http://www.inflationdata.com/inflation/inflation_articles/m3_money_supply.asp

So both commercial banks and the US govt have ability to do this.

Because every dollar is owed by sb to sb – and ultimately to the Fed – you need to have more and more money entering the system. If you do not have this – the supply of money would shrink and you would have constant deflation and all kinds of terrible recessions. So you need inflation as a way to manage debt which is part of the system and worked very well for many years.

I am almost sure that if pushed hard enough – they will really start the printing presses. They have good HP machines out there. In fact they do not need to do this – Fed gives out a loan to US govt, US govt deposits to a bank and that gets loaned out again etc etc.

I am almost sure auto makers will be bailed out. And if the US govt chooses they can forgive bad mortgages to people. They can do this all without even causing inflation if done in the right way.

While banks hate inflation, the government loves it. A little bit of steady inflation has consistently devalued the dollar since the 1930’s. Inflation lets governments run small deficits which they can finance/pay off with newer dollars of ever lesser value. Essentially, the government hasn’t been able to contain spending since the last depression, always running a deficit. But by fostering a monetary/fiscal policy that favors low but consistent inflation they have, until now, been able to keep a balance. Now, however, the monster has escaped, the deficit exploded to the point it probably can’t be brought back under control, and the government brought to insolvency.

Think of how inflation distorts the economy. The house my mom bought 30 years ago for $23K has turned into a million dollar property. It’s still the same house though. The true value or utility hasn’t changed, just the dollar denomination. What do you think has happened to the taxes? Hmmm.

It’s been estimated that every person- man, woman, and child is now responsible for a cumulative total of $292,233 of government debt, personal debt, and future government obligations. That’s $1.2 million per family of four, with a median household income of about $54,000. A 100% tax rate barely covers the current interest. This country isn’t going to inflate its way out this time– it’s going to deflate, then collapse.

It’s a testament to the American psyche that despite mathematical analysis that proves over and over again how constrained our choices will be, people still think there has to be a way out. And truth be told there are several paths out, but all of them will drastically change our lives, and our expectations for the future in ways most can’t imagine. The next decade will be filled with “interesting times.”

“Deflation. I just don’t believe that it can happen for a sustained period of time, because our government has unilateral ability to control it by issuing new currency.”

It’s interesting to see the stark contrast between the quality of Scotsman’s reply and the lack of it from economist. I have witnessed the highs and lows of seattlebubble within the span of just a few inches of screen.

Deflation means things are getting cheaper.

So have houses and stocks gotten more expensive over the last couple of years, or less expensive?

How have oil and other commodities done lately?

It is happening, doofus.

I think we are unlikely to see significant consumer price deflation, but asset price deflation is here in spades. That’s also what happened in Japan post-1990 BTW.

So, when $800B in bailout capital is made available to banks, does that mean an equal amount of T-bonds are issued to the public and must be sold?

If, after an act of congress and other structural changes, the government decided to just start printing dollars and handing them out the dollar would immediately become worthless- it would just be a piece of paper, not a debt backed obligation. Capital would flee the USA so quickly you couldn’t keep track. Interest rates would soar in anticipation of falling dollar values and rising inflation. The U.S. government would face bankruptcy because of ever increasing debt/financing costs. Lending and currency based trade would cease as dollars became increasingly worthless.

Bankers hate inflation, since their outstanding loans are always repaid with dollars of lesser value. And while they increase interest rates charged to try and recover some of the lost value, they always find themselves behind the curve, managing what is in effect a shrinking asset base. Who has a major say in how the country is run? Who has gotten the best deal under the current bailout fiasco? Do you really think bankers/pigmen will let inflation rule the day? Under deflation, the opposite is true- bankers benefit. Hmmmm.

We will see deflation. Debt and money are two sides of the same thing. Credit spends just like cash- your visa is just as accepted as your $20 bill. So when credit shrinks or debt defaults, its the same as burning real dollars. As the velocity of money slows, it’s the same as dollars and credit vanishing. Fewer dollars/credit/lower velocity means fewer stores of value chasing the same number of goods- deflation. There has never been a period of inflation during a depression- which is what we’re headed for. The two are essentially mutually exclusive.

Given this, the rules are simple. If you expect a deep recession or depression in the future, get out of debt now, and hoard dollars. They will be worth more (in purchasing power) with every passing day.

I taught an evening class on Short Sales last week. One of the Realtors has a buyer looking in the Everett/North area. He said all of the listings in the 200,000-250 range are short sales except one.

Perhaps this entire fiasco is in fact a BRILLIANT strategy by our leadership:

They got foreigners to loan us tons of money. Now in order to offset the trillions in deflationary pressure, they can print trillions to pay it back, creating equal and opposite inflationary pressure. The US citizen experiences normal inflation, and the foreign debt gets paid off out of thin air.

Am I missing something, or is this pure genius on the part of our administration?

“So, yesterday the media finally added up all the money and guarantees promised in all the alphabet soup programs in the past year. The tally? More than $7.7 trillion! And this morning we learn we get to add another $800 billion for a new total of $8.5 trillion! ”

http://www.tickerforum.org/cgi-ticker/akcs-www?post=73060

It is the velocity of money that is killing us, not the lending base.

As the velocity of money approaches zero, the money supply also approaches zero, regardless of the monetary base. $3T x 0 = 0 (3rd Grade math meets sophomore level economic theory).

The Treas/Fed can’t do a thing about the velocity of money. The only thing all these bailouts are doing is propping up the illusion that US debt can still be wholesaled.

Sarcasm my friend, sarcasm.

Please show me how the US Govt has printed any money. Please show me a source that cites there are any more 1,5,10,20,50,100 dollar bills in circulation right now than there were 3 months ago.

The Fed is “lending” not “printing”. There is a huge difference. The mainstream media keeps reporting about all this “printing” when there is none going on. The Fed is issuing credit by utilizing “swaps”. The credit that is being given to the banks is a mere drop in the bucket compared to the holes on their balance sheets. The Fed has expanded their balance sheet to 3 trillion dollars, and this amount is not even enough to offset the losses that the housing market itself has sustained, much less the rest of the economy.

The Fed is still taking collateral (albeit worth less than market value) for debt issuance. They aren’t just firing up the printing press and flooding the markets with USD. If they did start printing, you would see the dollar and the bond market fall of a cliff instantaneously.

Deflation is what is gripping the country. That is why we saw the dollar rally and commodities crash.

I would argue the opposite; the low tier is where most of the speculation generally happens; easier to get a loan.

I think the problem is that this will soon stop falling. Look at the govt. They started those printers rolling and we are flooded with lots of dollars. People will be able to refinance, get new loans. I thought at some point there would even be a total forgiveness program where the govt will just bailout people. So we are soon looking at housing rebound.

don’t worry. this won’t be a problem.

but go ahead and start preparing for inflation. I recommend a huge fixed-rate mortgage.

Out in the northern exurbs asking prices have drifted back to ‘06 levels and not much is moving but there aren’t many distressed sales either

Wondering are we affecting the whole world , by manipulating the $$$. Still wonder why the world always looks at us for leadership…

The govt can print money, bailout companies, people at will because it can create money out of nothing. This makes sense. If we had the gold standard this would not be possible. If the govt adopts sensible policy – this will be fine.

Also in a recession there is no problem in printing money because the prices are going down anyways because of the demand. You don’t run risk of starting an inflation.

All the best.