[Rich Toscano]

[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).

[Rich Toscano]

[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).

[Rich Toscano]

[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).

[Rich Toscano]

[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).

[Rich Toscano]

[quote=walterwhite]Also stocks can and do go to zero. Isn’t money destroyed then? What if things get so bad that starts happening a lot[/quote]

No!

If you own a stock that was worth something and the next day it is worth nothing, all that means is that YOUR ability to exchange that stock for someone else’s money just disappeared. It had absolutely no effect on the supply of money.

People, money is not a concept, and it’s not a feeling. Money is a specific, measurable thing. It is the societally accepted medium of exchange that is immediately redeemable at par value to use as such a medium. Stocks aren’t money; they are just claims on ownership of a business. The value of those claims changing does not, by itself, directly affect the amount of money in the economy. Houses are not money. They are places to live. Changes in their value can (as I have acknowledged many times) affect one mechanism of new money creation (home loans), but changes in home values DO NOT directly change the supply of money in the economy.

[Rich Toscano]

[quote=walterwhite]Also stocks can and do go to zero. Isn’t money destroyed then? What if things get so bad that starts happening a lot[/quote]

No!

If you own a stock that was worth something and the next day it is worth nothing, all that means is that YOUR ability to exchange that stock for someone else’s money just disappeared. It had absolutely no effect on the supply of money.

People, money is not a concept, and it’s not a feeling. Money is a specific, measurable thing. It is the societally accepted medium of exchange that is immediately redeemable at par value to use as such a medium. Stocks aren’t money; they are just claims on ownership of a business. The value of those claims changing does not, by itself, directly affect the amount of money in the economy. Houses are not money. They are places to live. Changes in their value can (as I have acknowledged many times) affect one mechanism of new money creation (home loans), but changes in home values DO NOT directly change the supply of money in the economy.

[Rich Toscano]

[quote=walterwhite]Also stocks can and do go to zero. Isn’t money destroyed then? What if things get so bad that starts happening a lot[/quote]

No!

If you own a stock that was worth something and the next day it is worth nothing, all that means is that YOUR ability to exchange that stock for someone else’s money just disappeared. It had absolutely no effect on the supply of money.

People, money is not a concept, and it’s not a feeling. Money is a specific, measurable thing. It is the societally accepted medium of exchange that is immediately redeemable at par value to use as such a medium. Stocks aren’t money; they are just claims on ownership of a business. The value of those claims changing does not, by itself, directly affect the amount of money in the economy. Houses are not money. They are places to live. Changes in their value can (as I have acknowledged many times) affect one mechanism of new money creation (home loans), but changes in home values DO NOT directly change the supply of money in the economy.

[Rich Toscano]

[quote=walterwhite]Also stocks can and do go to zero. Isn’t money destroyed then? What if things get so bad that starts happening a lot[/quote]

No!

If you own a stock that was worth something and the next day it is worth nothing, all that means is that YOUR ability to exchange that stock for someone else’s money just disappeared. It had absolutely no effect on the supply of money.

People, money is not a concept, and it’s not a feeling. Money is a specific, measurable thing. It is the societally accepted medium of exchange that is immediately redeemable at par value to use as such a medium. Stocks aren’t money; they are just claims on ownership of a business. The value of those claims changing does not, by itself, directly affect the amount of money in the economy. Houses are not money. They are places to live. Changes in their value can (as I have acknowledged many times) affect one mechanism of new money creation (home loans), but changes in home values DO NOT directly change the supply of money in the economy.

[Rich Toscano]

[quote=walterwhite]Also stocks can and do go to zero. Isn’t money destroyed then? What if things get so bad that starts happening a lot[/quote]

No!

If you own a stock that was worth something and the next day it is worth nothing, all that means is that YOUR ability to exchange that stock for someone else’s money just disappeared. It had absolutely no effect on the supply of money.

People, money is not a concept, and it’s not a feeling. Money is a specific, measurable thing. It is the societally accepted medium of exchange that is immediately redeemable at par value to use as such a medium. Stocks aren’t money; they are just claims on ownership of a business. The value of those claims changing does not, by itself, directly affect the amount of money in the economy. Houses are not money. They are places to live. Changes in their value can (as I have acknowledged many times) affect one mechanism of new money creation (home loans), but changes in home values DO NOT directly change the supply of money in the economy.

[Rich Toscano]

[quote=capeman]Rich – You don’t take into account the loss of money through leveraged losses in the markets. If banks will lend 1:1 for margin on stocks and a stock goes to 50% then upon liquidation the former stock owners value goes from 100% to zero. This is even more severe when looking at the leverage in futures trading and currencies. Does this destroy money? No but the deflationary effects on the former owner of the securities is multiplied much more. So when Alice goes from 3 million to zero instead of 3 million to 2 million her effect on the economy will be from something to nothing while the bank will naturally tighten it’s margin requirements thereby destroying what was liquid money. That is an apparent loss of money.[/quote]

Yes, I am taking it into account and I addressed this very objection in the snippet above. *You are talking about the ability to create new money (and to a lesser extent the effect of perceived net worth); I am talking about the stock of existing money.*

If you want to conflate those things in your own analysis feel free; but I do not conflate them because they are different phenomena and each should be addressed separately to best understand the mechanics of what is going on.

Cyphire’s post clearly stated that *asset value declines reduced the existing stock of money.* I posted to correct this misapprehension. That was all I said. Now multiple people are posting to argue as if I’d stated that asset price declines don’t inhibit future money creation (all things equal), but I never stated that and in fact I stated the opposite, per this section that I will repeat from the above post:

There are some price-deflationary effects of a widespread decline in asset prices. All the stock holders who were still holding their declining stocks would definitely feel less wealthy than they did before the price drop. It’s likely that they would accordingly reduce their spending and boost their saving, which would exert a price-deflationary effect due to reduced monetary velocity and an increased demand for cash balances. In other words, while there was no change in society’s overall ability to spend, there might well be a reduction in society’s willingness to spend. But this phenomenon is very different than the actual destruction of money or spending ability.

Lower asset prices might also make it difficult for banks holding those assets on their balance sheets to lend new money into existence. But while this puts a potential damper on new money creation, it does not destroy any existing money.

Now if you want to debate about the deflationary pressures of asset price declines by the mechanism of reducing the ability to create money in the future, feel free. (I would argue that the Fed has proven itself more than capable of overcoming that, with the evidence that money supply has grown in spite of asset price declines).

And if you want to debate about the effects of “apparent loss of money” as you put it, also feel free because that is definitely a valid topic.

But don’t jumble up perceived net worth, future money supply growth, and the size of the existing money supply as if they are one thing. They are three different factors and conflating them hopelessly confuses and already complex topic.

[Rich Toscano]

[quote=capeman]Rich – You don’t take into account the loss of money through leveraged losses in the markets. If banks will lend 1:1 for margin on stocks and a stock goes to 50% then upon liquidation the former stock owners value goes from 100% to zero. This is even more severe when looking at the leverage in futures trading and currencies. Does this destroy money? No but the deflationary effects on the former owner of the securities is multiplied much more. So when Alice goes from 3 million to zero instead of 3 million to 2 million her effect on the economy will be from something to nothing while the bank will naturally tighten it’s margin requirements thereby destroying what was liquid money. That is an apparent loss of money.[/quote]

Yes, I am taking it into account and I addressed this very objection in the snippet above. *You are talking about the ability to create new money (and to a lesser extent the effect of perceived net worth); I am talking about the stock of existing money.*

If you want to conflate those things in your own analysis feel free; but I do not conflate them because they are different phenomena and each should be addressed separately to best understand the mechanics of what is going on.

Cyphire’s post clearly stated that *asset value declines reduced the existing stock of money.* I posted to correct this misapprehension. That was all I said. Now multiple people are posting to argue as if I’d stated that asset price declines don’t inhibit future money creation (all things equal), but I never stated that and in fact I stated the opposite, per this section that I will repeat from the above post:

There are some price-deflationary effects of a widespread decline in asset prices. All the stock holders who were still holding their declining stocks would definitely feel less wealthy than they did before the price drop. It’s likely that they would accordingly reduce their spending and boost their saving, which would exert a price-deflationary effect due to reduced monetary velocity and an increased demand for cash balances. In other words, while there was no change in society’s overall ability to spend, there might well be a reduction in society’s willingness to spend. But this phenomenon is very different than the actual destruction of money or spending ability.

Lower asset prices might also make it difficult for banks holding those assets on their balance sheets to lend new money into existence. But while this puts a potential damper on new money creation, it does not destroy any existing money.

Now if you want to debate about the deflationary pressures of asset price declines by the mechanism of reducing the ability to create money in the future, feel free. (I would argue that the Fed has proven itself more than capable of overcoming that, with the evidence that money supply has grown in spite of asset price declines).

And if you want to debate about the effects of “apparent loss of money” as you put it, also feel free because that is definitely a valid topic.

But don’t jumble up perceived net worth, future money supply growth, and the size of the existing money supply as if they are one thing. They are three different factors and conflating them hopelessly confuses and already complex topic.

[Rich Toscano]

[quote=capeman]Rich – You don’t take into account the loss of money through leveraged losses in the markets. If banks will lend 1:1 for margin on stocks and a stock goes to 50% then upon liquidation the former stock owners value goes from 100% to zero. This is even more severe when looking at the leverage in futures trading and currencies. Does this destroy money? No but the deflationary effects on the former owner of the securities is multiplied much more. So when Alice goes from 3 million to zero instead of 3 million to 2 million her effect on the economy will be from something to nothing while the bank will naturally tighten it’s margin requirements thereby destroying what was liquid money. That is an apparent loss of money.[/quote]

Yes, I am taking it into account and I addressed this very objection in the snippet above. *You are talking about the ability to create new money (and to a lesser extent the effect of perceived net worth); I am talking about the stock of existing money.*

If you want to conflate those things in your own analysis feel free; but I do not conflate them because they are different phenomena and each should be addressed separately to best understand the mechanics of what is going on.

Cyphire’s post clearly stated that *asset value declines reduced the existing stock of money.* I posted to correct this misapprehension. That was all I said. Now multiple people are posting to argue as if I’d stated that asset price declines don’t inhibit future money creation (all things equal), but I never stated that and in fact I stated the opposite, per this section that I will repeat from the above post:

There are some price-deflationary effects of a widespread decline in asset prices. All the stock holders who were still holding their declining stocks would definitely feel less wealthy than they did before the price drop. It’s likely that they would accordingly reduce their spending and boost their saving, which would exert a price-deflationary effect due to reduced monetary velocity and an increased demand for cash balances. In other words, while there was no change in society’s overall ability to spend, there might well be a reduction in society’s willingness to spend. But this phenomenon is very different than the actual destruction of money or spending ability.

Lower asset prices might also make it difficult for banks holding those assets on their balance sheets to lend new money into existence. But while this puts a potential damper on new money creation, it does not destroy any existing money.

Now if you want to debate about the deflationary pressures of asset price declines by the mechanism of reducing the ability to create money in the future, feel free. (I would argue that the Fed has proven itself more than capable of overcoming that, with the evidence that money supply has grown in spite of asset price declines).

And if you want to debate about the effects of “apparent loss of money” as you put it, also feel free because that is definitely a valid topic.

But don’t jumble up perceived net worth, future money supply growth, and the size of the existing money supply as if they are one thing. They are three different factors and conflating them hopelessly confuses and already complex topic.

[Rich Toscano]

[quote=capeman]Rich – You don’t take into account the loss of money through leveraged losses in the markets. If banks will lend 1:1 for margin on stocks and a stock goes to 50% then upon liquidation the former stock owners value goes from 100% to zero. This is even more severe when looking at the leverage in futures trading and currencies. Does this destroy money? No but the deflationary effects on the former owner of the securities is multiplied much more. So when Alice goes from 3 million to zero instead of 3 million to 2 million her effect on the economy will be from something to nothing while the bank will naturally tighten it’s margin requirements thereby destroying what was liquid money. That is an apparent loss of money.[/quote]

Yes, I am taking it into account and I addressed this very objection in the snippet above. *You are talking about the ability to create new money (and to a lesser extent the effect of perceived net worth); I am talking about the stock of existing money.*

If you want to conflate those things in your own analysis feel free; but I do not conflate them because they are different phenomena and each should be addressed separately to best understand the mechanics of what is going on.

Cyphire’s post clearly stated that *asset value declines reduced the existing stock of money.* I posted to correct this misapprehension. That was all I said. Now multiple people are posting to argue as if I’d stated that asset price declines don’t inhibit future money creation (all things equal), but I never stated that and in fact I stated the opposite, per this section that I will repeat from the above post:

There are some price-deflationary effects of a widespread decline in asset prices. All the stock holders who were still holding their declining stocks would definitely feel less wealthy than they did before the price drop. It’s likely that they would accordingly reduce their spending and boost their saving, which would exert a price-deflationary effect due to reduced monetary velocity and an increased demand for cash balances. In other words, while there was no change in society’s overall ability to spend, there might well be a reduction in society’s willingness to spend. But this phenomenon is very different than the actual destruction of money or spending ability.

Lower asset prices might also make it difficult for banks holding those assets on their balance sheets to lend new money into existence. But while this puts a potential damper on new money creation, it does not destroy any existing money.

Now if you want to debate about the deflationary pressures of asset price declines by the mechanism of reducing the ability to create money in the future, feel free. (I would argue that the Fed has proven itself more than capable of overcoming that, with the evidence that money supply has grown in spite of asset price declines).

And if you want to debate about the effects of “apparent loss of money” as you put it, also feel free because that is definitely a valid topic.

But don’t jumble up perceived net worth, future money supply growth, and the size of the existing money supply as if they are one thing. They are three different factors and conflating them hopelessly confuses and already complex topic.

[Rich Toscano]

[quote=capeman]Rich – You don’t take into account the loss of money through leveraged losses in the markets. If banks will lend 1:1 for margin on stocks and a stock goes to 50% then upon liquidation the former stock owners value goes from 100% to zero. This is even more severe when looking at the leverage in futures trading and currencies. Does this destroy money? No but the deflationary effects on the former owner of the securities is multiplied much more. So when Alice goes from 3 million to zero instead of 3 million to 2 million her effect on the economy will be from something to nothing while the bank will naturally tighten it’s margin requirements thereby destroying what was liquid money. That is an apparent loss of money.[/quote]

Yes, I am taking it into account and I addressed this very objection in the snippet above. *You are talking about the ability to create new money (and to a lesser extent the effect of perceived net worth); I am talking about the stock of existing money.*

If you want to conflate those things in your own analysis feel free; but I do not conflate them because they are different phenomena and each should be addressed separately to best understand the mechanics of what is going on.

Cyphire’s post clearly stated that *asset value declines reduced the existing stock of money.* I posted to correct this misapprehension. That was all I said. Now multiple people are posting to argue as if I’d stated that asset price declines don’t inhibit future money creation (all things equal), but I never stated that and in fact I stated the opposite, per this section that I will repeat from the above post:

There are some price-deflationary effects of a widespread decline in asset prices. All the stock holders who were still holding their declining stocks would definitely feel less wealthy than they did before the price drop. It’s likely that they would accordingly reduce their spending and boost their saving, which would exert a price-deflationary effect due to reduced monetary velocity and an increased demand for cash balances. In other words, while there was no change in society’s overall ability to spend, there might well be a reduction in society’s willingness to spend. But this phenomenon is very different than the actual destruction of money or spending ability.

Lower asset prices might also make it difficult for banks holding those assets on their balance sheets to lend new money into existence. But while this puts a potential damper on new money creation, it does not destroy any existing money.

Now if you want to debate about the deflationary pressures of asset price declines by the mechanism of reducing the ability to create money in the future, feel free. (I would argue that the Fed has proven itself more than capable of overcoming that, with the evidence that money supply has grown in spite of asset price declines).

And if you want to debate about the effects of “apparent loss of money” as you put it, also feel free because that is definitely a valid topic.

But don’t jumble up perceived net worth, future money supply growth, and the size of the existing money supply as if they are one thing. They are three different factors and conflating them hopelessly confuses and already complex topic.

[Rich Toscano]

JP –

OK, let’s substitute housing. Let’s say that home prices go down. Did any money disappear? NO. Absolutely not.

It is true that it’s harder for banks to create new money via HELOCs because now the collateral (homes) are lower in value. But a reduced ability to create new money in the future is NOT THE SAME as a decrease in the supply of existing money. I covered this in detail in the article I linked to in my prior comment.

The rest of your post consists of multiple assertions that I’m not sure what to make of — ie. are you suggesting that I have argued that the bubble was not unsustainable, or that I think it’s a good idea to throw money at it to keep prices propped up? I certainly hope you aren’t under the impression that I believe such things.

Cyphire posted that a decrease in asset values decreases the money supply. I posted in reply to point out that this was not the case. I never said that the bubble was sustainable or that the government should throw money at it (not in this thread, or ever!)

I also don’t understand the assertion that the amount of money in the economy pales in comparison to the bubble. The fact is that the money supply has increased quite dramatically since the bubble ended. People aren’t spending the money as quickly because of the weak economy, but there is more money out there now than there ever was during the bubble, by a huge margin. Here is a chart of M2, a widely used monetary aggregate, to illustrate this:

http://research.stlouisfed.org/fred2/graph/?chart_type=line&s%5B1%5D%5Bid%5D=M2&s%5B1%5D%5Brange%5D=5yrs

As I’ve argued many times, and at great length (notably in the two-part series whose second part I linked to above), the Fed is fully committed to increasing the money supply and is entirely capable of doing so. Given that the money supply grew substantially in the face of generational asset price declines, I’m not even sure why this is a matter of debate any more.

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