[Rich Toscano]

[quote=jpinpb]Okay. I’m trying to follow along, but I’m still grappling w/understanding this. The only thing I keep coming back to is the houses, “asset” has gone down in value. That is fine if you just hold, don’t sell, etc. The money isn’t *destroyed*.

The reality is that people extracted money/equity and went on spending binges. They are not doing that now. Okay. To a lesser degree, people are living for free for up to 2 years, so they still are able to spend somewhat. Things didn’t come to a crashing, grinding halt. Nevertheless, the money being spent and circulated is considerably less.

Yes, the government is printing money. Indirectly this has also allowed people to live for free for 2 years, IMO, and hence money continues to be spent.[/quote]

Sounds like you understand it just fine… the only thing is there is more to the economy than home equity loans, so to the extent that home equity loans are no longer contributing to monetary growth/spending, there are other things that can.

[Rich Toscano]

[quote=jpinpb]Okay. I’m trying to follow along, but I’m still grappling w/understanding this. The only thing I keep coming back to is the houses, “asset” has gone down in value. That is fine if you just hold, don’t sell, etc. The money isn’t *destroyed*.

The reality is that people extracted money/equity and went on spending binges. They are not doing that now. Okay. To a lesser degree, people are living for free for up to 2 years, so they still are able to spend somewhat. Things didn’t come to a crashing, grinding halt. Nevertheless, the money being spent and circulated is considerably less.

Yes, the government is printing money. Indirectly this has also allowed people to live for free for 2 years, IMO, and hence money continues to be spent.[/quote]

Sounds like you understand it just fine… the only thing is there is more to the economy than home equity loans, so to the extent that home equity loans are no longer contributing to monetary growth/spending, there are other things that can.

[Rich Toscano]

[quote=jpinpb]Okay. I’m trying to follow along, but I’m still grappling w/understanding this. The only thing I keep coming back to is the houses, “asset” has gone down in value. That is fine if you just hold, don’t sell, etc. The money isn’t *destroyed*.

The reality is that people extracted money/equity and went on spending binges. They are not doing that now. Okay. To a lesser degree, people are living for free for up to 2 years, so they still are able to spend somewhat. Things didn’t come to a crashing, grinding halt. Nevertheless, the money being spent and circulated is considerably less.

Yes, the government is printing money. Indirectly this has also allowed people to live for free for 2 years, IMO, and hence money continues to be spent.[/quote]

Sounds like you understand it just fine… the only thing is there is more to the economy than home equity loans, so to the extent that home equity loans are no longer contributing to monetary growth/spending, there are other things that can.

[Rich Toscano]

[quote=jpinpb]Okay. I’m trying to follow along, but I’m still grappling w/understanding this. The only thing I keep coming back to is the houses, “asset” has gone down in value. That is fine if you just hold, don’t sell, etc. The money isn’t *destroyed*.

The reality is that people extracted money/equity and went on spending binges. They are not doing that now. Okay. To a lesser degree, people are living for free for up to 2 years, so they still are able to spend somewhat. Things didn’t come to a crashing, grinding halt. Nevertheless, the money being spent and circulated is considerably less.

Yes, the government is printing money. Indirectly this has also allowed people to live for free for 2 years, IMO, and hence money continues to be spent.[/quote]

Sounds like you understand it just fine… the only thing is there is more to the economy than home equity loans, so to the extent that home equity loans are no longer contributing to monetary growth/spending, there are other things that can.

[Rich Toscano]

First of all, I did address the impact of fractional reserve banking in the article. That is a means by which money can be created (though not the only one) and it is inhibited when bank lending decreases for any reason, be it unwillingness to lend or borrow or asset value declines. But this inhibits future money growth; it does not effect the stock of existing money. And because money created by fractional reserve loans shows up in the monetary aggregates, the results of fractional reserve transactions are easily measured by looking at how much money there is.

There is a lot of focus on the ability of the banking system to create new money under these conditions, and I think that is a valid concern… however, there are other vectors for money creation, notably “QE” (the Fed printing money and directly injecting it into the economy). The Fed has already done this and if there is a threat of deflation, they will do it again. Their actions and words and analytical biases have made this very clear.

JP, the point is not to suggest that our economy functions like the island economy, it’s to simplify things so that you can see the differing impact of money, credit, and asset values on an economy.

Re. CAR’s point about using assets to trade. I just think you are looking at one side of the coin. In your example, someone could trade financial asset for a treehouse, but the other guy is trading a treehouse for a financial asset. When the value of the asset went down in terms of treehouses, and you said wealth was lost. But the value of treehouses went up in asset terms — so wealth was gained for treehouse holders and lost for asset holders. It is a wash.

So I stick with my assertion a change in asset values doesn’t change the amount of purchasing power in the economy in currency terms — it just moves it around between holders of assets and holders of non-assets.

DWCAP explained the distinction better than I did, that money isn’t the same as values. The relative values between two things changing does not impact the supply of money, nor does it DIRECTLY change the value of money (though there could be indirect effects via changed spending patterns, etc). It just changes how much money each person could get.

Finally, yes, the government can print as much as they want… whether they can prop up asset values is another question because one never knows where the money will go. That’s their goal, or one of them, but I think at some point it will stop working. But the newly printed money will go somewhere and cause some prices to rise — they can flood the economy with money but they can’t predict or control where it will slosh around to.

[Rich Toscano]

First of all, I did address the impact of fractional reserve banking in the article. That is a means by which money can be created (though not the only one) and it is inhibited when bank lending decreases for any reason, be it unwillingness to lend or borrow or asset value declines. But this inhibits future money growth; it does not effect the stock of existing money. And because money created by fractional reserve loans shows up in the monetary aggregates, the results of fractional reserve transactions are easily measured by looking at how much money there is.

There is a lot of focus on the ability of the banking system to create new money under these conditions, and I think that is a valid concern… however, there are other vectors for money creation, notably “QE” (the Fed printing money and directly injecting it into the economy). The Fed has already done this and if there is a threat of deflation, they will do it again. Their actions and words and analytical biases have made this very clear.

JP, the point is not to suggest that our economy functions like the island economy, it’s to simplify things so that you can see the differing impact of money, credit, and asset values on an economy.

Re. CAR’s point about using assets to trade. I just think you are looking at one side of the coin. In your example, someone could trade financial asset for a treehouse, but the other guy is trading a treehouse for a financial asset. When the value of the asset went down in terms of treehouses, and you said wealth was lost. But the value of treehouses went up in asset terms — so wealth was gained for treehouse holders and lost for asset holders. It is a wash.

So I stick with my assertion a change in asset values doesn’t change the amount of purchasing power in the economy in currency terms — it just moves it around between holders of assets and holders of non-assets.

DWCAP explained the distinction better than I did, that money isn’t the same as values. The relative values between two things changing does not impact the supply of money, nor does it DIRECTLY change the value of money (though there could be indirect effects via changed spending patterns, etc). It just changes how much money each person could get.

Finally, yes, the government can print as much as they want… whether they can prop up asset values is another question because one never knows where the money will go. That’s their goal, or one of them, but I think at some point it will stop working. But the newly printed money will go somewhere and cause some prices to rise — they can flood the economy with money but they can’t predict or control where it will slosh around to.

[Rich Toscano]

First of all, I did address the impact of fractional reserve banking in the article. That is a means by which money can be created (though not the only one) and it is inhibited when bank lending decreases for any reason, be it unwillingness to lend or borrow or asset value declines. But this inhibits future money growth; it does not effect the stock of existing money. And because money created by fractional reserve loans shows up in the monetary aggregates, the results of fractional reserve transactions are easily measured by looking at how much money there is.

There is a lot of focus on the ability of the banking system to create new money under these conditions, and I think that is a valid concern… however, there are other vectors for money creation, notably “QE” (the Fed printing money and directly injecting it into the economy). The Fed has already done this and if there is a threat of deflation, they will do it again. Their actions and words and analytical biases have made this very clear.

JP, the point is not to suggest that our economy functions like the island economy, it’s to simplify things so that you can see the differing impact of money, credit, and asset values on an economy.

Re. CAR’s point about using assets to trade. I just think you are looking at one side of the coin. In your example, someone could trade financial asset for a treehouse, but the other guy is trading a treehouse for a financial asset. When the value of the asset went down in terms of treehouses, and you said wealth was lost. But the value of treehouses went up in asset terms — so wealth was gained for treehouse holders and lost for asset holders. It is a wash.

So I stick with my assertion a change in asset values doesn’t change the amount of purchasing power in the economy in currency terms — it just moves it around between holders of assets and holders of non-assets.

DWCAP explained the distinction better than I did, that money isn’t the same as values. The relative values between two things changing does not impact the supply of money, nor does it DIRECTLY change the value of money (though there could be indirect effects via changed spending patterns, etc). It just changes how much money each person could get.

Finally, yes, the government can print as much as they want… whether they can prop up asset values is another question because one never knows where the money will go. That’s their goal, or one of them, but I think at some point it will stop working. But the newly printed money will go somewhere and cause some prices to rise — they can flood the economy with money but they can’t predict or control where it will slosh around to.

[Rich Toscano]

First of all, I did address the impact of fractional reserve banking in the article. That is a means by which money can be created (though not the only one) and it is inhibited when bank lending decreases for any reason, be it unwillingness to lend or borrow or asset value declines. But this inhibits future money growth; it does not effect the stock of existing money. And because money created by fractional reserve loans shows up in the monetary aggregates, the results of fractional reserve transactions are easily measured by looking at how much money there is.

There is a lot of focus on the ability of the banking system to create new money under these conditions, and I think that is a valid concern… however, there are other vectors for money creation, notably “QE” (the Fed printing money and directly injecting it into the economy). The Fed has already done this and if there is a threat of deflation, they will do it again. Their actions and words and analytical biases have made this very clear.

JP, the point is not to suggest that our economy functions like the island economy, it’s to simplify things so that you can see the differing impact of money, credit, and asset values on an economy.

Re. CAR’s point about using assets to trade. I just think you are looking at one side of the coin. In your example, someone could trade financial asset for a treehouse, but the other guy is trading a treehouse for a financial asset. When the value of the asset went down in terms of treehouses, and you said wealth was lost. But the value of treehouses went up in asset terms — so wealth was gained for treehouse holders and lost for asset holders. It is a wash.

So I stick with my assertion a change in asset values doesn’t change the amount of purchasing power in the economy in currency terms — it just moves it around between holders of assets and holders of non-assets.

DWCAP explained the distinction better than I did, that money isn’t the same as values. The relative values between two things changing does not impact the supply of money, nor does it DIRECTLY change the value of money (though there could be indirect effects via changed spending patterns, etc). It just changes how much money each person could get.

Finally, yes, the government can print as much as they want… whether they can prop up asset values is another question because one never knows where the money will go. That’s their goal, or one of them, but I think at some point it will stop working. But the newly printed money will go somewhere and cause some prices to rise — they can flood the economy with money but they can’t predict or control where it will slosh around to.

[Rich Toscano]

First of all, I did address the impact of fractional reserve banking in the article. That is a means by which money can be created (though not the only one) and it is inhibited when bank lending decreases for any reason, be it unwillingness to lend or borrow or asset value declines. But this inhibits future money growth; it does not effect the stock of existing money. And because money created by fractional reserve loans shows up in the monetary aggregates, the results of fractional reserve transactions are easily measured by looking at how much money there is.

There is a lot of focus on the ability of the banking system to create new money under these conditions, and I think that is a valid concern… however, there are other vectors for money creation, notably “QE” (the Fed printing money and directly injecting it into the economy). The Fed has already done this and if there is a threat of deflation, they will do it again. Their actions and words and analytical biases have made this very clear.

JP, the point is not to suggest that our economy functions like the island economy, it’s to simplify things so that you can see the differing impact of money, credit, and asset values on an economy.

Re. CAR’s point about using assets to trade. I just think you are looking at one side of the coin. In your example, someone could trade financial asset for a treehouse, but the other guy is trading a treehouse for a financial asset. When the value of the asset went down in terms of treehouses, and you said wealth was lost. But the value of treehouses went up in asset terms — so wealth was gained for treehouse holders and lost for asset holders. It is a wash.

So I stick with my assertion a change in asset values doesn’t change the amount of purchasing power in the economy in currency terms — it just moves it around between holders of assets and holders of non-assets.

DWCAP explained the distinction better than I did, that money isn’t the same as values. The relative values between two things changing does not impact the supply of money, nor does it DIRECTLY change the value of money (though there could be indirect effects via changed spending patterns, etc). It just changes how much money each person could get.

Finally, yes, the government can print as much as they want… whether they can prop up asset values is another question because one never knows where the money will go. That’s their goal, or one of them, but I think at some point it will stop working. But the newly printed money will go somewhere and cause some prices to rise — they can flood the economy with money but they can’t predict or control where it will slosh around to.

[Rich Toscano]

Yes, I do… I think people put entirely too much credence on stock prices as an indicator of economic health. Also since so many people own such investments, they freak out when values drop and vice versa.

So my bet is that consumer confidence is heavily influenced by stock prices, ie that there is a causal relationship. I doubt you would spot the lag on a multi-year chart like that, but I’ll bet that if you could look closely you would indeed see that confidence trails stock prices. Anyone know of a chart that could confirm/deny my suspicion?

[Rich Toscano]

Yes, I do… I think people put entirely too much credence on stock prices as an indicator of economic health. Also since so many people own such investments, they freak out when values drop and vice versa.

So my bet is that consumer confidence is heavily influenced by stock prices, ie that there is a causal relationship. I doubt you would spot the lag on a multi-year chart like that, but I’ll bet that if you could look closely you would indeed see that confidence trails stock prices. Anyone know of a chart that could confirm/deny my suspicion?

[Rich Toscano]

Yes, I do… I think people put entirely too much credence on stock prices as an indicator of economic health. Also since so many people own such investments, they freak out when values drop and vice versa.

So my bet is that consumer confidence is heavily influenced by stock prices, ie that there is a causal relationship. I doubt you would spot the lag on a multi-year chart like that, but I’ll bet that if you could look closely you would indeed see that confidence trails stock prices. Anyone know of a chart that could confirm/deny my suspicion?

[Rich Toscano]

Yes, I do… I think people put entirely too much credence on stock prices as an indicator of economic health. Also since so many people own such investments, they freak out when values drop and vice versa.

So my bet is that consumer confidence is heavily influenced by stock prices, ie that there is a causal relationship. I doubt you would spot the lag on a multi-year chart like that, but I’ll bet that if you could look closely you would indeed see that confidence trails stock prices. Anyone know of a chart that could confirm/deny my suspicion?

[Rich Toscano]

Yes, I do… I think people put entirely too much credence on stock prices as an indicator of economic health. Also since so many people own such investments, they freak out when values drop and vice versa.

So my bet is that consumer confidence is heavily influenced by stock prices, ie that there is a causal relationship. I doubt you would spot the lag on a multi-year chart like that, but I’ll bet that if you could look closely you would indeed see that confidence trails stock prices. Anyone know of a chart that could confirm/deny my suspicion?

[Rich Toscano]

Thanks Arraya. I agree with much of what you say. Some of it comes down to speculation; eg you think that there is a line the Fed won’t cross, whereas I speculate that the Fed WOULD cross that line if the alternative were a multi-year deflationary spiral. But I can respect that people will naturally have different opinions of how far the Fed and govt will push things… I just happen to be on the side of the spectrum that thinks that they will fight deflation at all costs by any means necessary.

One thing I will note though is that while wages are down, if you include government handouts in the picture, personal income has actually grown all along. Consider this chart from the excellent clearonmoney.com site:

Might the government handouts slow down? Sure, maybe (though I personally speculate that they will not do so as long as there is a perceived deflation threat). And are people less willing to spend that money? Yes, for as long as they consider cash a safe haven. So I’m not saying this is the only factor, by any means. However, it does demonstrate the reality that stimulative government policy can, and has succeeded in, growing personal incomes and putting money into people’s hands.

That said, I agree that there are deflationary forces at work right now and the timing of outcomes is as inscrutable as ever.

I will state though that at this point, I think the most likely “inciting incident” for turning things overtly inflationary will be a US govt funding crisis in which our foreign debtors finally realize they’re not geting paid back in real terms. Of course, that is a speculation as well.

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