Say Goodbye to Your Retirement and 401K

[ASH]

Re: Say Goodbye to Your Retirement and 401K

ASH,

I must disagree with your view that it is all funny money.

The Fed's balance sheet is largely fictional as is the 'reserves' it creates, true. But said entities spill over into the real world in very concrete ways:

1) Crap MBS assets were paid for with real money at some point.

Real bonuses were paid.

The properties whose loans upon which these MBS' are based on are real, as are the people who bought/live/rent in them and the cash flows that result.

The ownership of said properties when they default - as nearly 14% of ALL mortgages are now delinquent - is also real

2) The reserves which the Fed has given to the TBTF banks is 'funny money' but equally has real world effects. The small banks which are failing left and right are a good example.

The interest paid by the Fed on these reserves is real - as it goes into the cash flow for the TBTF banks and in turn funnels through into pay and bonuses.

3) Even the guarantees the Fed extends are real, because if you were to obtain similar guarantees from a private party - it would cost you money.

4) Lastly I note that there are other links between the 'funny money' and the real world: the US military, for example, consumes huge amounts of natural resources like oil. This must be paid for - and the monster deficits being run mean that the 'funny money' is actively being employed to exchange for tangibles.

To summarize: I don't disagree with your point about monetization of bad assets not itself lending to inflation (as a first order effect). But it is not a thorough analysis to say that there isn't some impact, and likely a waterfall one since the value of the 'funny money' is largely perceptual.

Hi c1ue. I'm not saying there isn't some impact (although I may have simplified the discussion to the ideal case in some of my posts for the sake of brevity). The point I'm trying to get across is the fundamental distinction between a first order inflationary impact that closes a positive feedback loop, and one that does not.

The 'funny money' comment is just to remind folks that where fiat is concerned, rules can change, so it's wrong to conclude that the current set of rules lock you into a particular outcome. The phrase wasn't intended to downplay the significance under a fixed set of rules of the money that was 'printed'.

[jtabeb]

Re: Say Goodbye to Your Retirement and 401K

Backstopping a banks assets by itself is not inflationary, not in theory, and not in real life. I feel like I'm beating a dead horse. The value of those assets rose in the past and creating money to support their value only legitimizes the inflation that has already occurred, it does nothing to produce new price appreciation.

NO, it IS inflationary. Because money was created TWICE!

Money was CREATED ONCE by the bank to fund the ASSET and Money was created AGAIN by the FED to by the BAD ASSET from the bank. That's why this is all highly inflationary.

Inflation an INCREASE in the MONEY SUPPLY, anyone doubt that this is happening.

Not inflationary you say because of credit collapse.

Well let's see, money created Twice, asset liquidated ONCE. 2-1 does not equal ZERO! You forget that the first instance of monetary creation, has already been spent! That MONEY didn't disappear, only the asset valuation declined. This was then Liquidated by the FED purchase, with, you guessed it, NEW MONEY.

2-1=1 that's ALL YOU HAVE TO UNDERSTAND.

Right now "1" is sitting there as excess reserves, but IT IS LEAKING OUT, in terms of Financial company share prices, CEO Bonuses, Lobbying funds to our wonderful elected officials.

You can ARGUE that that money is not having an inflationary IMPACT due to it supposedly remaining dormant as excess reserves. BUT YOU CAN'T ARGUE that it is not INFLATION.

MORE MONEY WAS CREATED ON TOP OF THAT WHICH WAS ALREADY CREATED. THE MONEY EXISTS. THE FED CLAIMS IT CAN REMOVE THIS EXCESS MONEY CREATION WITHOUT FURTHER COLLAPSING THE ECONOMY.

I say BULLFUCKINGSHIT!

[radon]

Re: Say Goodbye to Your Retirement and 401K

ASH,

I must disagree with your view that it is all funny money.

The Fed's balance sheet is largely fictional as is the 'reserves' it creates, true. But said entities spill over into the real world in very concrete ways:

1) Crap MBS assets were paid for with real money at some point.

Real bonuses were paid.

The properties whose loans upon which these MBS' are based on are real, as are the people who bought/live/rent in them and the cash flows that result.

The ownership of said properties when they default - as nearly 14% of ALL mortgages are now delinquent - is also real

2) The reserves which the Fed has given to the TBTF banks is 'funny money' but equally has real world effects. The small banks which are failing left and right are a good example.

The interest paid by the Fed on these reserves is real - as it goes into the cash flow for the TBTF banks and in turn funnels through into pay and bonuses.

3) Even the guarantees the Fed extends are real, because if you were to obtain similar guarantees from a private party - it would cost you money.

4) Lastly I note that there are other links between the 'funny money' and the real world: the US military, for example, consumes huge amounts of natural resources like oil. This must be paid for - and the monster deficits being run mean that the 'funny money' is actively being employed to exchange for tangibles.

To summarize: I don't disagree with your point about monetization of bad assets not itself lending to inflation (as a first order effect). But it is not a thorough analysis to say that there isn't some impact, and likely a waterfall one since the value of the 'funny money' is largely perceptual.

While its true that the MBS were paid for with real money and real bonuses were paid, the run up in prices had already happed and were collapsing when the fed intervened. The fed intervention didn't cause the rise in price, that had already happed. The central bank simply prevented the asset price from collapsing.

I agree with you in that printing money to finance the government is harmful. Running large deficits to fund the military adventurism is a classic way to kill a currency, but I don't think that this is what ASH was talking about. I don't think ASH ever intended it to be an analysis of the broad spectrum of QE instruments the FED and government have at their disposal. He wasn't even talking about the case where interest is paid on reserves. He only said that the printing money to backstop asset prices is not inflationary since this money is essentially frozen in the banking system tied up with an illiquid asset. So in that example it really is funny money because it can't be used for anything.

[radon]

Re: Say Goodbye to Your Retirement and 401K

Wrong again, this is actually a horse race and it has yet to be determined . You have staked your horse and I have staked mine. If the fed's actions (backstopping the bank's assets) turn out to be inflationary, my horse wins. It's a little bit early in the race for you to be declaring yourself the winner.

I guess we'll have to agree to disagree. I agree that the government is doing plenty of other things that have the potential to cause a currency crisis, but propping up bank asset values isn't one of them. If some one could find an historical example of a hyperinflation triggered by intervention like that I'd be interested in studying it.

[radon]

Re: Say Goodbye to Your Retirement and 401K

NO, it IS inflationary. Because money was created TWICE!

Money was CREATED ONCE by the bank to fund the ASSET and Money was created AGAIN by the FED to by the BAD ASSET from the bank. That's why this is all highly inflationary.

Inflation an INCREASE in the MONEY SUPPLY, anyone doubt that this is happening.

Not inflationary you say because of credit collapse.

Well let's see, money created Twice, asset liquidated ONCE. 2-1 does not equal ZERO! You forget that the first instance of monetary creation, has already been spent! That MONEY didn't disappear, only the asset valuation declined. This was then Liquidated by the FED purchase, with, you guessed it, NEW MONEY.

2-1=1 that's ALL YOU HAVE TO UNDERSTAND.

Right now "1" is sitting there as excess reserves, but IT IS LEAKING OUT, in terms of Financial company share prices, CEO Bonuses, Lobbying funds to our wonderful elected officials.

You can ARGUE that that money is not having an inflationary IMPACT due to it supposedly remaining dormant as excess reserves. BUT YOU CAN'T ARGUE that it is not INFLATION.

MORE MONEY WAS CREATED ON TOP OF THAT WHICH WAS ALREADY CREATED. THE MONEY EXISTS. THE FED CLAIMS IT CAN REMOVE THIS EXCESS MONEY CREATION WITHOUT FURTHER COLLAPSING THE ECONOMY.

I say BULLFUCKINGSHIT!

You seem to be implying that money once created can never be destroyed. I guess I don't really understand what you just said, but I'll take a stab at replying.

Spent money doesn't go off into a cloud somewhere. Aside from the tiny bit of currency in physical circulation most money gets moved from account to account. It isn't some static entity that just sits around in a pile as a printer adds to it. I don't remember ever claiming that inflation is not happening, only that backstopping bad assets doesn't produce it. By your own definition this operation could be completely neutral from the standpoint of the money supply. They made money to replace what had been lost through deleveraging.

And yes, the fed sure can remove the excess reserves. Whether they do or not remains to be seen. Seriously, if all you had to do to expend the money supply was backstop bad assets Japan never would have had a lost decade. There is a broad spectrum of tools the fed can use to produce inflation, latching on to buying bad assets is a red herring. Paying interest on reserves, on the other hand, is pure genius.

[jtabeb]

Re: Say Goodbye to Your Retirement and 401K

There is a broad spectrum of tools the fed can use to produce inflation, latching on to buying bad assets is a red herring. Paying interest on reserves, on the other hand, is pure genius.

Sorry, just trying to address the crux of your argument as I understood it.

R.E.

"The value of those assets rose in the past and creating money to support their value only legitimizes the inflation that has already occurred, it does nothing to produce new price appreciation. That money has to come from somewhere else."

Besides, I THINK the point is that the FED destroys the dollar in the process. Not due to immediate inflationary impact (though this certainly helps), but through LOSS OF CONFIDENCE in the CURRENCY. We aren't Argentina due to our reserve currency status, but if you think a country with an EXTERNAL debt (AKA NOT Japan) can monetize asset prices ad-infinitem without a currency crisis or collapse, well THAT's a bet that I would take. (even if it happens to be the USD).

Why?

Because if you listen to Hudson, THIS IS THE PLAN. Crash the USD, preserve asset prices, and then COMES SOMETHING ELSE, some new unit of account.

I think it is beyond foolish to hold an asset that the FED fully INTENDS to eventually DESTROY. How close, Don't know. But I do know that the propaganda Games being played in managing perceptions makes me THINK that it is closer than most people (and professional fund managers) realize.

Just saying WATCH your BACK, nobody else is going to.

[aaron]

Re: Say Goodbye to Your Retirement and 401K

Here is my thinking (and I know nothing)

Unless the banks have agreed to never lend that money out, then some will spillover. Some ideas why:

- Wall Street bonuses and salaries -> I wonder what these guys are doing with their money? I bet they are buying things, not more crap paper. They know the value of paper.
- What should oil really cost based on supply/demand alone? $20? Would things be so expensive if not for the Chinese getting dollars for their MBS?

In my mind, there is a huge difference between a stack of MBS certificates and a stack of US dollars. The former cannot be spent. The latter can. I want to know where the trillion dollars went. If it all went to foreigners (China?), I can see how inflation is being felt abroad more strongly. It would also help explain the rise in commodity prices (with lower demand).

Money is created when it is lent out. Money creation leads to inflation. Our money has a built-in self-destruct mechanism -> it is paid back (to a bank with minimum capital requirements) and destroyed. It also gets destroyed on Wall Street when the markets crash.

How many of the $trillion(s) printed was given to banks? How many to non-bank investors? I can see how money given to the banks in the current environment is non-inflationary but only if they are required to keep a certain reserve ratio. However, if the money is given to make an investor whole, she can turn around and spend the money on real assets or consumption.

[jtabeb]

Re: Say Goodbye to Your Retirement and 401K

However, if the money is given to make an investor whole, she can turn around and spend the money on real assets or consumption.

My point EXACTLY!

[radon]

Re: Say Goodbye to Your Retirement and 401K

However, if the money is given to make an investor whole, she can turn around and spend the money on real assets or consumption.

If the investor is made whole that implies that they paid about as much for the asset as they got from the sale of it. Ie that investor has about the same amount of money as they had before they bought the bad asset in the first place. Yes they can spend it but creating money to buy the asset didn't make the investor any richer it only prevented them from becoming poorer.

[radon]

Re: Say Goodbye to Your Retirement and 401K

Sorry, just trying to address the crux of your argument as I understood it.

R.E.

"The value of those assets rose in the past and creating money to support their value only legitimizes the inflation that has already occurred, it does nothing to produce new price appreciation. That money has to come from somewhere else."

Besides, I THINK the point is that the FED destroys the dollar in the process. Not due to immediate inflationary impact (though this certainly helps), but through LOSS OF CONFIDENCE in the CURRENCY. We aren't Argentina due to our reserve currency status, but if you think a country with an EXTERNAL debt (AKA NOT Japan) can monetize asset prices ad-infinitem without a currency crisis or collapse, well THAT's a bet that I would take. (even if it happens to be the USD).

Why?

Because if you listen to Hudson, THIS IS THE PLAN. Crash the USD, preserve asset prices, and then COMES SOMETHING ELSE, some new unit of account.

I think it is beyond foolish to hold an asset that the FED fully INTENDS to eventually DESTROY. How close, Don't know. But I do know that the propaganda Games being played in managing perceptions makes me THINK that it is closer than most people (and professional fund managers) realize.

Just saying WATCH your BACK, nobody else is going to.

I understand that, but I'm not talking about reserve currencies, game theory, psychology, or monetizing debt to meet operational expenses. I'm not trying to imply anything about US fiscal policy in the future. I was just commenting on a very specific tool that ASH brought up - nothing more.

[ThePythonicCow]

Re: Say Goodbye to Your Retirement and 401K

Because if you listen to Hudson, THIS IS THE PLAN. Crash the USD, preserve asset prices, and then COMES SOMETHING ELSE, some new unit of account.

That sounds right to me too, along with absconding with most of America's real wealth (resources, revenue streams, fighting men and machines, ...) First they bankrupt or devastate an entity (business, government, ...) then they nationalize it "for our own good" then they privatize it ("capitalism at work") into the hands of their own hands. This sucks, man.

Maybe that's why "they" have (if indeed they have) suppressed the development of U.S. oil and gas resources (off-shore, national parks, Alaska north slope, the eastern half of the Gulf of Mexico, ...) for the last several decades. They wanted to make sure the nation was good and stolen first before they brought more of its petro online.

[ASH]

Re: Say Goodbye to Your Retirement and 401K

The idea that debt defaults are deflationary in the absence of government intervention seems to violate some basic itulip premise, although I don't really understand why.

NO, it IS inflationary. Because money was created TWICE!

Money was CREATED ONCE by the bank to fund the ASSET and Money was created AGAIN by the FED to by the BAD ASSET from the bank. That's why this is all highly inflationary.

I think the point of confusion has to do with the fact that when money created as credit is spent, it can become a deposit at a different bank, and therefore the basis of further fractional reserve lending. Once the credit is spent, it does stay in the system -- neither repayment of the original loan nor default on that loan can recall the subsequent 'daughter' loans. (Default subtracts from the lender's capital with leveraged consequences upon the money supply, and repayment of the loan extinguishes money that was in circulation and the bank's corresponding asset.) However, the reserve fraction rules are such that a series of sequential loans of the maximum size allowed, starting from an initial reserve deposit at the Fed, converges to a finite sum -- it's just a lot larger than what one would get from a single application of a reserve fraction like 10%. (For those who don't remember how this works, this is covered pretty well in the video "Money as Debt".)

Most of the arguments on iTulip about the deflationary impact of default stem from measuring the quantity of money in the system at different times. Default or repayment don't reduce the total quantity of money below the level that existed at the time the loan was made -- they don't restore the quantity of money to its initial condition if 'daughter' loans have been made. However, default or repayment do reduce the quantity of money relative to the amount that exists at the time of default. (Technically, it would be necessary for every daughter loan spawned by the initial loan to be repaid in order to return to the initial condition.)

If I'm right, and not hopped up on cold meds, JT's exchange with radon is typical of this type of miscommunication. I think JT is pointing out that loan default doesn't extinguish the money that was spent from the initial loan, and whatever became of it. Default "isn't deflationary" relative to the point in time when the loan was first issued; it is deflationary relative to the point of time at which the default occurs. However, it would be incorrect to say that default "is inflationary" because that double-counts the inflationary consequences of spending the money from the original loan. The addition to the money supply is strictly associated with spending the original loan -- and subsequent flow of the money created by the loan through the economy. They occur regardless of whether the loan defaults or not, and regardless of whether the default is made good with printed money. They do not re-occur if the defaulted loan is made good with printed money. Replacing capital lost as the result of a loan default, and the inflationary consequences of spending the original loan, are not directly related. So, I take radon's position that replacement of capital lost as the result of default is neutral to first order (JT's 1 - 1), but the consequences of spending the loan are indeed inflationary in a way that isn't canceled out by the default (JT's +1). It's just that the inflationary consequences of spending the loan are unrelated to the fact that capital lost when the loan defaulted was made good. (And I don't think anyone disputes the point raised by bcassill and others about the potential future impact of the tinderbox of reserves that result from the Fed replacing bank capital by buying non-Treasury assets... but that's a potential future increase in the money supply, rather than an immediate increase.)

So, when iTulipers argue that loan defaults aren't deflationary, they are either measuring the money supply relative to when the loan was first issued (rather than at the moment of default), or they are double-counting the inflationary impact of spending the loan, which is actually unrelated to the default.

The final point of confusion is that sometimes people forget that leverage works in reverse. They understand that fractional reserve lending can amplify the total money in the system by a very large factor relative to the supply of reserves, but they forget that a drop in reserves also has a leveraged impact upon the amount of credit that can be extended. (Edit: The leverage that applies in contraction isn't precisely the regulatory reserve fraction except in a very special case; otherwise it depends upon how leveraged the bank was to begin with, and how much leverage it judges is safe given the economic environment and its exposure following the default.)

[c1ue]

Re: Say Goodbye to Your Retirement and 401K

So in that example it really is funny money because it can't be used for anything.

That is not true. The 'funny money' being used to prop up Fannie and Freddie, for example, is coming straight out of taxpayer pockets (or Fed computers depending on P.O.V.). Thus the monetization of bad assets definitely is having some impact on the real world.

I'd also note that the very fact that crap TBTF banks are...TBTF is itself a consequence.

The actions which are preventing systemic correction are a real world impact.

[aaron]

Re: Say Goodbye to Your Retirement and 401K

If the investor is made whole that implies that they paid about as much for the asset as they got from the sale of it. Ie that investor has about the same amount of money as they had before they bought the bad asset in the first place. Yes they can spend it but creating money to buy the asset didn't make the investor any richer it only prevented them from becoming poorer.

It turned something unspendable (and frankly worth cents on the dollar... ) to money. Cash spent into the economy, all else being equal , will cause prices to go up.

So, let's say you have some piece of paper (MBS,bond,loan, whatever) that you own. Then for whatever reason, its value drops 90%. Sure, you could take your 10 cents on the dollar and run. Perhaps you would even be smart and buy an oil tanker or gold mine and never touch paper again.

Or, the Fed offers to buy your paper back for 100 cents on the dollar. Only a fool would say no. And only a fool would turn around and buy more MBS with it.

I can also imagine that the big banks had to agree to certain "strings" that were attached to the money:

1) Put the excess on deposit at the Fed
2) Buy Treasuries
3) Stop making stupid loans

In exchange, the banks get to collect rent and continue to mark to fantasy. But the people who control the banks (this is most important) get to keep making their silly salaries and bonuses. Why wouldn't they agree to any terms dictated?

Obviously, the Fed/U.S. government has less control over the foreign banks & investors and what they do with the money. Again, I am no expert, but if I had a few million dollars returned to me (or billions) that I thought was already gone in the U.S. housing debacle, I would try to keep my money "safe" --> which as we know is a tough thing to do. I'd buy some gold, some real estate, some businesses, some cars.

China: Perhaps they were promised Africa? If they spend the money there, then the inflation might stay there? The Fed's gift to China had to have strings attached (buy treasuries, stay out of certain countries). And, it is not too difficult to believe that China is composed of different people/entities less willing to accept these conditions--> leading to more leakage.

[ThePythonicCow]

Re: Say Goodbye to Your Retirement and 401K

If the investor is made whole that implies that they paid about as much for the asset as they got from the sale of it.

That was not the intended implication, I'm pretty sure.

I'm no longer reading this particular thread closely (my "big picture" opinion is this hydraulic analysis of monetary flows is a misleading distraction at this point), but I presume "made whole" means something like "got out what he put in" In an illiquid or falling market, that could be quite a bit more than the current sale value.