Thread: The Dollar Bubble

Currency and economic collapse is inevitable but inflationary collapse is becoming less likely. For inflationary collapse to happen M0 has to grow faster than debts go bad and have to be written off. Since about 1998 the bubbles have been bursting and destroying the money supply faster than it can be created. With the passage of ever more stringent protection for lenders first in education loans and them credit card loans bad debt drag has gotten worse and worse. I don't know about "banksters" but the Mafia and other forms of organized crime has been exercising greater control of financial markets through second and lower tier financial firms since the 1980s. This is a straight steal from the Yakuza and Triad playbooks.



While the exact mechanism of deflation varies, countries with established organized criminal gangs rarely experience hyperinflationary collapse because too much of the money gets siphoned off into organized crime. The money then gets converted into durable assets. This in turn creates rotating pump and dump asset bubbles. The bad debts from the successive bursting asset bubbles have to be written off and that has a multiplier effect equal to or greater than the square of inflationary money creation bubbles. 1T of inflated bad debt that takes about 67B in new money to create eventually eats up about 15T of M3.

The problem with these sorts of videos is that they take individual economic indicators and variables entirely out of context. In essence, they simply the discussion and mislead people by failing to note that everything in economics is relative. It's kind of like fear mongering.



Since such videos have an obsession with the printing presses of the Fed and the expansion of the money supply (inflation causation) I'll use this example:



In 1960 US GDP amounted to about $526 billion dollars (2000 Dollars), while the M2ASL and M2A money supply (both are discontinued measures, but are the equivalent of the modern M2)amounted to around $235 billion. In sum, the aggregate money supply amounted to around 45% of GDP.



In 2009 US GDP amounted to about $14.5 trillion dollars, while M2 amounted to $8.2 trillion. In sum, the aggregate money supply amounted to 57% of GDP.



Considering that a moderate rate of inflation is the gears on wheels of industry and production, it can be expected that central banks ought to maintain and control a moderate rate of inflation to stimulate economic activity. More specifically, the gradual expansion of the money supply can be expected over time reflecting economic growth, increased velocity of money, rising price levels and expenditures that characterize economic expansion.



While the 12% relative increase in the money supply relative to GDP is significant, over 50 years it is a lot less apocalyptic than a lot of the Gold bugs would have you believe (and a lot less alarming to the eye than the nominal graphs they often employ). There is actually quite a bit of variance, but generally M2 hasn't risen over 65% of GDP since the post-war economic boom.



With this kind of perspective, the inflationary data over the past several decades actually makes some sense.

The Keynes-Fisher counter-cyclical hypothesis rests on several self-evidently false postulates.



Innovation and by extension the product life cycle can be ignored. Since all non-demographic economic growth comes from innovation this postulate that forms the basis for inflation cures is obviously a crock.



Demographic shifts can be ignored. So Japan is still growing like its 1992, not because the previous slowdown in population growth did not happen.



Outcomes are normally distributed. For this to be true not merely negative GDP growth but actual GDP would have to demonstrate negative GDP which is an impossibility because anti-widgets do not exist by economic definition.



That's a non-starter.

In 2009 US GDP amounted to about $14.5 trillion dollars, while M2 amounted to $8.2 trillion. In sum, the aggregate money supply amounted to 57% of GDP.

What about value? Should we not consider several of the terms you used more closely?



For example:

Considering that a moderate rate of inflation is the gears on wheels of industry and production...

Really? That's an interesting and broad assumption with all kinds of ramifications, bound to impact you entire economic philosophy. Hopefully, you have a dissertation prepared to justify a statement that enormously powerful.



But let's get back to the GDP, which, according to you, grew at "a moderate rate" between 1960 and 2009, I presume? And in that 49-year period, grew to roughly 27 times its previous size? So growing on average 50% every year is moderate inflation? Show that number to any business owner you want and ask if she'd be happy with that sort of growth.



And value... The question isn't what percentage of money is out there. It's whether or not there is value behind the dollars. You can say GDP was $14.5 trillion, but what is it made of? Are you aware what percentage of the U.S. GDP is finance at this point, as compared to 1960?



Hi, I'm America. I spent a gazillion dollars on finance last year. I'm thinking of taking out a loan so I can build a special garage to keep my new finance. The only problem is, I haven't seen it yet. I spent all that money, on something, not sure where it is now, but my finance still hasn't been delivered. In 1960? In 1960 I bought steel and science, weapons and cars and food and ovens and toys. I pulled oil and coal out of the ground. Grew and processed enough cotton to clothe the world. Today? I can't seem to take delivery on that finance thing I spent all that money on.



I'll bet the Fed has it, and they're holding it for me, since they know what to do with it and can make sure I don't fuck it up.

[quote name='anonnymous' date='16 May 2010 - 11:06 PM' timestamp='1274065602' post='151898']

I disagree, here on the ground people with fixed incomes have lost a great deal of purchasing power. The money supply has increased a great deal more than you suggest. While a moderate increase over time is to be expected, here recently, the increases have been more than moderate to say the least and large increases in such a short period of time can and will lead to large in creases in prices. Hence the need for the FRB to entice banks to leave their excess reserves with them to prevent a price explosion which in turn causes interest rates on short term debt and consumer debt to rise which in term prevents the economy from getting the credit it needs to expand.

[/quote]No it hasn't increased a great deal more than I suggest.



If you are speaking within the context of the last decade or so, I would agree that many Americans have seen their total purchasing power stagnate and in some cases decline marginally. This broad statistical trend has been observed since the wake of the 2001 recession and is due to a number of things, but is indeed characterized by a significant amount of American wages failing to keep pace with inflation. There are a host of issues at play here, including labor force pressures, rates of capital investment, stagnant productivity, significant inflationary spikes (upward of 6% at one point) and pressures from increased global competition. This problem needs a remedy.



Since late 2008 loses in purchasing power have a lot more to do with depressed wages, layoffs and the depreciation of consumer assets - rather than being directly correlated with the money supply. Within the context of the latest economic recession, inflation peaked in June of 2008 with a CPI of around 5.8%, following this much of the rest of the year was characterized by a core inflation rate of around 2%, and significant incidents of deflation in 2009.



During the recessionary period (Jan 2008-July 2009) the M2 money stock increased from around 7.5 trillion to 8.4 trillion, an increase of around 8.3%, which actually was well within the statistical range of the past two decades. There was definitely a spike linked to dramatically dropped interest rates in 2008, however due to depressed consumer demand, failing economic conditions among other thing - it failed to have a significant impact on inflation over the past 2 years.







Later in your post you refer to the massive growth in financial institution deposits at the Fed, this is important. The monetary base exploded in 2008/2009 jumping from 800 billion to just around 2 trillion. To treat these reserves as a part of the conventional money supply is false as they are removed from circulation and thus do not impact inflation (as can be empirically verified by the inflation rate since the recession). Further their eventual injection into the economy must be put within the context of the broader money supply (increase accounts for 14% of total money stock), with them only exerting inflationary pressures when financial institutions inject their reserves into the economy proper. This process is likely to be very gradual and slow, likely taking the better part of the next decade as financial institutions slowly decouple themselves from the Fed. This will cause inflationary pressures, however within the context of future interest rates, economic growth and the rate of re-investment. A gradual rate of banks utilizing their deposits will mute inflationary pressures in the long run - however the point is that these deposits have not empirically impacted the inflation rate.

[quote name='michaelr' date='19 May 2010 - 10:23 PM' timestamp='1274322235' post='152798']

Err who do I say this without losing your attention, this may get difficult. Thanks to derivatives, actual dollars need not be present, in fact it would be saver if they were. Christ......

[/quote]

Yeah, derivatives as currently done multiply bad debts and those bad debts eat at the effective size of the money supply.