observation. Almost all of the QE "new money" was never used by the banks to make loans; it just sat in their accounts at the Fed. Why? Because the banks weren't fools: they knew they had way too little reserves for the loans they already had outstanding, so they just used the QE funds to increase their reserves. That equates to "significantly deleverage".
> I guess it may also have to do with how the QE was introduced. If it was money printed to pay civil servants it might have had a different effect than introduced in the bond market.
Or money printed to pay ordinary people whose retirement savings had collapsed through no fault of their own. And yes, that would have caused inflation, because you would have had a greatly increased quantity of money chasing the same quantity of goods and services. It might also have stimulated some economic growth which could have offset that effect, but that's a chancy thing to rely on.
Earlier quoted context omitted.
Active traders tend to lose money relative to the “rest of us” passive index investors.
Unless they are a market making financial institution, yeah.
1. Market makers don't make investment decisions or hold positions. They facilitate trading as counterparties to investing parties, but do not drive prices themselves.
2. Market makers would make a terribly poor shadowy cabal, because the amount of capital they collectively manage is in the high single to low double digit billions. Mutual funds, hedge funds and private equity account for trillions.
Earlier quoted context omitted.
" If something goes wrong, we can juice the economy by engaging in extaordinary activities which generate the illusion of wealth resulting in increased spending." This is not what Keynesian economics is. It's perfectly rational for the government to step up their investment in things like bridges and roads as the private sector weakens for a bit. This restores confidence in markets, and keeps money flowing through th…
>in some extraordinary cases it would actually make sense to dig holes and fill them How is paying people to dig and fill holes better than just giving them money without requiring the useless activity? Even if "dignity of work" is a real thing, there's no way doing useless work could provide it.
To me the biggest mystery about the 2008 crisis is why so much QE has resulted in so little inflation. The only convincing arguments I have heard so far is that: 1. at the same time banks were forced to significantly deleverage, so while the fed was pouring money into the systems, banks were effectively pouring money out of the system. 2. inflation happened but it was all concentrated into financial assets, real esta…
Keynesian Economics are the economics of political convenience. If something goes wrong, we can juice the economy by engaging in extaordinary activities which generate the illusion of wealth resulting in increased spending. These ideas were very popular until Great Britain encountered stagflation - conditions under which both economic recession and inflation coincided and traditional Keynesian levers and predictions…
Suddenly the problem is Keynesian economics and not the proliferation of greed, liberalization of finance, deregulation, lack of accountability of credit agencie, etc.? A nice article on today’s business schools philosophy: https://www.theguardian.com/news/2018/apr/27/bulldoze-the-bu...
Keynesian economics doesn't cause those things, true. But Keynesian economics does make it much easier to hide their consequences until they are bad enough to cause a meltdown.
One of the fundamental weaknesses of modern economics is its reliance on un-knowable, extraordinary, incomprehensible "shocks" when faced with evidence that their theories have flaws. One thing it does is to prevent their theories from making progress in understanding...economics.
One might even call such behavior irrational.
So I'll throw in the Austrian Theory of the Business Cycle to the mix: https://en.wikipedia.org/wiki/Austrian_business_cycle_theory
Basically, the artificial expansion of bank credit kicks off the boom. The bust must inevitably follow. And the credit expansion is enabled by an unsound fiat money and banking cartel protection, such as the US Federal Reserve system.
Earlier quoted context omitted.
" If something goes wrong, we can juice the economy by engaging in extaordinary activities which generate the illusion of wealth resulting in increased spending." This is not what Keynesian economics is. It's perfectly rational for the government to step up their investment in things like bridges and roads as the private sector weakens for a bit. This restores confidence in markets, and keeps money flowing through th…
>in some extraordinary cases it would actually make sense to dig holes and fill them How is paying people to dig and fill holes better than just giving them money without requiring the useless activity? Even if "dignity of work" is a real thing, there's no way doing useless work could provide it.
The real irony is that he was actually decrying digging gold out of the ground and burying it in vaults as he wrote that and among his critics, that kind of "digging a hole in a ground and filling it up" is typically considered above reproach.