Cheers.
Ed

Picturing Deflation: Velocity of Money Slows

Bernanke’s Printing

Keep an eye on the charts in the above links showing us the adjusted monetary base and the multiplier!

Imagine the attention-grabbing headlines: “Fed sells dollars for gold!” or “Fed loses faith in the greenback!” or ” ECB gives Euro the heave-ho!” etc – or perhaps even
“B of E corrects Crash Gordon’s mistake – buys back gold at 5 times the price he sold it for!”

People would pretty soon cotton-on to the fact that currencies could be losing value big-time and soon! And let’s face it – this is what needs to happen anyway.Together with Bena’s solution, the whole merry-go-round would then crank up again and it’d be off to the races with eventual rising interest rates etc etc

stevie b.: the Fed and ECB need to signal more clearly they are inflating and will continue to do so and that will definitely get people to buy. I am told that Vincent Reinhart has been indicating to the Fed that they need to spell it out in order to manage expectations as part of their program. Tell me, how does telling people they are buying gold change expectations? Is that a similar signal that the Fed and ECB are printing money?

Carol, I sympathize with you here because we have been led down a very nasty path. This is one reason I prefer quantitative easing over lower interest rates. Lowering the price of money just favors debtors over borrowers and distorts time preferences (buying a flat screen on 48-month financing is easier when interest rates are low) and investment decisions. And, ultimately, this is what got us in this mess. But, how the heck do we get out of this without inflating away some of the real value of that debt through printing money?

bena gyerek has an interesting solution, which hearkens back to the original purpose of the TARP (troubled asset relief program) that Paulson touted. Honestly, I thought that is exactly what Paulson had in mind when Freddie and Fannie were nationalized. I thought that the government would use them as vehicles to nationalize the mortgage problem by buying up mortgages via Fannie and Freddie. But, alas, this has not happened.

Any proposal, including bena’s, is going to involve a redistribution of bank and mortgage debtor problems onto the backs of taxpayers as a whole and it’s a shame. But, we have no alternative. We should never have gotten here. It was poor regulatory oversight and easy money that allowed this bubble to reach such ridiculous proportions and now we are all paying for it. At least monetizing our debt and devaluing the dollar saves us from depression.

Differing opinions are appreciated.

here’s an alternative suggestion: what if the fed just bought up a 5-10% pro rata share of all outstanding mortgages at par, then with treasury support, cancelled the debts entirely. this would reliquefy banks, but also recapitalise them (as in effect the first 10% loss share on all their mortgages was being bought and written up to par, not just being accepted as collateral against a loan). it would also significantly improve the balance sheets of households, boosting consumption.

Price stability (neither inflation or deflation) is what we need. However, I am coming to the sad conclusion that our monetary system requires inflation, and so encourages these speculative booms and busts. Who on earth could think this is the best way for people to live?

I’m also grateful to Hbl for the link to Knzn. I just posted the following there and wondered whether you both think this off-the-wall idea is moronic…?

“Maybe it’s very simple. “Printing” more money just pushing on a string? Want the world to anticipate a bit of inflation and actually start spending a.s.a.p.? Get the Fed and the ECB to tell the world they’re buying gold!”