Excessive global pool of money - now what?

[WM]

In another thread, lazygood4nothinbum posted a really interesting link to an NPR segment talking about the origins of the mortgage meltdown:

NPR Media Player

Essentially, they're saying that the "global pool of money" suddenly exploded. The amount of investable money increased way beyond the capacity of the system to handle it.

My question is, if too much money was the root of the problem, where does that leave us? Will a lot of it "disappear" as a result of the meltdown, leaving us back to reasonable investing options? If not, then where are investors going to put it? It seems like we still have the problem, and it will just come out someplace else in the next go-around.

 

[MasterBlaster]

The classic symptom of too much money in the system is inflation.

That is the tradeoff that Paulsen and Bernanke are struggling with. They want to flood the market with liquidity yet they know that the result will be inflationary. It is kind of a balancing act.

So choose your poison... credit squeeze (recession) or inflation.

 

[Gone4Good]

My revelation today . . .

We are in the very, very early phase of blowing up the mother of all bubbles. With every government, everywhere in the world, throwing money at the current crisis, we can't help but overshoot. Sooner or later the market will stabilize but the world will seem too fragile to withdraw all this excess liquidity . . . and then it will be off to the races again.

I missed [-]investing[/-] speculating in the tech bubble and mostly missed the real estate bubble, too. But this time around, I'm keeping my eyes out for the next hot thing (flower power, yellow cake, soylent green, you name it). As soon as it starts taking off, I'm jumping in, riding the wave for maybe three years and then burying all my profits in the back yard and waiting for the end of days.

I'm only partly kidding.

 

[ladelfina]

WM.. I fear that is the exact opposite of what happened.

There was no excess money.. only excess credit (read: debt). Now that no one can pay, the real lack of money or productive (actual) wealth-building prospects has been revealed.

See my post on "the Lifting of the Veil".

Deflation is happening now and will continue.. the Fed can't bail out the whole world. The $700 billion will be absorbed overnight. They are already putting in liquidity but it is not working. You can't get more liquidity than the government actually paying banks interest to hold even their required capital. I correct myself: you can't get more liquidity than zero capital requirements.

Divide by zero: the liquidity is infinite. The solvency is quite finite.

 

[Hamlet]

Eventually, all that money they're pushing into the system will stabilize prices. Deflation is the easiest thing in the world to fight, and they're doing what is required to fight it (printing money).

It will take some time, but eventually dropping money from the sky will start pushing up the price of things, even housing and equities.

The real problem comes when people around the world start questioning the value of taking dollars that are being printed like mad. Since the rest of the world is starting to look worse off than the US, though, we may have a little time to get our ship back in order.

WM.. I fear that is the exact opposite of what happened.

There was no excess money.. only excess credit (read: debt). Now that no one can pay, the real lack of money or productive (actual) wealth-building prospects has been revealed.

See my post on "the Lifting of the Veil".

Deflation is happening now and will continue.. the Fed can't bail out the whole world. The $700 billion will be absorbed overnight. They are already putting in liquidity but it is not working. You can't get more liquidity than the government actually paying banks interest to hold even their required capital. I correct myself: you can't get more liquidity than zero capital requirements.

Divide by zero: the liquidity is infinite. The solvency is quite finite.

 

[ladelfina]

Deflation is the easiest thing in the world to fight, and they're doing what is required to fight it (printing money).

I don't see money being printed; I see credit being extended.

We don't need to artificially push up the prices of houses or equities; they need to fall. Allowing/encouraging prices to inflate artificially is what got us into this mess.


Deflation is not easy to fight. Bernanke (Mr. Big-Student-of-the-Depression) is scared. He's throwing everything at this but the kitchen sink: if it (unlikely) works.. good; if it (likely) fails, well you can't say he didn't try. This is a tsunami of debt the world is facing.. a force of nature. The US gov. does not have enough sandbags to deflect it.

 

[Notmuchlonger]

Well if things get bad enough maybe I can move to Iceland..

 

[lazygood4nothinbum]

isn't "lifting of the veil" where i learned that the $700billion is actually $7trillion because a bank can lend $100 for every $10 it has?

anyway, here's the full npr story. warning it is about an hour long

Chicago Public Radio

 

[ladelfina]

at least Iceland has that geothermal heating thing going for them.

 

[boont]

Too Much Savings

One of my early posts was titled "Too Much Savings".

This was the response...



"I love reading that people think the market is going to crash. That's a bullish indicator for me." (Azanon)


"Yawn!

2000 - 2003 was a pimple on an elephant's butt - the usual minor market fluctuation.

Now a 5000 point drop in the DOW would be interesting - in which case I would be tempted to up the stock portion of my balanced index.

Heh, heh, heh."

(Uncle Mick)



Then came the threats...

"boont, you sound like a guy who wants to argue/pick a fight/troll. Don't think unclemick, Azanon, SG or any other regular poster here is going to go for your bait."


Very hard to add anything to a discussion when people are so hostle.


My personal rule is that if you haven't been correct about at least one thing in the past two years I think you should listen more closely when people you don't agree with are talking.


b.

 

[lazygood4nothinbum]

as much fun as it might be to rub someone's nose in it, i'm not a big fan of the "i told you so". it's sort of like telling someone they need to lose weight; they already know. so instead of being a teacher, you just wind up being an exhibitionist of your own ego, which was likely just what the other person was doing to you when they were wrong in both substance and in execution. nobody learns anything from that.

 

[Hamlet]

Where do you think all that credit the Fed is extending is coming from?

For all practical purposes, Bernanke and Paulson are just firing up the printing press.

Wait until Pelosi gets "stimulus II" going after the election. We'll all probably get a $1200 check in the mail for Christmas, and another for Easter.

There is nothing backing the dollar. The government can print as many as they want. If prices keep going down, that is exactly what they will do.

Deflation solved!

I don't see money being printed; I see credit being extended.

We don't need to artificially push up the prices of houses or equities; they need to fall. Allowing/encouraging prices to inflate artificially is what got us into this mess.


Deflation is not easy to fight. Bernanke (Mr. Big-Student-of-the-Depression) is scared. He's throwing everything at this but the kitchen sink: if it (unlikely) works.. good; if it (likely) fails, well you can't say he didn't try. This is a tsunami of debt the world is facing.. a force of nature. The US gov. does not have enough sandbags to deflect it.

 

[ladelfina]

This new bailout credit expansion is not necessarily going to "trickle down", though, as they might hope. How much monetary inflation can one have without wage inflation? I don't think there is any more money supply, just credit supply.. from what I can understand sometimes they act the same and sometimes not.

If I have $100 outright to spend that buys me whatever.. that is still a little bit different in complexion from having $10 and being $90 in debt. Having $200 outright to spend is different from leaving me with $10 and $190 of debt instead, at least as I see it. For others it might be a distinction w/o a difference, but I see it as important. Feeding the money beast is not exactly the same to me as feeding the credit/debt beast.

 

[Hamlet]

Kudlow was showing a chart of the money supply, and it shows a sharp upturn in September.

Bernanke and Paulson are flooding the system with dollars. It may take some time, but eventually that is going to start having effects.

Not all of those effects will be good, but they should start counteracting deflation, at least.

This new bailout credit expansion is not necessarily going to "trickle down", though, as they might hope. How much monetary inflation can one have without wage inflation? I don't think there is any more money supply, just credit supply.. from what I can understand sometimes they act the same and sometimes not.

If I have $100 outright to spend that buys me whatever.. that is still a little bit different in complexion from having $10 and being $90 in debt. Having $200 outright to spend is different from leaving me with $10 and $190 of debt instead, at least as I see it. For others it might be a distinction w/o a difference, but I see it as important. Feeding the money beast is not exactly the same to me as feeding the credit/debt beast.