Oh Drunkle. It would have been naïve of me to think I could put such a post on here and not get some response like yours. I see three problems that are keeping us apart– an apparent misunderstanding of terminology, extrapolation to long term conclusions from a few discrete events you observe in the immediate time frame, and reading things into my post that were not said.
To get a better feel for fiat money and how it works there is a great book called “Frozen Desire – The Meaning of Money”. It is entertaining, non-technical and very engaging.
“recent readings i’ve done “
What have you been reading?
“you say that the fed can essentially print unlimited dollars. but that’s false; when the value of the dollar hits zero, no amount of additional printing will help.”
I’m not sure what you are trying to say here and you commingle two issues –
1.How much money the Fed can print
2.The point at which additional printing no longer helps
I’ll just take the second topic for now; the point at which creating additional money stops helping and starts hurting will be reached long before the dollar becomes worthless.
“you’re suggesting that inflation is a means of producing infinite growth”
Please re-read my post. What I wrote is that increasing the supply of money (and thereby enhancing liquidity and curing certain solvency problems) will ensure that economic activity does not cease. This is a very different than the “infinite growth” concept you are reading into my words. Nowhere do I suggest we will not have a recession. Why do you believe my post suggests that we will not have a recession?
“an apple is an apple at 10 cents or 20 dollars. the price of the apple may increase with everyone awash in funny money, but the value is the same”
I do not agree with you that real values do not fluctuate over time – they do fluctuate, and sometimes in the extreme. But we do agree that price fluctuations can be caused by changes in the value of fiat money. (By the way, reserve currencies fluctuate in value too, it is just not as predictable or controllable as fiat money.) For example, the real value of a gallon of gasoline is higher now than it was a year ago. I don’t follow apple prices, but with out a doubt, like any other asset, good or service, they also do not have a constant real value.
“evidence of deflation is here”
I agree that prices are decreasing in some areas – mostly in assets – but that does not mean that there is currency deflation. In many cases it means that real values are decreasing. In other areas, prices are going up – mostly in goods and services – which alone does not necessarily indicate currency inflation.
These differential movements in valuation are, obviously, what is needed to correct the problem of over valued housing which you so clearly call out – assets (like real estate) are too expensive relative to wages – so prices of goods and services need to rise (and over time wages with them), while asset prices, (home prices in particular), need to decline – which decline is the half of the correction equation Piggington.com focuses on.
These price changes are happening as a mix of changes in real value and currency inflation. It will not be a straight line, and the process will not complete this year. However, as said on another Pigginton post “eventually the twain shall meet”.
Between and now there will be some major upheaval along the way. But there will be no food riots. The “system” will not collapse and the dollar will not go to zero.
You also say “the fed cannot print money” but this is inconsistent with your earlier assertion that “when the value of the dollar hits zero, no amount of additional printing will help.”
The truth is that the Fed can and does create (“print”) money. Where do you believe the Fed gets the dollars they lend and dollars they use to buy up government debt (and CDOs/CMOs for that matter)? They just make it up – AKA “print” it.
Of course they are not going to literally print it out on paper and just hand it out in big suitcases to random pedestrians on the street. They use a structured approach so that there is accountability and transparency. All these mechanisms you mention – discount window, having reserve requirements for loans, etc. are measures to provide an orderly conduit for newly “printed” money to enter the economy. There is no limit to the amount of dollars they can lend and the amount of treasuries they can buy is only limited by the total amount of federal borrowing outstanding (i.e. – they could buy EVERY SINGLE Treasury Bill, Bond and Note if they wanted to).
“purchasing a home at 3x wages may hedge against inflation, but not at 9x wages”
Finally, in the last line of your post, you reveal a certain agreement with my essential premise! The dollar is not going to zero, the Federal Government will not implode, the sun will come up and people will engage in commerce! HAVE YOU BEEN BAITING ME THIS ENTIRE TIME? 😉
The statement is still not quite right though. You get a dollar short position from borrowing dollars at a fixed rate of interest, it does not matter how many times wages you borrow, so long as you can afford to keep the position open. I agree that given current borrowing costs and requirements, most people would struggle to open and keep open such a position at 9X wages. Also, it is not a hedge (the term implies a risk neutral position), but a dollar short position.
In addition to considering wages and house price, I also suggest considering net worth and expenses. Now we have reduced the conversation to personal financial planning. Boring.
