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davelj
ParticipantHoly moly, this thing’s gotten off track. I think some of you folks are over-thinking this issue.
As someone already pointed out above, the REAL economy expands because of population growth and productivity. Over the long term here in the U.S. each has averaged about 1.25-1.50% annually, for real annual growth of 2.5-3.0% per year. That’s the REAL part.
The government tells us that inflation has averaged about 3%/year for some time, although that number is probably more like 4%, or a little more in recent years. The inflation rate, over the long term, is a function of the expansion of the country’s monetary base (for the most part). The monetary base expands as new banks are chartered, the Fed tinkers with interest rates via open market operations (and provides additional liquidity to the system like last week), and tinkers with reserve requirements, among other things. This is how new money is created.
There is nothing inherently wrong with debt or fractional reserve banking. The degree of its inflationary tendencies is all a matter of how the system is managed. And the fact is that while there have been several hundred new banks chartered over the last few years (oh no!! inflation!!), the amount of capital they’ve started with is MINUTE compared with the banks already in operation. Furthermore, most of the deposits that these banks gather come from people switching their accounts over from other banks such that the net effect of new banks throughout the system is negligible from a credit/inflation standpoint. Most of the new banks’ gains come from the pockets of banks already in existence.
In my opinion the inflation from the last several years – particularly in the housing market – has come primarily in the ability of banks to sell mortgages into the secondary markets. This engendered additional demand for mortgages, and thus lower rates (than would otherwise be the case), and eventually looser terms, etc. This, of course, allowed people who could otherwise not get a mortgage to get one, housing prices escalated, and here we are. But that’s now over, for all intents and purposes. We’re in the process of correcting that imbalance.
It’s important to keep in mind, however, that credit/money isn’t necessarily created just because a bank makes a loan. For example, the vast majority of commercial loans aren’t new loans – they’re loans being re-financed and/or moved from one institution to another. And brand new commercial loans are offset by customers who pay off loans and don’t need them anymore; that is, “business births” are offset to some extent by “business deaths.”
Now we’ve had some craziness on the lending side for several years now – not just mortgages, but think of LBOs, etc. – which has caused some inflation (that the government hides from us), but I think those days are over for some time. My guess is that “real” inflation will be somewhat benign for the next 5-10 years unless the Fed screws the pooch in the near-term and tries to bail out Wall Street and marginal SFR borrowers. Then things could get really bizarre.
My point is, don’t overthink the whole fractional reserve issue, non-gold standard issue. Yeah, we’ve got inflation and it’s not going anywhere. It’s certainly worse than what the government tells us, but it’s also not the end of the world. If you don’t get into long-term lending contracts at fixed rates it’s not a big deal.
Personally, I’d rather live in a world of 3%-4% inflation on a regular, expected basis than live in a world where it bounces around negative and positive from year to year. The reason is simple: planning. If I have a reasonable idea of where inflation is headed I (and other businesses) can plan accordingly. If it’s jumping all over the place I and other businesses have a much harder time planning and then maybe we don’t invest as much as a result of the uncertainty, and the economy suffers as a consequence.
The bottom line: We have a fiat currency. Therefore, low to moderate inflation is probably here for our lifetimes and beyond. I don’t fight it. I just plan accordingly. Even though our Central Bankers aren’t perfect (and Greenspan was an out-and-out fraud), over the long term they’ll probably do a moderately o.k. job of managing inflation. So long as you don’t expect any miracles out of them you won’t be disappointed.
ParticipantHoly moly, this thing’s gotten off track. I think some of you folks are over-thinking this issue.
As someone already pointed out above, the REAL economy expands because of population growth and productivity. Over the long term here in the U.S. each has averaged about 1.25-1.50% annually, for real annual growth of 2.5-3.0% per year. That’s the REAL part.
The government tells us that inflation has averaged about 3%/year for some time, although that number is probably more like 4%, or a little more in recent years. The inflation rate, over the long term, is a function of the expansion of the country’s monetary base (for the most part). The monetary base expands as new banks are chartered, the Fed tinkers with interest rates via open market operations (and provides additional liquidity to the system like last week), and tinkers with reserve requirements, among other things. This is how new money is created.
There is nothing inherently wrong with debt or fractional reserve banking. The degree of its inflationary tendencies is all a matter of how the system is managed. And the fact is that while there have been several hundred new banks chartered over the last few years (oh no!! inflation!!), the amount of capital they’ve started with is MINUTE compared with the banks already in operation. Furthermore, most of the deposits that these banks gather come from people switching their accounts over from other banks such that the net effect of new banks throughout the system is negligible from a credit/inflation standpoint. Most of the new banks’ gains come from the pockets of banks already in existence.
In my opinion the inflation from the last several years – particularly in the housing market – has come primarily in the ability of banks to sell mortgages into the secondary markets. This engendered additional demand for mortgages, and thus lower rates (than would otherwise be the case), and eventually looser terms, etc. This, of course, allowed people who could otherwise not get a mortgage to get one, housing prices escalated, and here we are. But that’s now over, for all intents and purposes. We’re in the process of correcting that imbalance.
It’s important to keep in mind, however, that credit/money isn’t necessarily created just because a bank makes a loan. For example, the vast majority of commercial loans aren’t new loans – they’re loans being re-financed and/or moved from one institution to another. And brand new commercial loans are offset by customers who pay off loans and don’t need them anymore; that is, “business births” are offset to some extent by “business deaths.”
Now we’ve had some craziness on the lending side for several years now – not just mortgages, but think of LBOs, etc. – which has caused some inflation (that the government hides from us), but I think those days are over for some time. My guess is that “real” inflation will be somewhat benign for the next 5-10 years unless the Fed screws the pooch in the near-term and tries to bail out Wall Street and marginal SFR borrowers. Then things could get really bizarre.
My point is, don’t overthink the whole fractional reserve issue, non-gold standard issue. Yeah, we’ve got inflation and it’s not going anywhere. It’s certainly worse than what the government tells us, but it’s also not the end of the world. If you don’t get into long-term lending contracts at fixed rates it’s not a big deal.
Personally, I’d rather live in a world of 3%-4% inflation on a regular, expected basis than live in a world where it bounces around negative and positive from year to year. The reason is simple: planning. If I have a reasonable idea of where inflation is headed I (and other businesses) can plan accordingly. If it’s jumping all over the place I and other businesses have a much harder time planning and then maybe we don’t invest as much as a result of the uncertainty, and the economy suffers as a consequence.
The bottom line: We have a fiat currency. Therefore, low to moderate inflation is probably here for our lifetimes and beyond. I don’t fight it. I just plan accordingly. Even though our Central Bankers aren’t perfect (and Greenspan was an out-and-out fraud), over the long term they’ll probably do a moderately o.k. job of managing inflation. So long as you don’t expect any miracles out of them you won’t be disappointed.
ParticipantThis has been discussed here in a previous thread. Inflation can help the earnings of some companies. BUT, the problem is that even if inflation helps earnings, the discount rate applied to those earnings increases as well, thereby reducing the present value of said earnings (i.e., the stock price). The negative effect of inflation on the discount rate (and thus stocks’ present value) is typically much greater than any positive effect on earnings. So, for the most part, inflation is bad for stock prices. See the 70s for a good example of this.
ParticipantThis has been discussed here in a previous thread. Inflation can help the earnings of some companies. BUT, the problem is that even if inflation helps earnings, the discount rate applied to those earnings increases as well, thereby reducing the present value of said earnings (i.e., the stock price). The negative effect of inflation on the discount rate (and thus stocks’ present value) is typically much greater than any positive effect on earnings. So, for the most part, inflation is bad for stock prices. See the 70s for a good example of this.
ParticipantThis has been discussed here in a previous thread. Inflation can help the earnings of some companies. BUT, the problem is that even if inflation helps earnings, the discount rate applied to those earnings increases as well, thereby reducing the present value of said earnings (i.e., the stock price). The negative effect of inflation on the discount rate (and thus stocks’ present value) is typically much greater than any positive effect on earnings. So, for the most part, inflation is bad for stock prices. See the 70s for a good example of this.
ParticipantI read this earlier today and chuckled:
“Thornburg Mortgage President Larry Goldstone says ‘there is no possible way’ the company can lose $3.5 billion worth of long-term capital in a portfolio filled with highly rated mortgage assets.”
Is that so, Larry? Clearly, Larry’s either (a) lying, or (b) stupid. Larry’s not stupid, so see (a). At least he displays an aptitude for playing a confidence game.
The problem, of course, is that when your highly-leveraged funding structure exists largely at the whim of lenders who will cover their asses at all costs when problems crop up, eventually you’re going to pay the piper.
ParticipantI read this earlier today and chuckled:
“Thornburg Mortgage President Larry Goldstone says ‘there is no possible way’ the company can lose $3.5 billion worth of long-term capital in a portfolio filled with highly rated mortgage assets.”
Is that so, Larry? Clearly, Larry’s either (a) lying, or (b) stupid. Larry’s not stupid, so see (a). At least he displays an aptitude for playing a confidence game.
The problem, of course, is that when your highly-leveraged funding structure exists largely at the whim of lenders who will cover their asses at all costs when problems crop up, eventually you’re going to pay the piper.
ParticipantI read this earlier today and chuckled:
“Thornburg Mortgage President Larry Goldstone says ‘there is no possible way’ the company can lose $3.5 billion worth of long-term capital in a portfolio filled with highly rated mortgage assets.”
Is that so, Larry? Clearly, Larry’s either (a) lying, or (b) stupid. Larry’s not stupid, so see (a). At least he displays an aptitude for playing a confidence game.
The problem, of course, is that when your highly-leveraged funding structure exists largely at the whim of lenders who will cover their asses at all costs when problems crop up, eventually you’re going to pay the piper.
ParticipantWell, looks like I was wrong, and it won’t be the last time. Today looks pretty prosaic for the stock market so far. And it’s up, so I was wrong on both counts – it’s up and not particularly volatile. That’s about par for the course. Another good example of why I don’t fool around with public securities.
Should be an interesting week…
ParticipantWell, looks like I was wrong, and it won’t be the last time. Today looks pretty prosaic for the stock market so far. And it’s up, so I was wrong on both counts – it’s up and not particularly volatile. That’s about par for the course. Another good example of why I don’t fool around with public securities.
Should be an interesting week…
ParticipantWell, looks like I was wrong, and it won’t be the last time. Today looks pretty prosaic for the stock market so far. And it’s up, so I was wrong on both counts – it’s up and not particularly volatile. That’s about par for the course. Another good example of why I don’t fool around with public securities.
Should be an interesting week…
ParticipantPowayseller once said, with characteristic confidence, that “50% of the ARMs originated in 2005/2006 are going to default.” Not just subprime ARMs, or Alt-A ARMs… but ALL ARMs. I offered to take the other side of such a wager – that in fact, less than 50% would default – but she was uninterested… I don’t think it would surprise anyone here to find that 25% of the “non-conforming” 2/28s & 3/27s originated between 2004 and 2005 ultimately default. But recall that a large percentage of mortgages that default are ultimately brought current. In summary, it’s gonna get very ugly, but Powayseller’s predictions regarding defaults remain, shall we say, “aggressive.”
ParticipantPowayseller once said, with characteristic confidence, that “50% of the ARMs originated in 2005/2006 are going to default.” Not just subprime ARMs, or Alt-A ARMs… but ALL ARMs. I offered to take the other side of such a wager – that in fact, less than 50% would default – but she was uninterested… I don’t think it would surprise anyone here to find that 25% of the “non-conforming” 2/28s & 3/27s originated between 2004 and 2005 ultimately default. But recall that a large percentage of mortgages that default are ultimately brought current. In summary, it’s gonna get very ugly, but Powayseller’s predictions regarding defaults remain, shall we say, “aggressive.”
ParticipantPowayseller once said, with characteristic confidence, that “50% of the ARMs originated in 2005/2006 are going to default.” Not just subprime ARMs, or Alt-A ARMs… but ALL ARMs. I offered to take the other side of such a wager – that in fact, less than 50% would default – but she was uninterested… I don’t think it would surprise anyone here to find that 25% of the “non-conforming” 2/28s & 3/27s originated between 2004 and 2005 ultimately default. But recall that a large percentage of mortgages that default are ultimately brought current. In summary, it’s gonna get very ugly, but Powayseller’s predictions regarding defaults remain, shall we say, “aggressive.”
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