the economy: a friendly question and answer.
one friend of mine posted this:
"In my gut, I feel that the passing of this latest stimulus package has to have a long-term negative impact on the economy simply by putting more money into circulation. More supply generally means that each unit (dollar) is worth less. Even if wages adjust (which they won't), devaluing peoples' savings cannot do anything positive.
At least this is the line we get from Ron Paul. But I noticed he speaks in qualified sentences, such as, "if you measure inflation as...". This is troubling because the Consumer Price Index keeps falling every month. That would indicate that things cost less, implying that demand for the dollar is up. If that's true, then more cash flow would only serve to stop the tide of falling prices and perhaps not result in inflation. But how can that be?
I'm so confused."
I forwarded to another friend of mine who said this:
"The CPI is a fantasy. It doesn't measure 1) housing 2) food 3) energy.
The reason for this is that a significant amount of government's costs of
borrowing are directly tied to the CPI, both directly and indirectly, and
it is not in their best interests for the US Government to pay higher
interest.
Inflation in its truest sense is simply a measure of the money supply,
because you have a limited amount of currency in circulation for a
nation's or the world's fixed assets, goods, and services. There are two
kinds we are principally concerned with. M0, or narrow money supply
directly issued by central banks. Then M3 credit money which is
fractionally issued by banks in return for a borrower's promise to
eventually repay, with M1 and M2 derivations in between. Monetary
inflation is something of a zero sum game.
The dollar itself has a bit of a special status as the world's reserve
currency, that is, every other currency is basically denominated in
dollars as it is recognized as the world's premier currency. That means
people will borrow and lend dollars before any other currency in the run
of things. This allows the USA to continue to print currency, while
sterilizing it through the issuance of an equal amount of Treasury Debt,
whose interest rates are running south of 0.1% annually, and indeed,
sometimes Treasury Debt has even had a negative return in recent times.
As soon as foreign governments and funds decide to stop lending to the
USA at essentially zero cost, the USA will be in the position of printing
money unbacked by anything at all, and then massive price increases will
be substantially felt at the consumer level. Alternatively, banks could
become confident and start lending again (as they might with a guaranteed
federal 4% rate, or government backed spending projects), which would
also lead us to the hyperinflation disaster.
In the meantime, we're having massive defaults everywhere, which has led
to widespread deflation, because we are destroying M3 money, and the
artificial credit money that exists as borrower's IOUs. Every consumer
default, every missed credit card payment, every bankruptcy wipes out
debt, and thus money from the world economy, and that too has an effect
on consumer pricing."
hope this helps.
"In my gut, I feel that the passing of this latest stimulus package has to have a long-term negative impact on the economy simply by putting more money into circulation. More supply generally means that each unit (dollar) is worth less. Even if wages adjust (which they won't), devaluing peoples' savings cannot do anything positive.
At least this is the line we get from Ron Paul. But I noticed he speaks in qualified sentences, such as, "if you measure inflation as...". This is troubling because the Consumer Price Index keeps falling every month. That would indicate that things cost less, implying that demand for the dollar is up. If that's true, then more cash flow would only serve to stop the tide of falling prices and perhaps not result in inflation. But how can that be?
I'm so confused."
I forwarded to another friend of mine who said this:
"The CPI is a fantasy. It doesn't measure 1) housing 2) food 3) energy.
The reason for this is that a significant amount of government's costs of
borrowing are directly tied to the CPI, both directly and indirectly, and
it is not in their best interests for the US Government to pay higher
interest.
Inflation in its truest sense is simply a measure of the money supply,
because you have a limited amount of currency in circulation for a
nation's or the world's fixed assets, goods, and services. There are two
kinds we are principally concerned with. M0, or narrow money supply
directly issued by central banks. Then M3 credit money which is
fractionally issued by banks in return for a borrower's promise to
eventually repay, with M1 and M2 derivations in between. Monetary
inflation is something of a zero sum game.
The dollar itself has a bit of a special status as the world's reserve
currency, that is, every other currency is basically denominated in
dollars as it is recognized as the world's premier currency. That means
people will borrow and lend dollars before any other currency in the run
of things. This allows the USA to continue to print currency, while
sterilizing it through the issuance of an equal amount of Treasury Debt,
whose interest rates are running south of 0.1% annually, and indeed,
sometimes Treasury Debt has even had a negative return in recent times.
As soon as foreign governments and funds decide to stop lending to the
USA at essentially zero cost, the USA will be in the position of printing
money unbacked by anything at all, and then massive price increases will
be substantially felt at the consumer level. Alternatively, banks could
become confident and start lending again (as they might with a guaranteed
federal 4% rate, or government backed spending projects), which would
also lead us to the hyperinflation disaster.
In the meantime, we're having massive defaults everywhere, which has led
to widespread deflation, because we are destroying M3 money, and the
artificial credit money that exists as borrower's IOUs. Every consumer
default, every missed credit card payment, every bankruptcy wipes out
debt, and thus money from the world economy, and that too has an effect
on consumer pricing."
hope this helps.