[quote=jpinpb]Rich – didn’t the money disappear in a sense when housing prices went down in the form of circulation, only b/c the money was being extracted in the form of HELOCs and being spent. They certainly weren’t saving it. (savings lowest in history)
So if the price goes down, wouldn’t you consequently lose your equity extraction and money circulation? People were taking great advantage of that. Not just new, recent bubble buyers. I can’t count how many NODs I’ve come across on properties that were purchased long before our bubble. A few that should have had loans paid off in full. [/quote]
You are confusing the existing stock of money with future money growth. Yes, a mechanism for new money creation (one of many such mechanisms) disappears in your scenario. But that does not affect the existing stock of money.
It seems that perhaps you are also alluding to home loans not just as a mechanism of creating new money, but as a means of “spreading it around” to more people. Absolutely correct and this is a valid point. But it’s not a point I ever denied. I was talking about effects on the existing money supply, and specifically about the mistaken assertion that reduced home values destroy money. You can see my post to capeman to understand why I think this distinction is important.
[quote=jpinpb]
While the government is printing a great amount of money, I don’t think it’s being all circulated. Maybe people are buying gold w/it or paying off credit cards or hoarding it in mattresses. I don’t know. Printing money is different than actually getting it circulated. They can print 24/7, but if people don’t have it in their hands and spend it, then how is printing going to help?
For instance, giving the few thousand in tax credits as stimulus would probably get people to spend. But contrast people were spending tens of thousand, hundreds of thousands extracted from their house during the bubble.
Yes, the government is taking on projects. I think this is just going to be less money to the people as they’ll have to pay for the projects through eventual taxation. But that’s another issue for another day.
Maybe we are in that lag period you mention. How long does lag time normally last? Months? Years? True that people *need* to spend money to live, but it is quite different than splurging on unnnecessary *wants*. That’s what was happening during the bubble. And frankly, during the depression, people still needed to live and money wasn’t there to spend. But different economic policies then, I guess.
I understand the money is there – somewhere. Where it went is like a mystery to me. Banks just holding it? Because few are lending the credit on real estate purchases. It’s mostly government FHA.
As being discussed on another thread, consumer index collapsed. It can’t be for lack of government printing.
While I understand the decrease of an item does not destroy the ability to purchase, wouldn’t it change the quantity/volume of money circulated (wealth?)
So maybe money supply isn’t the issue. Maybe it’s the distribution and spending?
I admit rudimentary knowledge on this topic. Just
my observations of what’s happening. I would love to understand all this and make sense of it. I always seem to have a difficult time grasping the dynamics of it all and I appreciate your tolerance w/my questions.
Thanks for your patience on this topic. I will go back and re-read your links again to see if it sinks in.[/quote]
You are absolutely right that money supply isn’t the only issue. I completely agree and never said otherwise; what I’m trying to do here is to be rigorous about the mechanisms of inflation and deflation and to not lump everything together.
As for why there is not a lot of consumer price inflation right now, I think that all the things you cite are an important factor. Money in the economy is just one issue. I think it’s a very important one because *over the long haul* prices changes tend to be dictated by changes in the money supply. But in the short term many other things have an effect. Right now, as you note, the money is more concentrated in the hands of those who are less liable to spend it on consumer goods (but apparently more liable to spend it on assets). Also, everyone across the board is much more cautious and not as liable to save. There are deflationary forces at work and they are battling out with inflationary forces. I don’t pretend to know what will happen in the short term but I’ve made no secret of my belief that the inflationary forces will prevail in the end (that is to say, if we look at a timeframe of multiple years).
