Regulating inflation.

If spending on services is about 80% of GDP and probably 80% of employment, and if GDP is $18 trillion, then 80% of $18T equals $14.4T. How much does the government need to earn in taxation from services each year...$1 trillion? or $500 billion? If it's $1 trillion on $14.4T of GDP, then the services tax rate would need to be about 7% so they would add about $21K in tax on the surgery above. No matter...extracting another $1 trillion from taxpayers, who currently refuse to increase taxes by $500 billion per year to avoid deficit spending, will be a tough sell...

 

You cannot regulate inflation.

It regulates you.

 

There is an attempt to regulate inflation by manipulating the cost of money, however, it does not stop inflation...

 

Perhaps we just need smaller State and local governments that run on less cash.

 

If the federal government wasn't micromanaging them, then perhaps that would be possible. As is, they need the Benjamins.

 

We don't sell them on the tax, silly goose. We hide the tax in legislation with a nifty sounding name that they will support on that alone. It worked on the Financial Services Modernization Act and No Child Left Behind.

 

I would prefer we just starve them all.

 

Oooo....I was going to answer the OP, but your answer is so much more interesting.

Quite right.

Mmmm...Here we seem to be losing the forest for the trees. Yes consumption is important because productivity is important. We live in a world of cultures that would seek to be dominant over each other. The best way to esure your culture survives and prospers is to cooperate and maximize real resources and human capital, so I'd say it goes a little beyond consumerism.

Or you could save it in the form of a security that pays interest that keeps pace with or beats inflation (though hard to find these days) or you could invest it (which is just spending in reverse) which keeps the dollars flowing.

Again, all pretty much spot on.

And inflation is driven by the current rate of spending relative to the curent level of productive capacity.

Sure, completely correct, but it's secured by money owned by investors. Of course it's leveraged, but that's because when loan applications are properly vetted, there is little risk that they will all default at the same time.

Aweee.....And you were doing soooo good!

No, an increase in the money supply does not increase inflation. Stores don't check the morning news to see how much money there is in circulation, they set prices based on demand for their goods relitive to their supply, basically they measure inventory of their business and the inventory of their competitors. No store owner would raise his prices if they didn't have customers.

The Fed printed trillions as part of QE....where is the hyperinflation that was predicted by some?

Gold is different than dollars for reasons you've already pointed out. It is both a "money" and a commodity. Dollars are just paper or digital entries, they are not a commodity, so the amount you print has nothing to do with their value. It's the amount you spend relitive to the econonomies ability to meet demand.

It really depends on external factors like, is the nation in question a net importer or exporter. Is the population growing or shrinking and how fast? Is the economy running a large deficit or surplus?

Adding and removing dollars from the economy is how the Fed manipulates interest rates based on the factors and prevailing conditions

So why haven't people been borrowing more over the last 8 years. Lending is wayyyy down.

Austrian Business Cycle Theory is wrong and that's been pretty well shown to be true over the last 8 years.

When private debt increases faster than wage growth, discretionary spending decreases. This, in turn, decreases demand as people are using more of their income servicing "yesterday's productivity" (loans).

Sure higher rates of interest decrease consumption and increase investing.

Without a doubt.

"Those guys", while they are independent of the political bureaucracy, they are still bound by the charter set forth by Congress. The Fed can be dissolved by Congress if the Fed only served itself.

The problem with bitcoin is they arn't debt for anything and they aren't backed by anything. They litterally only have value because people beleive they do.

Now, look up increases in salaries over the same time. As you point it, the nominal value means nothing out of any context.

You said it yourself, inflation is only a tax if you save significant amounts in dollars. If you invest in things of real value, their value will inflate right along with inflation.

-Cheers[/quote][/QUOTE]

 

Private debt creates far more inflation in money supply than the Fed does, but for some reason the 'monetarists' can only blame the Fed. Unless they can claim there was no inflation before the Fed, when banks were still printing their own currencies and a store owner had to buy a picture book every year with the multitude of bank currencies in order to identify counterfeit bills, their arguments are fantasy.

 

It would be controlled by ridiculous bubbles followed by severe and deadly major Depressions about every 3 years that last for decades, and if the first one didn't kill your nation the second one certainly would.

 

Again, I think you need to stop and define exactly what you mean by inflation. It might help you to understand what you're talking about if you explain how inflation might work in a moneyless (barter) economy. Maybe even a very simple economy with only two goods, say apples and oranges. Let's say the price of an apple is 2 oranges, which means the price of an orange is 1/2 an apple. So how would we see inflation in an economy such as that?

 

One or two people could control the entire apple or orange supply, or the supply of both, and set the rate at whatever they wanted to.

 

Okay, and what would inflation look like? How many apples would an orange cost, and how many oranges would an apple cost? In my example an apple costs two oranges and an orange costs 1/2 of an apple. How would this change?

 

As a thought experiment, could you describe how inflation would manifest itself in a non-monetary (barter) economy? It would also be helpful for you to define inflation, so we both know what you're talking about.

 

Inflation is more money chasing the same or fewer goods. If that money doesn't hit circulation you don't see the immediate impact of said money printing. In the case of the United States, we are the current world's reserve currency and that affords us the ability to "export" our inflation to foreign countries. Wall Street investment banks also ate up a lot of the money printed during QE as evidenced by The Fed's current balance sheet. Buy T-Bill at auction - Sell bond back to The Fed - profit - repeat. It is through these magical mechanisms that you print trillions of dollars with minimal effect on inflation.

Why type of lending? Mortgages seem to still be going strong. Say's law says hello .

lol....it's tough to be correct when every aspect of a market is manipulated beyond recognition.

The Fed works for its member(owner) banks.

"It doesn't matter if your dollar is worth less, we are paying you more!"

It matters if you plan on saving.

Real value as defined by whom?

Keynesians.....ugh.

 

Inflation is a rise in the general price level.

Simply put, inflation happens when demand exceeds supply such that there is a rise in the CPI or in a barter economy, the exchange for things in demand increase on average.

I'm sure you've heard that inflation happens when there are too many dollars chasing too few goods? We can turn it around and it means the same thing. "Inflation happens when there is not enough productivity to meet demand".

Of course, not things can be created via labor. Land, or a lack of it, in any reasonable amount, isn't subject to increases in productivity as a way to increase supply. Worse it's subject to speculation...But I digress.

As far as barter economies, what point are you trying to make by asking me this question? Between barter and fiat economies, there are some similarities and some key differences.

To answer your question, prices rises when supply falls relative to demand. If supply falls, especially on mandatory goods like food, clothing (wool, cotton in barter economies), energy (wood, coal, oil etc).

 

Or, it's a lack of productivity relative to demand, is it not? Why impose austerity to fix the problem? Austerity increases unemployment, where inflation, driven by demand, reduces the barrier to entry for individuals wanting to get into business to meet the new level of demand or increase market share for companies that already exist. When productivity ramps up to meet the new higher level of demand, there is more employment, not less, there is more overall productivity and often this results in lower prices prior to the inflation due to economies of scale. Look at the oil industry over the last 10 years, classic example. Prices rose, this created increased incentives for energy productivity, new productivity comes on line and the US is making more oil/ NG than ever, prices are lower when accounting for inflation and more people have jobs in oil and NG

Immediate? No, you don't see inflation, period, until the money enters the economy and it finds it way into the hands of people that use it to drive up demand to the point that supply cannot keep pace.

Yes, the world holds $10 trillion in FOREX reserves, money sitting in what amounts to a checking account at the Fed. They use this money to defend their own currencies and as settlement funds between foreign governments. The convenience of being able to shift balances around on a computer at the Fed as a way to settle up with other nations is a spectacularly easy and low-cost way to conduct business between nations. Money lost to US inflation pales in comparison to the cost of having to constantly shift and exchange money between nations as a way to facilitate trade.

To be clear, I'm no fan of QE for reasons I'll spare you unless you ask, but no one "ate up" any of the money printed via QE. All of that money is hopelessly trapped in the banking system.

QE simply destroyed the old method of setting the Feds target rate. QE dollars drove the Federal Funds rate to zero, so the Fed had to pay interest on reserves as a way to raise the cost of borrowing above zero. I could be convinced that QE caused massive speculation fueled via low-cost borrowing and is driving a potential stock bubble. I say potential because I believe the Fed can unwind its position slowly over 5-10 years without popping the "bubble", but there are a lot of moving parts. There are 1000 reasons the bubble could pop and another 1000 reasons why it might not.

All lending...Say's law says goodbye



Even in the mortgage markets, haven't, until 2016 seen strong borrowing, but it's still small in comparision to pre-2008:



One of the reasons we're seeing strong real-estate without the borrowing is that speculators deal in cash. In 2012 57% of all homes were purchased outright with cash (a year I happen to know the stat for).

I agree there is a lot of market manipulation, but that's because unregulated unmanipulated markets tend toward disequilibrium and inequity. Now, this is the knife of 1000 cuts...That's a bold claim on my part and we could spend an entire thread arguing it. If you want to respond, feel free, if you don't and you disagree, I'm ok if you ignore it and agree to disagree. I don't know if I have the energy for the kind of debate that would entail

How so?

LOL...If you are saving your money in dollars, you deserve to loose them to inflation.

No, inflation hurts people on a fixed income who are receiving payments from an annuity, pension, or government benefits. If you have control of your wealth, IRA or 401K you have the option of moving your money into investments that can keep pace with inflation.

The Fixed income problem is real, and I recognize that, but the solution isn't austerity it's to ensure that we can increase production and productivity so that supply can meet or exceed demand.

When I say "real value" I mean things of tangible, intrinsic value. In the context of the comment you made, if you invest in steel, something of real intrinsic value and inflation rises. If you invested your dollars into steel, your money would grow with inflation because as steel becomes more expensive, the value of the steel you own increases.

 

Nice thought but impossible...all governments will continue to cost more due to population growth and the simple fact that everything today costs much more than yesterday. And, IMO, since we fail to maintain the USA to acceptable standards, this work and the problems that are created by doing nothing will cost 2-3X as much in the future to deal with. Government spending will forever increase...

 

I'm thinking most Americans will know if/when there is a 7% sales tax on 80% of what they consume...

 

There will be diminishing returns as prices are increased since the consumer is not capable or willing to pay any price. Even if we were talking about essentials like water or oil or energy, etc. if someone tried to 'control' the market the government would step in.

In Strasser's comment, the price of an orange over time will go from 1/2 apple to 5/8 apple to 3/4 apple, etc. due to escalating costs...

 

Same thing. Demand = more money, lack of productivity = fewer goods. Therefore inflation is more money chasing fewer goods...now why that happens can certainly vary.

I wouldn't advocate for austerity....my solution would have prevented the issue in the first place.

That works until prices come back down to earth. Look at the Shale industry in North Dakota - booming at $100/barrel oil....now at sub $50 the majority of those companies are not viable...massive lay offs have occurred. Market manipulation at its finest.

I said immediate because that money is always there and as this debt cycle progresses we are going to continue to have to find more creative way's to keep that money off shore as foreign governments buy fewer and fewer bonds.

Until it isn't. So long as the music keeps playing and the status quo is maintained you are correct, but that can't go on forever...to many huge imbalances in the global economy. To much debt.

I wish I shared your optimism. I think the moment The Fed stops re-investing the money when its holdings mature is the moment the wheels come off. The largest purchasers of US debt are now domestic and are flipping those bonds to The Fed. Once that stops....it gets ugly unless The Fed starts buying again.

Lending rates are still astronomically high historically speaking. I wouldn't send Say away just yet.

Not sure comparing to pre-2008 levels is all that good of an idea as those rates were artificially inflated for reasons I am sure don't need explaining.

Fair point, but speculators have been tapering for the last 5 years as their margins dry up and traditional buyers have stepped back in. Its all going to blow up again...but don't tell them that!

Agree to disagree .

See above - I feel we would get way into the weeds on this topic. I am of the opinion that the "member banks" own and profit from The Fed. I have seen the official releases and financials on the counter argument...but I am still not buying it much in the way I don't buy the official inflation numbers.

Really? That wasn't the case until the early 70's. Thats when the bankers won.

Inflation hurts everyone. Deflation is great, unless you owe people money (I don't). IRA's and 401k's have extremely limited flexibility....they are investment vehicles for chumps in my opinion. "Here, put your money in this small selection of mutual funds.". When things are good and the stock market is going to the moon with no sign of trouble its fine I suppose...but in a market with any kind of volatility...look out.

If by "austerity" you mean tearing down the institutions that created this mess....I think it is the solution. You are basically suggesting we continue down the path of debt fueled production without thought for the consequences...because hey, if everyone is doing it then nobody will blow it up right?

 

Sure once it is passed. It is getting it passed that is the tricky part.

 

Well, they kindof are backed by the most powerful computer network that has ever been known to man.. Consumes more electricity than Germany..

 

Sure they are, but how you fix the problem isn't. If you have a growing population (spare labor) and adequate real resources, then targeting productivity growth is the right approch. Decreasing the quantity of money is the answer only if you have some combination of a shrinking population, inadaquate labor and/ or real resorces.

What if inflation is caused by a massive shortage of a necessary good/ and or services

Isn't that the free market at work. There is a shortage, business picks up and companies rush to fill the void. As supply increases prices come back down. Those businesses that aren't operating as efficiently as their competitors are bought up or they go out of business.

It seems as if you assume that going out of business is bad. That's what happens sometimes, the stronger more capable businesses survive and the weaker ones fail. my point was that today there are more people in oil/ NG than there were in 2006 and the output is at historic levels thus the lower price, even compared to 2006. It was the inflated price of energy that made all of that possible.

You seem to be addressing a point I wasn't making.

I said that money created but not spent into circulation would not cause inflation. If the government created a $5 trillion dollar coin, it wouldn't do a thing to prices if it wasn't spent. Money is not a commodity like gold and it not subject to the kinds of speculation that commodities are.

Foreign governments are buying all the treasuries we need. Last year we sold $95 trillion worth and redeemed $94 trillion. That's a net gain of $1 trillion. No problem.

Furthermore, I don't think you understand our relationship with the countries we import from, like China. First, I'm sure you realize that when we "borrow" from China, we don't borrow their money, we sell them a bond and repatriate US dollars.

Do you realize how the Chinese government came to hold about $4 trillion US dollars? I mean, the Chinese government doesn't make and sell things to the US....So how did they come to hold $4 trillion dollars ($3 trillion in FOREX and about $1 in treasuries)?

They "print" their money and use it to buy our money from Chinese exporters who are earning American dollars who wish to trade back into Yaun in order to manipulate the value of their currency. I say fine good for them. But you need to remember that they can hold dollars they (the Chinese gov) purchase in treasuries or in FOREX, but if they stop buying US treasuries, they can't stop buying our currency, if they did their economy would crash as Chinese dollars would spike in value against the US dolalr and imports would decrease.

The only reason that China has backed off recently is that they are in a lot of trouble in their real the housing market. In 2008 when most nations (save China and Australia) were resetting after the housing bubble, China encouraged lots of private debt to get past it. Now demand is decreasing as debt service in the private sector increases.

The only way China, Japan and Korea (three of our larger trading partners, stop buying treasuries is if US productivity declines.

It's gone on since the nation was founded 250 years ago, why can't it go on? The solution to this question/ problem requires that you understand banking and more specifically double entry accounting.

Can you tell me what the negative effects of carrying "debt" are? The only time we've ever not carried a debt, under Jackson, the nation immediately fell into a massive depression. As a matter of fact, with the exception of one period, every time the nation has run a sustained surplus of 3+ years, the nation has lapsed into depression.

The highest period of spending ever was the 1940-1944 when the government spent $4 trillion dollars (accounting for inflation in 2013 dollars) and the 20 years that followed were some of the best in US history.

So where is the problem?

Why would it stop?

Not as a percentage of GDP they aren't.

, sure but the graph shows that lending has flatlined over the last 8 years, consumption has fallen and much of our GDP is now made in the financial sector where we aren't making anything and employ few people relative to the money that circulates through that sector of the economy.

It blew up last time because the banking sector no longer needed to care about risk as loans changed hands and were eventually buried in complicated investment instruments.

Fine with me

They earn a fixed 6% margin from the Fed.

You mean when we went off a gold standard (fiat) and our balance of trade went negative by $600-$800 billion and the entire nation of Japan and China have been shipping us low-cost cars, electrinics, and other goods for almost 60 years.

Deflation encourages people not to spend, decreases consumption and it causes people salaries to fall relative to the loans they hold. No deflation is an unmitigated disaster.

It's been 250 years of debt. The only time it's blown up is when people try to cut spending. So explain to me how increased spending causes real problems? Is is the 95% drop in the value of $1? Well that would matter of salaries were fixed, but they aren't, salaries have increased 6600% over the same time....So where is the problem, I'm not seeing it.

Ever played Monopoly? Instead of calling the bank the "bank", just imagine it's the government, and instead of handing money from a tray of dollars, imagine that when passing "Go" the "government" passes out $200 in "entitlements", then imagine that each dollar is freshly printed and there is a ledger where every dollar given out to players int he game (the private sector) creates a negative entry of the same amount (the public sector). Now play the game for about an hour until all the properties are owned and people have improvements. Then announce that the "government" has too much debt. Instead of passing "Go" and collecting $200, imagine that passing "Go" you have to pay $200. You will find that the money in the game will slowly disappear and all properties and improvements would have to bo sold back to the bank as everyone goes broke as everything is deleveraged.

The only reason that this isn't obvious in our economy is that the government creates dollars and the banking system creates credit denominated in the governments unit of account. We can't see the difference between government dollars and credit, nor can we see or understand the service provided by the banking system as it creates on demand highly elastic credit available for productivity that wants to happen.

 

Monopolies and duopolies and oligopolies aren't usually run by morons; they can calculate the points where their maximum long term gains are going to be. By then they can own most of the government, same as they do today in many countries, the U.S. included. The government stepped in to order the Standard Oil Trust to break up, for instance; the result was the value of the stock doubled, and the Trust members stilled owned the majority of shares and voting rights in the dozens of companies that comprised it. It was just cosmetic and a show.