Quote: (05-18-2013 03:15 PM)TheCaptainPower Wrote:
Westcoast knows his stuff, i've been following him. You can disagree with his outlook on the economy, but he still knows his stuff...
I'll take your word for it. I just think he was waaaay off base in this particular post. Here's why I think so:
- Everyone knows what happened the last few times the Fed expanded credit in the face of economic difficulty; you're all familiar with how the tech bubble, the housing bubble , the mortgage bubble, etc. ended. It ended with a crash! Those were, essentially, the case of too many dollars chasing the same assets.
- What we have now is essentially the same situation. Except now we have it on a world wide basis: Prime Minister Abe is doing it in Japan (and unsurprisingly, the Yen is falling as a result), Carney at the BoE is doing the same. So you have it on a grander scale - and that suggests to me we may have a grander fall.
- For my money, I don't see how the Fed's extreme quantitative easing can produce anything other than a temporary (and ultimately disasterous) financial distortion, as has happened in the recent past.
- Think of the money supply this way: There are only two forms of monetary base - 1) currency and 2) banking reserves. Of the many trillions of dollars of monetary base created the past few years, only a small percent ($200B?) has been in the form of actual currency. All of rest is just an increase in banking reserves, which eventually takes the form of an expansion of credit. This credit can be exchanged for actual assets! They only "go away" at the point that the Federal Reserve reverses course and begins to
sell Treasuries or mortgage backed securities, and retires that credit in circulation as payment.
Meanwhile, with the Fed keeping the short end of the curve near zero, all that extra money floating around creates discomfort for those holding it: There is a negative real interest rate (i.e., inflation exceeds what your bank will pay you in interest), which does what? It causes you to SEEK HIGHER YIELDS. To take more risk. To buy stocks, bonds, and real estate. The Fed is hoping you will do this!
Why? B/c the government hopes that the feeling of wealth created by the rise in prices of the assets you have bought will cause you to feel richer, and therefore SPEND more in the consumer economy. I.e., they hope that creating a "phantom" recovery (based on credit) will eventually lead to a REAL recovery! That would certainly be nice, if it happened. Maybe it will. It remains to be seen.
But the problems associated with this course of action, in my view, are the following:
1) This is all "fiat money": The currency isn't tied to gold or any actual asset, so all it does in the long run is cause more dollars chasing the same amount of goods (the very definition of inflation). AND ONE OF THE THINGS THAT GET INFLATED IN THIS SEARCH FOR YIELD IS ASSET PRICES! Houses, stocks, etc. Now, if this could be done indefinitely (I guess that's what Wall St is implying, though he won't actually tell us), then I suppose asset prices could rise indefinitely. But that doesn't happen! We've seen three times the past 13 years that eventually, the music stops, and this game of musical chairs is over. When does the music stop? When credit has been expanded too far, and people are getting credit and buying assets (such as homes!) that they can't afford. Then, since banks want to minimize losses, a GREAT UNWIND of credit begins. Fewer dollars chasing the same amount of assets has exactly the opposite effect that MORE dollars chasing the same amount of assets had: Prices DECLINE!
2) The second problem this scenario has is it causes MALINVESTMENT. I.e., instead of credit going where it naturally would in a normal credit environment, excess credit means projects get done that SHOULD NOT GET DONE. Well, that leaves a bit of a hangover when these projects crash! Just like you can use your time wisely or spend it poorly - but you pay a price years later if you've spent your time poorly -- you've nothing to show for it! Its the same with money that flows towards projects that should never have gotten funded: Our society is poorer for it.
That's what I base my opinions on. That's what I think the government is doing. Anyone who has a different view, and wants to tell us why, is more than welcome to do so and will be treated respectfully. I may even learn something! But if you reply with a childish "hahaha - anyone who thinks that knows nothing", well, you will be repeatedly invited to tell us WHY you think that.
