Why the Fed can’t put out the fire

[ltokuda]

Josh, thanks for the great explaination on your views of inflation. I’m still trying to get my head around it but your posts have been a big help. There’s one part of your post that I’m a little unclear about:

“If that borrowing is put to productive use, its not inflationary. Say I borrow money to build a factory which then improves productive output or fosters competition. That doesn’t tend to be inflationary.”

“However if I borrow money and pour ever more of it into something like housing, where the population is growing slowly or not at all, that becomes inflationary as ever more dollars chase ever fewer, or stagnant amount of resources.”

When you use the term “inflationary” above, are you actually talking about prices going up (rather than money in the system)? That seems to make sense to me. Here’s my interpretation of it:

It seems like once you borrow money, then you’ve added to the amount of money in the system. That, in itself is inflation. But if you use that money to produce products, then you’ve added another source of competition for the consumer’s money. This added competition for the consumer’s money tends to balance out the additional money supply. So that’s why this type of inflation doesn’t tend to drive up prices?

If you borrow money and buy a house with it, you’re also adding money to the system. This is also inflation. But buying a house doesn’t produce any products that consumers want. There is no additional competition for the consumer’s money. This imbalance leads to prices going up?

Do I have it right?

Regards,
ltokuda

[kewp]

The Fed doesn’t loan to you are I.

For the time being. That may change!

[kewp]

The Fed doesn’t loan to you are I.

For the time being. That may change!

[kewp]

The Fed doesn’t loan to you are I.

For the time being. That may change!

[kewp]

The Fed doesn’t loan to you are I.

For the time being. That may change!

[kewp]

The Fed doesn’t loan to you are I.

For the time being. That may change!

[barnaby33]

ltokuda, perhaps I misspoke. I’m figuring this stuff out as I go along too. Im not an economist (professional bullshitter) just a programmer who reads a lot.

You are correct, I used the term inflationary when I should have used something like, “asset price increase.” We are so used to using the word inflation to describe prices rising, even though I don’t agree, that even I do it now and again.

Borrowing money is by its nature inflationary. The lovely counterpart to that is that paying back the borrowed money is deflationary! You’ve destroyed the debt, but in a good way. For my way of thinking, under normal circumstances they cancel each other out. The question is, what are you left with?

So like most people I too concentrate on the EFFECTS of borrowing. Housing doubling in San Diego in 5 years being an obvious effect. Productivity to me is a function of deploying money borrowed or otherwise in a way which tends to pay for itself, or offer some non-monetary benefit of equal value to the borrower.

So in a housing bubble it may seem to be an effective use of borrowed money to lever up and buy a house, but watch out, if the demand isn’t pretty constant, you’ll end up with a monster house payment (debt service) and no one to take the albatross off your hands. So there is a physical artifact, the house, sitting there. If you can’t make the payment the bank takes the house from you and sells it. In the process the debt it cannot recover is destroyed.

Once enough of this “deflation” has occurred people take notice and start to hoard the money they do have. They don’t want to borrow, they want to save.

I am so done thinking for today.

Josh

[barnaby33]

ltokuda, perhaps I misspoke. I’m figuring this stuff out as I go along too. Im not an economist (professional bullshitter) just a programmer who reads a lot.

You are correct, I used the term inflationary when I should have used something like, “asset price increase.” We are so used to using the word inflation to describe prices rising, even though I don’t agree, that even I do it now and again.

Borrowing money is by its nature inflationary. The lovely counterpart to that is that paying back the borrowed money is deflationary! You’ve destroyed the debt, but in a good way. For my way of thinking, under normal circumstances they cancel each other out. The question is, what are you left with?

So like most people I too concentrate on the EFFECTS of borrowing. Housing doubling in San Diego in 5 years being an obvious effect. Productivity to me is a function of deploying money borrowed or otherwise in a way which tends to pay for itself, or offer some non-monetary benefit of equal value to the borrower.

So in a housing bubble it may seem to be an effective use of borrowed money to lever up and buy a house, but watch out, if the demand isn’t pretty constant, you’ll end up with a monster house payment (debt service) and no one to take the albatross off your hands. So there is a physical artifact, the house, sitting there. If you can’t make the payment the bank takes the house from you and sells it. In the process the debt it cannot recover is destroyed.

Once enough of this “deflation” has occurred people take notice and start to hoard the money they do have. They don’t want to borrow, they want to save.

I am so done thinking for today.

Josh

[barnaby33]

ltokuda, perhaps I misspoke. I’m figuring this stuff out as I go along too. Im not an economist (professional bullshitter) just a programmer who reads a lot.

You are correct, I used the term inflationary when I should have used something like, “asset price increase.” We are so used to using the word inflation to describe prices rising, even though I don’t agree, that even I do it now and again.

Borrowing money is by its nature inflationary. The lovely counterpart to that is that paying back the borrowed money is deflationary! You’ve destroyed the debt, but in a good way. For my way of thinking, under normal circumstances they cancel each other out. The question is, what are you left with?

So like most people I too concentrate on the EFFECTS of borrowing. Housing doubling in San Diego in 5 years being an obvious effect. Productivity to me is a function of deploying money borrowed or otherwise in a way which tends to pay for itself, or offer some non-monetary benefit of equal value to the borrower.

So in a housing bubble it may seem to be an effective use of borrowed money to lever up and buy a house, but watch out, if the demand isn’t pretty constant, you’ll end up with a monster house payment (debt service) and no one to take the albatross off your hands. So there is a physical artifact, the house, sitting there. If you can’t make the payment the bank takes the house from you and sells it. In the process the debt it cannot recover is destroyed.

Once enough of this “deflation” has occurred people take notice and start to hoard the money they do have. They don’t want to borrow, they want to save.

I am so done thinking for today.

Josh

[barnaby33]

ltokuda, perhaps I misspoke. I’m figuring this stuff out as I go along too. Im not an economist (professional bullshitter) just a programmer who reads a lot.

You are correct, I used the term inflationary when I should have used something like, “asset price increase.” We are so used to using the word inflation to describe prices rising, even though I don’t agree, that even I do it now and again.

Borrowing money is by its nature inflationary. The lovely counterpart to that is that paying back the borrowed money is deflationary! You’ve destroyed the debt, but in a good way. For my way of thinking, under normal circumstances they cancel each other out. The question is, what are you left with?

So like most people I too concentrate on the EFFECTS of borrowing. Housing doubling in San Diego in 5 years being an obvious effect. Productivity to me is a function of deploying money borrowed or otherwise in a way which tends to pay for itself, or offer some non-monetary benefit of equal value to the borrower.

So in a housing bubble it may seem to be an effective use of borrowed money to lever up and buy a house, but watch out, if the demand isn’t pretty constant, you’ll end up with a monster house payment (debt service) and no one to take the albatross off your hands. So there is a physical artifact, the house, sitting there. If you can’t make the payment the bank takes the house from you and sells it. In the process the debt it cannot recover is destroyed.

Once enough of this “deflation” has occurred people take notice and start to hoard the money they do have. They don’t want to borrow, they want to save.

I am so done thinking for today.

Josh

[barnaby33]

ltokuda, perhaps I misspoke. I’m figuring this stuff out as I go along too. Im not an economist (professional bullshitter) just a programmer who reads a lot.

You are correct, I used the term inflationary when I should have used something like, “asset price increase.” We are so used to using the word inflation to describe prices rising, even though I don’t agree, that even I do it now and again.

Borrowing money is by its nature inflationary. The lovely counterpart to that is that paying back the borrowed money is deflationary! You’ve destroyed the debt, but in a good way. For my way of thinking, under normal circumstances they cancel each other out. The question is, what are you left with?

So like most people I too concentrate on the EFFECTS of borrowing. Housing doubling in San Diego in 5 years being an obvious effect. Productivity to me is a function of deploying money borrowed or otherwise in a way which tends to pay for itself, or offer some non-monetary benefit of equal value to the borrower.

So in a housing bubble it may seem to be an effective use of borrowed money to lever up and buy a house, but watch out, if the demand isn’t pretty constant, you’ll end up with a monster house payment (debt service) and no one to take the albatross off your hands. So there is a physical artifact, the house, sitting there. If you can’t make the payment the bank takes the house from you and sells it. In the process the debt it cannot recover is destroyed.

Once enough of this “deflation” has occurred people take notice and start to hoard the money they do have. They don’t want to borrow, they want to save.

I am so done thinking for today.

Josh

[paramount]

Since last weekend and the Bear Sterns saga, the Fed began taking serious action.

We are now seeing the light at the end of the tunnel.

Well, that’s basically what Cramer said tonight.

[paramount]

Since last weekend and the Bear Sterns saga, the Fed began taking serious action.

We are now seeing the light at the end of the tunnel.

Well, that’s basically what Cramer said tonight.

[paramount]

Since last weekend and the Bear Sterns saga, the Fed began taking serious action.

We are now seeing the light at the end of the tunnel.

Well, that’s basically what Cramer said tonight.

[paramount]

Since last weekend and the Bear Sterns saga, the Fed began taking serious action.

We are now seeing the light at the end of the tunnel.

Well, that’s basically what Cramer said tonight.

[Author]

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