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**MichaelB** · 10-26-2010, 02:12 PM

Quote:

Originally Posted by Gone4Good

Because instead of losing real purchasing power holding cash in an inflationary environment, I'm going to invest or spend that money. Or now that I expect my business will have pricing power, I can hire that worker without fear that my unit revenues (prices) will continue to decline even as my unit costs (wages) remain stable.

A new bubble isn't a prerequisite for any of this to happen.

Yes, but you hire that worker because you are going to produce more, not just sell at a higher price. You produce more because you can sell it - which means demand is growing. Could be external demand from a falling US$, could be increased demand from currently employed people that have saved enough and feel more confident about the future. But it's not demand from currently unemployed folks. Possible, I guess.

One of the reasons economists are always so gloomy is they are data driven, and a change in economic trend is partly behavioral, which they only see in the data after the fact. With uncertainty so high, I don't think people are going to loosen up the purse strings. Just the opposite.

Gone4Good · 10-26-2010, 02:21 PM

Quote:

Originally Posted by MichaelB

Yes, but you hire that worker because you are going to produce more, not just sell at a higher price. You produce more because you can sell it - which means demand is growing.

Agreed. But, in an extreme example, if inflation were 50%, and you had a dollar, would you hold on to that dollar for the next year and lose 50% of your purchasing power, or would you spend it immediately when it buys twice as much?

Inflation encourages people to spend cash and deflation encourages them to hold on to it.

haha · 10-26-2010, 02:35 PM

Quote:

Originally Posted by Gone4Good

Agreed. But, in an extreme example, if inflation were 50%, and you had a dollar, would you hold on to that dollar for the next year and lose 50% of your purchasing power, or would you spend it immediately when it buys twice as much?

Inflation encourages people to spend cash and deflation encourages them to hold on to it.

This has been Bernanke's stated rationale all along. It makes theoretical sense, but it seems that under very high debt and poor employment conditions, it is hard to get that inflaion started, except in commodities and other assets. And commodity hoarding does very little for unemployment, or US GDP. In fact, these bubbles that get blown tend to depress demand by increasing risk and uncertainty. In particular, look out below for GDP and employment if crude and gasoline prices start climbing due to Li'l B's machinations.

Milton Friedman was correct- we would be better off to disband the FRB and replace both its liquidity function and its credit/monetary growth function by a set of algorithms giving a highly damped output.

Ha

ziggy29 · 10-26-2010, 02:40 PM

Quote:

Originally Posted by Gone4Good

Agreed. But, in an extreme example, if inflation were 50%, and you had a dollar, would you hold on to that dollar for the next year and lose 50% of your purchasing power, or would you spend it immediately when it buys twice as much?

Even stoking inflation may not kick-start spending, though. Cash hoarding isn't only happening because of deflation; in fact, I'd say that's at best the *secondary* driver for hoarding cash.

The main driver? People feeling like they are going to need a practically Armageddon-proof pile of cash to survive a terrible employment market which could last for who knows how many years. Even many who have kept their employment through the whole mess feel like they could be next. So they hoard cash to help them survive it.

Easier said than done, I understand, but get people back to work -- steady work they don't feel they could lose next week or next month or next year -- and deflation is more likely to go away than by waging a War on Savers with monetary policy.

Gone4Good · 10-26-2010, 03:04 PM

Quote:

Originally Posted by ziggy29

Even stoking inflation may not kick-start spending, though.

Which is why even proponents of QE2 aren't terribly optimistic about it and why many view it as a second best alternative to . . . fiscal stimulus (queue shrieks of horror).

harley · 10-26-2010, 03:12 PM

Quote:

Originally Posted by Gone4Good

Which is why even proponents of QE2 aren't terribly optimistic about it and why many view it as a second best alternative to . . . fiscal stimulus (queue shrieks of horror).

That's a great idea! A little meth in the water supply will get this nation right back on track!

Gone4Good · 10-26-2010, 03:12 PM

Quote:

Originally Posted by haha

And commodity hoarding does very little for unemployment, or US GDP. In fact, these bubbles that get blown tend to depress demand by increasing risk and uncertainty. In particular, look out below for GDP and employment if crude and gasoline prices start climbing due to Li'l B's machinations.

That's Hussman's view, but I find it hard to take him seriously when in the same article he reiterates his belief that fiscal deficits cause inflation (has he seen deficit and inflation statistics lately, or for the 1930's for that matter?). And on the merits, I'm not convinced that rising oil prices driven by dollar weakness is a net negative for economic growth. Most economists model a weaker dollar as positive for growth.

haha · 10-26-2010, 04:26 PM

Quote:

Originally Posted by Gone4Good

That's Hussman's view, but I find it hard to take him seriously when in the same article he reiterates his belief that fiscal deficits cause inflation (has he seen deficit and inflation statistics lately, or for the 1930's for that matter?). And on the merits, I'm not convinced that rising oil prices driven by dollar weakness is a net negative for economic growth. Most economists model a weaker dollar as positive for growth.

Well, it is also my POV, and I really care not a whit whether or not you take it seriously.

I act on my views, and overall it works out fine.

Likely the best act one could make now is to get the hell out of dodge and move to Singapore.

Ha

HFWR · 10-26-2010, 05:11 PM

RE: uncertainty, if I hear one more CEO/banker/trader/hedgefund manager on CNBC say they're uncertain, I'm gonna puke...

Betcha that uncertainty will miraculously evaporate after the election...

Funny how the same whiny-assed CEOs/bankers/etc, and ~~Santelli, Kernan et al~~ their puppets on CNBC about have a cow over QE2, but the market seems to go up when the possibility is mentioned. Crocodile tears?

Gone4Good · 10-26-2010, 06:04 PM

Quote:

Originally Posted by HFWR

RE: uncertainty, if I hear one more CEO/banker/trader/hedgefund manager on CNBC say they're uncertain, I'm gonna puke...

It's a plausible theory that government induced uncertainty is retarding economic growth, so one should ask "what's the evidence?" As luck would have it, the National Federation of Independent Businesses has been asking small business owners the question "What is your single biggest problem?" for nearly 30 years. The results show that while concerns about taxation and regulation have ticked up a bit in the last couple of years, concern over "Sales" is off the charts. So looking at some objective evidence, one might conclude that the "uncertainty" actually being felt by business owners isn't so much about the government, but more generally about an economy that fell of a cliff and more specifically about final demand for their products.

samclem · 10-26-2010, 07:28 PM

From an article in tomorrow's WSJ: Fed Gears up for Stimulus

Quote:

The Federal Reserve is close to embarking on another round of monetary stimulus next week, against the backdrop of a weak economy and low inflation—and despite doubts about the wisdom and efficacy of the policy among economists and some of the Fed's own decision makers.
The central bank is likely to unveil a program of U.S. Treasury bond purchases worth a few hundred billion dollars over several months, a measured approach in contrast to purchases of nearly $2 trillion it unveiled during the financial crisis. The announcement is expected to be made at the conclusion of a two-day meeting of its policy-making committee next Wednesday. The Fed's aim is to drive up the prices of long-term bonds, which in turn would push down long-term interest rates. It hopes that would spur more investment and spending and liven up the recovery. But officials want to avoid the "shock and awe" style used during the crisis in favor of an approach that allows them to adjust their policy . . .

Fed Chairman Ben Bernanke's push to restart the bond-buying program—a form of monetary stimulus known as quantitative easing—has been greeted with deep skepticism among some of his colleagues.
In some of his strongest words yet, Thomas Hoenig, president of the Federal Reserve Bank of Kansas City, said Monday that more expansive monetary policy was a "bargain with the devil."

. . .

Investors already expect Fed action. Stock prices have rallied since Mr. Bernanke broached the idea of bond buying in late August. But investors and analysts are divided on whether the gambit will work.

. . .
Investors are on edge about how the Fed will proceed. On the one hand, the Dow Jones Industrial Average has risen 12% since Mr. Bernanke began hinting about buying more bonds two months ago, a welcome rise inside the Fed.
But commodities prices are also soaring, with copper, gold and oil prices rising 16%, 8.1% and 13% respectively. That could portend more inflation than the Fed wants. At the same time, the dollar has slid nearly 10% against the euro; that could help U.S. exports, but it creates tensions with trading partners.

So, if the folks on this board can't decide if QE2 will work, it sounds like we're in good company. The timing of the upcoming Fed announcement is interesting--if it is made "next Wednesday", that would be 3 Nov, the same market day that the election results are known in the US. It'll make it difficult to know if any market surges or drops are due to the election or the Fed announcement. A lot of folks will doubtless find that convenient.

Gone4Good · 10-26-2010, 07:46 PM

Quote:

Originally Posted by samclem

A lot of folks will doubtless find that convenient.

A 12% increase in equities, 10% drop in the dollar, a double digit increase in commodity prices, a 50bp increase in inflation expectations (~30%), . . .

How much of a market reaction were you looking for? It seems to me, the market has spoken and QE2 is doing exactly what it is supposed to do.

samclem · 10-26-2010, 07:53 PM

Quote:

Originally Posted by Gone4Good

A 12% increase in equities, 10% drop in the dollar, a double digit increase in commodity prices, a 50bp increase in inflation expectations (~30%), . . .

How much of a market reaction were you looking for?

Reaction to what--that's the point. If on market close on 3 Nov the S&P is up (or down) 100 points, is it in reaction to the Fed announcement, or in reaction to the election results ("better" or "worse" than market expectations)? We can bet there'll be plenty of spin from all concerned.

Gone4Good · 10-26-2010, 07:57 PM

Quote:

Originally Posted by samclem

Reaction to what--that's the point. If on market close on 3 Nov the S&P is up (or down) 100 points, is it in reaction to the Fed announcement, or in reaction to the election results ("better" or "worse" than market expectations)? We can bet there'll be plenty of spin from all concerned.

I guess my point was, the market has already reacted to QE2, and pretty significantly at that. So far, the market is doing exactly what policy makers want. Not just the equity market, but the bond markets and currency markets too. I suspect any reaction on Nov. 3 will be of the "buy on the rumor, sell on the news" variety. Not a lot of information content to be had there.