Liquidity Trap

Discussion in 'Economics & Trade' started by Quadhole, Jul 8, 2020.

  1. Quadhole

    Quadhole Well-Known Member

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    This is what Mr. Long is saying on his latest presentation Matasii. No longer does low rates and Printing money work. It only hides or gives the illusion of a Prosperous economy. M2 Money supply (money hand to hand transfer) I think is best definition of M2. is not happening in this country. Guy goes to work, stops at the baker, grocery store, gas station, and butcher on way home. Saturday he goes to the local Hardware store where Fred the handyman asks if he needs any work. All of these businesses and people are transferring money to each other within a city, county, country. It filters around and around helping to grow the area.

    Today we buy from Amazon and what you pay goes mostly OUT of the Country, or into Jeff Bezos pocket. Very little stays in the community. This is the growing phenom.
    Thus to create an illusion of growth we print money and lower rates. This also drives up the value of your home, land, THINGS... the costs and the value. Higher home value means higher LOCAL taxes.

    I think the Market, or most of it continues to go up due to deflation. While the dollar becomes worth less the value of EVERYTHING goes up... Deflation... which is followed by hyperinflation. You have that to look forward too... Food goes up 10% a quarter as more layoffs happen, and so on.

    Got GOLD ?
     
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  2. OldManOnFire

    OldManOnFire Well-Known Member

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    Take away the annual TRILLION$ deficits and tell me how the economy is going?
    Take away all the deficit money the Feds funnel to local governments and tell me how their economy is doing?
    Change the prime rate to 5-6% and tell me how the economy will go?
    Downsize federal government spending and tell me how the economy will respond?

    It's all smoke and mirrors!!
     
  3. kazenatsu

    kazenatsu Well-Known Member Past Donor

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    Anyone who understands how the monetary system works knows that the Fed can only keep interest rates down for so long before inflationary pressures start building.
    It actually gets very expensive to hold down interest rates, since the tool the Fed has for doing this is to issue new money and then lend it out at below market interest rates, which is subsidizing the interest rates on the loans. That cost gets born in inflation.
     
  4. kazenatsu

    kazenatsu Well-Known Member Past Donor

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    The Fed is supposed to be preventing bubbles, not contributing towards creating them. But it seems the latter may be the case.
     
    Last edited: Jul 12, 2020
  5. kazenatsu

    kazenatsu Well-Known Member Past Donor

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    Yes, there's an inherent inverse relationship between interest rates and asset prices. Because when interest rates are lower than the yields on investment assets, investors can just borrow money at a lower rate and then use it to buy an asset to get a higher rate.

    So when the Fed "expands the money" supply to work their low interest rate magic, they're basically buying up assets in the economy.
     
    Last edited: Jul 12, 2020
  6. kazenatsu

    kazenatsu Well-Known Member Past Donor

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    I've been saying this all isn't sustainable for a while now.

    related thread
    US trading away their ASSETS
     
    Last edited: Jul 12, 2020
  7. kazenatsu

    kazenatsu Well-Known Member Past Donor

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    Deflation is typically what happens after an economy begins to deflate.

    Maybe that doesn't mean anything to you.

    During the formation of a bubble, it tends to create some gradual and unwarranted inflation, as people think there is more wealth than there actually is and asset prices overinflate. So once things start adjusting back down to where they should be, you will get deflation back down, to compensate for the inflation that should have never happened.

    This effect is independent from inflation caused by the paper money supply issued by the Fed.

    The Fed tried to compensate by pumping out money (creating inflationary pressure) to cancel out the deflation that they knew was going to be caused by the housing bubble and economy deflating.
    They didn't want to let things go back down. They were basically propping up asset prices. This was fully done on purpose.
     
    Last edited: Jul 12, 2020
  8. kazenatsu

    kazenatsu Well-Known Member Past Donor

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    I do very much wonder, if rates went up to 5 or 6%, what effect that would have on housing prices. (how far down they would fall, a little bit or a lot)
     
  9. OldManOnFire

    OldManOnFire Well-Known Member

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    It's not about 'housing prices' it's about the cost of money for everything...
     
  10. kazenatsu

    kazenatsu Well-Known Member Past Donor

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    What are you even talking about?
     
  11. Longshot

    Longshot Well-Known Member

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    We should let the market, not the state, choose the monetary unit.
     
  12. LafayetteBis

    LafayetteBis Well-Known Member Past Donor

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    I've not seen so much BS on an Economics Thread here in a great long time.

    Well done ... ! (Economic interest = Zero)
     
  13. OldManOnFire

    OldManOnFire Well-Known Member

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    You said; "I do very much wonder, if rates went up to 5 or 6%, what effect that would have on housing prices."

    It's not about 'housing prices'...it's about the cost of money! House sales will continue unimpeded at 5-6% rates...
     
  14. kazenatsu

    kazenatsu Well-Known Member Past Donor

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    I'm still not sure what you're talking about, or exactly what you are trying to refer to by "cost of money".

    Are you basically claiming that interest rates will actually have little effect on home prices?
    Or that interest rates are only one of the minor little factors?

    Obviously if interest rates go down, people are typically able to borrow more money, or may be more inclined to do so.
    Interest rates going down typically means banks are more inclined to lend out money (as it is indicative of supply & demand, a greater supply of money to lend out relative to demand for borrowing).
     
    Last edited: Jul 15, 2020
  15. LafayetteBis

    LafayetteBis Well-Known Member Past Donor

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    Yes, but Americans have been doing this for quite a long time. Even before Bezos started Amazon. He just had the amazing good luck to start a company providing products over the internet by means of damn-good pricing and speedy delivery. The old-timer companies all had local sales-distribution in large stores in the center of towns or nearby the center.

    Things change, and especially in the age of the Internet. And we must adapt with them instead of complaining. Which will do no good.

    If you want to do something about stupendous upper-incomes then make sure that the Taxation is the mechanism. There is no reason these billionaires should be profiting from a ridiculously low income-tax.

    And we should have known that when Reckless Ronnie did it right before our very eyes in the 1980s ...
     
  16. Longshot

    Longshot Well-Known Member

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    Why would we want to do something about stupendous upper-incomes? The purpose of taxation is to pay the for the military, courts, and police (i.e. governance).
     
    Last edited: Jul 15, 2020
  17. frodly

    frodly Well-Known Member

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    There is absolutely no evidence to support this conclusion. Gold Bugs and inflation hawks have been saying hyperinflation is just around the corner for a few decades now. Yet we never find ourselves around that corner. The reality is, inflation IS NOT always and everywhere a monetary phenomenon. There will be no significant uptick in inflation without increased velocity of money. We won't see an increase in the velocity of money without higher wages and we won't see higher wages anytime soon. Similarly, we won't see increased velocity without businesses spending money. In a crisis, people save and businesses save, pay off their debts, basically anything except spend money. Inflation in this current economic climate is in fact highly unlikely.
     
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  18. liberalminority

    liberalminority Well-Known Member

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    inflation started when they ended the gold standard, it was managed well by the petrodollar.

    they printed money and kept interest rates low since the 1990's, 2008 recession, and now. interest rates should be at 15 percent
     
  19. LafayetteBis

    LafayetteBis Well-Known Member Past Donor

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    A PICTURE IS WORTH A THOUSAND WORDS

    Exactly - in fact, perhaps just the opposite is welcome.

    The burgeoning of upper-incomes is a result of the Great Recession that was corrected in 2016 during Obama's second administration.

    By the time the 2016 presidential election came around, the country's Employment-to-population Ratio was on the mend - after 4-years of stagnation (Nov 2009 to Dec 2013). See E-to-p Ratio evolution here. What happened in terms of "correction" was also a boost in personal earnings mostly spent. Which also stimulated inflation but not inordinately (except in realty).

    That looked like this (note on the left "Annual percentage (Price Index) growth rate":
    [​IMG]
    As can be seen above, realty price increases are peaking every two years in a correction (of prices) from the period 2007 to 2012 but nonetheless on an upward trend.

    Will there be a "bust"? I doubt it. The "price busting" seen above occurred because it was provoked by the Great Recession.

    I for one don't think that will happen again - and I for one don't give a damn because I don't own property in the US ... !
     
    Last edited: Jul 16, 2020
  20. kazenatsu

    kazenatsu Well-Known Member Past Donor

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    I think what happened is the housing bubble created a large amount of inflation, and rather than letting the housing bubble deflate back to normal where it should have been, the Fed cemented and propped up that inflation permanently. Basically converting housing inflation into monetary inflation. They intentionally tried to prevent asset prices from falling.
    The inflationary pressure of printing out more money cancelled out deflationary pressure from the economy deflating (this was entirely intentional), and thus no overall sudden inflation was observable.
    I've elaborated on this in other threads.

    Furthermore, there's also this:
    QE1 did result in some inflation by 2011
    So it looks like at least some inflation was visible.

    I think the idea of velocity of money causing inflation is a false theory.
    I've elaborated on this in at least one other thread and I might have started a thread about it too, though I can't seem to be able to find it now.
     
    Last edited: Jul 16, 2020
  21. LafayetteBis

    LafayetteBis Well-Known Member Past Donor

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    FACTUAL EVIDENCE

    Perhaps you haven't noticed but my comment just above yours shows in a chart that realty-inflation was not at all that great.(except for 2013). Currently it peaks at 10% but for the year the average is much lower.

    So, I don't understand all this "price inflation" that is supposedly severe. The facts say otherwise for the national realty-market.

    Shall we trust the factual evidence when we see it? Because, oh do we love to bitch-'n-moan about price inflation ... !
     
  22. Longshot

    Longshot Well-Known Member

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    Of course it's always a monetary phenomenon. Inflation (by which I assume you mean a general rise in the price level) cannot exist without money.
     
  23. frodly

    frodly Well-Known Member

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    So you have no evidence or argument to provide? I do not care if you have elaborated on something in another thread, what difference does that make to me or this thread? Do you expect me to just go read every other post you have ever made at this forum?

    Also, what you are saying is not supported by evidence.

    This is the only place I can find this excellent graph, in a set of slides by Brown political economist Mark Blyth, check slide number 7.

    https://www.volatilityinvesting.co.uk/Content/pdf/stupid-economic-ideas-mark-blyth.pdf

    What becomes clear looking at this, is that inflation hasn't been a serious global economic issue in the entirety of human history, with the exception of the 1970s. It was a serious issue for individual countries with no credibility, but only once was it a serious global issue. That moment in time saw the end of Bretton Woods, the end of the gold peg, the oil crisis, and had seen extraordinarily high wage growth for the previous three decades across the "developed" world. That confluence of events won't repeat itself now, because we have none of those issues to deal with. In particular, we have no wage growth. Without wage growth, it is very unlikely that we will have inflation.
     
    Last edited: Jul 16, 2020
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  24. frodly

    frodly Well-Known Member

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    That is the most pointlessly banal statement I have ever seen. Do you mean money, as in a means of exchange? Then of course your are correct, trite and pointless, but still correct. However, that isn't what Milton Friedman meant when he said that inflation was always and everywhere a monetary phenomenon.
     
  25. kazenatsu

    kazenatsu Well-Known Member Past Donor

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    Perhaps you ignored the meaning of what I was saying. What I was actually referring to was an inflationary effect. Obviously this would not have been obviously visible if it was cancelled out by a deflationary effect from something else.
    Please, try to read the wider context of what I am writing.

    I think one of the issues here, that leads to disagreement, is defining inflation.

    Everyone knows what "inflation" sort of means in general, but what many people don't seem to be able to grasp is it's actually not possible to measure in a purely quantitative and objective way.
    The disagreements ultimately come down to a semantic argument, I believe, but the two sides disagreeing do not see that.

    Sorry if that's not the most clear, I can try to explain it more.
    You both are arguing that "inflation does this", or "inflation does that", but even though you're using the same word, you're not talking about the same thing when each of you uses that word.

    Now please, to point out the obvious, don't try to define inflation without looking at the context of how it applies in your arguments, and how the application differs between your different arguments.

    Sorry if that's too "complicated", but such is reality and logic.
     
    Last edited: Jul 16, 2020

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