tag:blogger.com,1999:blog-8861605.post5842425226327439579..comments2024-03-24T11:01:27.668-04:00Comments on Resource Insights: Will energy show us that inflation and deflation can occur at the same time?Kurt Cobbhttp://www.blogger.com/profile/05330759091950742285noreply@blogger.comBlogger5125tag:blogger.com,1999:blog-8861605.post-63378650534082639802009-01-14T17:59:00.000-05:002009-01-14T17:59:00.000-05:00Henry,Your general impression is correct. The mon...Henry,<BR/><BR/>Your general impression is correct. The money isn't making it into the broader economy. But that bad debt that the government is buying does put money into the banking system. It's just that right now the banks would rather do something other than lend it to people since they're not sure they'll get it back--just like last time!<BR/><BR/>So, they invest the proceeds in guess what? Government debt. Neat system. I buy worthless or nearly worthless debt from you and then you loan the money back to me and I pay you interest. I think I'll become a bank!<BR/><BR/>Banks are also using the money to buy other banks and to pay off obligations of their own.<BR/><BR/>Now someday, they may actually start lending again. And, that's when the fractional accounting system will kick in since they can lend 10 times what they have. Don't you wish you were a banker?<BR/><BR/>Given all the so-called high-powered money that's out there, once this gets started it may get out of control. That's why people worry about inflation.<BR/><BR/>But, I suspect that while the banks sit on their bailouts, the government will begin to make more and more direct loans very much like the ones they're making to General Motors and Chrysler. And, they may make credit available to consumers through the banking system via some program that forces banks to lend to consumers for homes, cars, etc.<BR/><BR/>That might not get an inflation going, but it could prevent a severe deflation.<BR/><BR/>Finally, the government can simply spend a lot more money on things it wants to build or buy which is what Obama is proposing big time.<BR/><BR/>The key point is how did the government pay for all its largesse? If it did it by borrowing money from the public, then the effect is huge additions to the government's debt. Bad on a lot of counts, but the problem is essentially as you describe it. The only thing they're really on the hook for is the interest unless investors at some point refuse to buy bonds anymore and the government is forced to redeem some of its debt. (Of course, some people believe that we may get to that point in the next few years and then the government will have no recourse except to raise taxes or to print money.)<BR/><BR/>If, on the other hand, the government has sold its debt not to the public but to the central bank, then a lot of new money is being created out of nothing and put into the economy. As long as the amount put in equals the amount destroyed through debt defaults we are unlikely to have inflation. But there is no good way to gauge how much newly created money the government and the central banks should put into the economy since the effect of such an action has a long lag time, perhaps 18 months to 2 years and there is no telling how much debt will default in that period.<BR/><BR/>So, the risk is the government and the central bank (which can loan money into existence itself by loaning to banks or directly to enterprises) will overdo it.<BR/><BR/>Simple, you say. Just withdraw the amount by which they overdid it. But this too is hard to calculate, again due to lags in the effect. It is impossible to know how many more defaults will occur from a given point onward or whether the rate of default will speed up or slow down or whether the economy is sound enough to begin a self-feeding recovery.<BR/><BR/>Make a mistake and you end up with a recession or a depression all over again. This is why I think the government and central bank will err on the side of too much for too long instead of the other way round. This has been their modus operandi in the past.<BR/><BR/>My point in this piece, of course, is somewhat different. I'm saying that regardless of how much money is coursing around in the system, it seeks to find the highest return and that's why some sectors of the economy can expand even as there is an overall contraction or stagnation.Kurt Cobbhttps://www.blogger.com/profile/05330759091950742285noreply@blogger.comtag:blogger.com,1999:blog-8861605.post-40593294380618732402009-01-14T14:07:00.000-05:002009-01-14T14:07:00.000-05:00hi Kurt.good stuff.I would add the following, whic...hi Kurt.<BR/><BR/>good stuff.<BR/><BR/>I would add the following, which will help explain some of this seemingly contradictory situation.<BR/><BR/>The money being dumped into the banking system to buy bad/toxic debt is not money in the economic system.<BR/><BR/>Imagine this: the Treasury has a trillion dollars worth of $100 bills printed up. They put it into a giant warehouse. Then they burn the warehouse down.<BR/><BR/>Outside of the marginal costs (several million) spend printing the bills up, did that trillion dollars DO ANYTHING in the economy? No. So, in net effect, no money was put into the economy.<BR/><BR/>Same thing with the gov't buying $1T of toxic debt. The money simply vanishes. What remains? $1T of gov't debt?<BR/><BR/>No.<BR/><BR/>What remains is the obligation to finance the $1T debt. The $1T doesn't exist - it went from gov't to bank and then poof: gone. what remains is the gov't obligation to pay its debts. So, of that obligation, what actually exists? The monthly payment?<BR/><BR/>No. <BR/><BR/>what remains is the monthly payment ON THE INTEREST of the debt to the debt holder. As long as the gov't pays the interest, the debt holder has nothing to whinge about - they're getting paid.<BR/><BR/>So, instead of $1T debt divided up into (x) payments resulting in $zero debt after (x) payments, you have a continuous payment, a kind of eternal subsidy, to the debt holder. In fact, the debt holder doesn't want the gov't to pay off the debt, because then the interest payments would stop.<BR/><BR/>So, that's why we can have the gov't pouring multiple trillions of dollars into the aether and have a deflationary economy. Those trillions only matter if they are used for some tangible purpose. since they were burned up in a digital incinerator, the only thing that remains is the maintenance of the debt in terms of interest payments. And as the interest level approaches zero, the debt can be stacked up arbitrarily high.<BR/><BR/>Debt Holder: "OK - you owe me $1Quad. Yup - 1,000 $1T. but the interest rate is .0000000000001%. so where's my $1000? Pay up."<BR/><BR/>USgov: "OK - here: a short stack of Benjamins for ya. Next month we'll have another short stack for ya!"<BR/><BR/>DH: "You better... OR ELSE!"<BR/><BR/>Now, when the DH and the USgov ARE THE SAME ENTITY, then what? People would shout "INFLATION!!! EEEEK!!!" but ONLY IF the money ever makes it way to the economy. If it erased/burned in the digital warehouse long before, then it never existed, and all that exists is the "trust" between debt holder and debtor and the notion that the debt, as experienced as payments on the interest, is an actual claim on future labour.<BR/><BR/>So, in this way, you can dump some arbitrarily large amount of money into the system without inflation.<BR/><BR/>If I'm completely wrong or crazy, I'm willing to re-examine this, but from my perspective it makes sense.<BR/><BR/>What do you think?Henry Warwickhttps://www.blogger.com/profile/16051313050545406852noreply@blogger.comtag:blogger.com,1999:blog-8861605.post-3123597057843133592009-01-13T15:09:00.000-05:002009-01-13T15:09:00.000-05:00"What is likely to happen, unfortunately, is that ..."What is likely to happen, unfortunately, is that once demand rises to meet available capacity or capacity shrinks to meet demand, catapulting energy prices will choke off any economic recovery which will in turn cause energy prices to plummet all over again."<BR/><BR/>We saw that happen only at the pinnacle of one of the longest credit expansion streaks in history. Its going to take a very long time for credit and monetary stimulus to equal levels seen at the end of this particular cycle.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-8861605.post-76949793064807943412009-01-12T11:29:00.000-05:002009-01-12T11:29:00.000-05:00Thanks for your Resource Insights, Kurt. I have l...Thanks for your Resource Insights, Kurt. I have lately been thinking that current gasoline prices in particular illustrate just how broken beyond repair the current economic system really is. The current modest demand reduction has not suddenly produced an greater abundance of the stuff. On the contrary, as you pointed out, it has lessened future supplies through elimination of investment in more extraction.<BR/><BR/>The extraction of resources from the natural environment requires no sort of payment for the degradation and subsequent cleanup or compromised condition of the natural environment. Logging is a big activity around where I reside. No payment is required for the ecosystem services removed from the natural environment, nor the creek siltation caused, by the tree cutting. <BR/><BR/>Perhaps we can use the current economic crisis to take a second look at our economic system. To begin to move towards sustainability requires a redesign of the system. Now, we socialize a significant portion of the costs for economic activity and privatize 100% of the profits. A sustainable system would balance the equation of costs and profits with fair deference given to future generations. We are attempting to model one such way at our project, <A HREF="http://entropypawsed.org" REL="nofollow">EntropyPawsed</A>Frank Giffordhttps://www.blogger.com/profile/08732100848570571207noreply@blogger.comtag:blogger.com,1999:blog-8861605.post-6306917761266690992009-01-12T11:14:00.000-05:002009-01-12T11:14:00.000-05:00Very nice post! Thanks.Very nice post! Thanks.Anonymousnoreply@blogger.com