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TheDumbMoney (58.64)

Panic at the Disco!

Recs

19

June 10, 2011 – Comments (20) | RELATED TICKERS: MSFT , INTC , SPY

My post title is both a reference to the band, quite popular in the summer of 2008, and to the mood gripping the nation as the Dow dipped below 12,000 this morning, perhaps temporarily, perhaps as part of a continued decline.  The question is whether this is Summer 2008 redux, or Summer 2010 redux.  Either way, the mo-mos are in panic mode, as many hot stocks collapse and 50-day moving averages and all that sh!t is breached.  I for one am thrilled.  Happily I sold all but one or two of my riskiest stocks towards the end of May. 

However, it must be remembered, what we are seeing is not even yet an official "correction," though after this morning we are getting close toa 10% drop from the high.  For that reason, I am keeping my powder dry, rightly or wrongly.  One thing I learned in 2007 and 2008 and which I relearned this Spring, is that the market keeps going up even after the bad event has happened.  In 2007 the market climbed even after the sub-prime crisis first exploded.  In 2008 there was a significant rally even after the first major banks failed.  This Spring, we had a rally (or a continued climb) even after the earthquake and tsunami in Japan, a rally that was totally unjustified. 

I for one do not think we are going into a depression or anything.  I think we have become accostomed to thinking with a broad brush, and everyone thinks the smartest move is to call the next collapse.  There is going to be no immediate new collapse in my view, though that is largely an intuitive feeling.  Yes, housing prices (including the price of my own house) may move significantly lower, yes we may see slower growth, and we may even see a recessionary quarter (which is not the technical definition of an actual recession, which requires two or more quarters of decline).  But fundamentally, the banks are vastly better capitalized now, a vast amount of consumer de-leveraging has taken place already, and companies are sitting on oodles of cash.

People who think that the United States is going to "default" do not understand how a fiat monetary system works.  The U.S. cannot default unless it chooses to do so.  This is derived not from Modern Monetary Theory, though those are the folks who commonly say this.  It is perfectly true under standard monetary theory as well.  Bernanke knows this, and again the only risk is that the pitchfork-wielding economic flat-earthers will prevent the Fed from exercising its true independence and doing what needs to be done.  Let me direct you to Bernanke's 2002 speech at the National Economics Club.  Anyone who claims to be talking intelligently about what has gone on in this country in the last three years and who hasn't read this speech at least three times is a charletan.

Let me direct you in particular to this passage, which I'm going to quote in full:

"Historical experience tends to support the proposition that a sufficiently determined Fed can peg or cap Treasury bond prices and yields at other than the shortest maturities. The most striking episode of bond-price pegging occurred during the years before the Federal Reserve-Treasury Accord of 1951.  [footnote omitted]  Prior to that agreement, which freed the Fed from its responsibility to fix yields on government debt, the Fed maintained a ceiling of 2-1/2 percent on long-term Treasury bonds for nearly a decade. Moreover, it simultaneously established a ceiling on the twelve-month Treasury certificate of between 7/8 percent to 1-1/4 percent and, during the first half of that period, a rate of 3/8 percent on the 90-day Treasury bill. The Fed was able to achieve these low interest rates despite a level of outstanding government debt (relative to GDP) significantly greater than we have today, as well as inflation rates substantially more variable. At times, in order to enforce these low rates, the Fed had actually to purchase the bulk of outstanding 90-day bills. Interestingly, though, the Fed enforced the 2-1/2 percent ceiling on long-term bond yields for nearly a decade without ever holding a substantial share of long-maturity bonds outstanding.  [footnote omitted]  For example, the Fed held 7.0 percent of outstanding Treasury securities in 1945 and 9.2 percent in 1951 (the year of the Accord), almost entirely in the form of 90-day bills. For comparison, in 2001 the Fed held 9.7 percent of the stock of outstanding Treasury debt."

What people refer to as "Quantitative Easing" as if it is this entirely new thing, never before seen, as if we are in "uncharted waters" and as if the world is collapsing, they are morons at worst, and at best, they don't know what they are talking about.  It has happened before.  This time is not "different."  The Fed could very easily reduce interests below even what they are today.  The Fed could hold more of outstanding Treasury securities than it does today.  When the Fed holds those Treasury securities that is not debt.  Ninety-nine percent of the people who are freaking out about this stuff had never thought about the nature of fiat currency before the Fall of 2008.  They had been blissfully unaware.  But just because their conception of our fiat currency has changed, that does not mean that the nature of fiat currency has changed. 

Our only real danger is inflation, which there is virtually none of.  Why did gas prices and commodities prices drop before QEII ended?  Because they are mechanically not related to QEII.  Were you buying silver because of money you got from QEII?  Of course not.  Commodities were rising because of speculation, because of high margin allowances, and because of demand from Asia.  (Gold is different, because it rises and falls as a function of fear about the soundness of fiat currency (see above).)  Now that people are freakadoodling about inflation in China and Brazil and India, commodities have fallen.  But not many agricultural goods, because additionally there have been a bunch of natural disasters, and man-made disasters, including the moronic policy of ethanol subsidization in this country, which utterly distorts the price of corn, for example. 

And why is there inflation in China?  Is it because of QEII?  No.  It's because the Chinese have pegged their currency to the dollar.  That means the NOMINAL exchange rate changes not at all.  But foreign exchange is like water; you cannot stop it.  The REAL exchange rate between China and the United States mathematicall must change to adjust for China's greater productivity increases.  That, in addition to a massive amount of "animal spirits" in Chinese markets, is why there is so much inflation in China.  China has made the decision (vicious, morally bankrupt, cold-hearted and anti-democratic government that it is) to screw its workers and consumers in favor of benefiting its exporters.  The economy is driven by export, and even more importantly, China's vision of itself as a future super-power, with world-leading companies, depends upon supporting those companies.  So those who work in those factories pay more for bread, and meat, but the companies continue to do well.  High end consumers still do fine, and buy Coach purses, and meanwhile the Chinese blame QEII for their inflation and idiots here buy that.  And I imagine that it's Google and the U.S. that are engaged in a cyber-war, and not China, just as they say, right?  Yes, we're engaged in a cyber-war when we complain that they have hacked our systems.  It makes perfect sense.

Meanwhile, people are also freaking the fluck out about the increase in bank reserves.  Large reserves do not necessarily make banks lend, and when banks do not lend, there can be no inflation resulting from expansion of the M2 money supply.  (See this chart for the source of the freakadoodle.)  Not only are banks not inclined to lend, but the the interest the Fed pays on reserves is the tool the Fed has to control inflation, as many people have pointed out, for example here, and here (Bernanke himself).  In short, if banks start lending a ton of money, and inflation picks up because the M1 and M2 money supplies pick up, the Fed can immediately increase the interest rate it pays on reserves.  This will disincentivize lending, and be contractionary (both of the money supply and of the economy) because the banks will be able to get more money at less risk from the Fed than they will be able to get on a mortgage to grandma, so they will hold more as reserves (monetary base).

Where does this leave us.  The best policy in 2008-2009 would have been an even bigger stimulus, double the size of the one that was enacted, combined with reform of social security and medicare/medicaid to allay long-term deficit fears.  We got neither of those things.  We got a stimulus that was insufficiently stimulative, opening the President to attacks that it had actually hurt the economy.  These are wrong.  When the government spends money, it stimulates the economy in the short term.  Money the government did not spend was either: 1) retained by taxpayers, and not spent, because they were too scared to spend it; or 2) not borrowed, not spent, and stimulated nothing.  Period.  And we did not get the long-term deficit reduction that we needed, which would have allayed rational fears about our long-term fiscal sustainabiliyt, which would have provided further stimulus. 

Why does that matter, given what I said about fiat currency?  Because there is a tipping point, whereat a country realizes it can no longer pay its debts, and so it defaults, usually by allowing inflation.  Here, the Fed will not allow significant inflation, contrary to what the wild-eyeds among us say, because it is in fact independent from Congress, it has a mandate not to allow huge inflation, and it is perfectly capable of adhering to that mandate.  The risk is twofold:  1) it is possible that the economic flat-earthers gain control of Congress, eliminate the Fed's independence, and seek to monetize our debts with significant inflation in an unstable manner; 2) because the Fed will not allow significant inflation, debt will in fact consumer a larger and larger portion of our taxes, unless Congress fixes the f^cking long-term deficit problems.

So there you have it.  That's my view.  As an investor, where does this leave me?  I am deeply concerned about the economy, but I am very grateful for the Fed.  One thing it could do if it REALLY wanted to expand the money supply would be to charge banks for reserves. That would certainly get them to lend.  But instead the Fed is trying to thread the needle.  It is trying, if Congress, and the American public, will just f^cking let it, to ameliorate the pain long enough that:  1) massive consumer debt can deleverage without taking us all into a Depression; and 2) it can keep its finger in the dyke long enough for Congress and the President to get their acts together and fix the long term structural problems that are sapping confidence.  Ultimately, I think Congress and the President do so, maybe this year, maybe the year after, maybe the year after that.  But they will not do so until the crisis of confidence is so great that it overwhelmes their concern for their short-term political futures, which is to say, it is highly unlikely it will happen before January 2013.

Accordingly, I continue to stick with high-quality large cap companies that typically derive their earnings from a broad array of countries, and which are therefore not entirely dependent on the American or European economies.  These companies also pay dividends that are higher than what I could get on any Treasury bill or in most cases on long term debt, and moreover pay dividends that may grow in time, unlike a bond coupon.  Because I am buying stock in companies with near-bullet-proof balance sheets I am confident that they can survive any further crisis, and that they can continue to pay dividends to boot.  In the meantime, while I am not outperforming on CAPS (where all my picks are real-life, and where later buys are indicated in the comments), I have essentially matched the market in the last year and half, while taking on vastly, vastly less risk than the average market participant.  I view may strategy as better than simply holding and S&P index fund because the S&P has plenty of crappy companies in it, and as we have seen in the last month, while I should be able to match the S&P in a rising market, I will hugely outperform it in a falling market.  Thus I am attempting to garner most of the benefits of any rise, while insulating myself from the worst of possible drops. 

What I am not doing is freaking the f^ck out.  I am above twenty-five percent cash, and if markets drop further, I may buy more.  At this time, I remain most interested in MSFT, with lesser interest in INTC and CSCO, and also Apple, frankly.  I may get confident enough that I'll forget the stock-purchases, pull out the elephant gun, and buy some January 2013 Leaps on all of these companies.  The buy on Apple, note, would be both a bullish call, and also a hedge if in fact the iPad and the rise of pad/tablets/slates generally, does harm MSFT and INTC more than I believe it will. 

Hasta luego.

20 Comments – Post Your Own

#1) On June 10, 2011 at 12:52 PM, TheDumbMoney (58.64) wrote:

Bit of a rant, I see now.  And typing too fast of course I made typos and have disorganized paragraphs.  So it goes.  On to Friday.

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#2) On June 10, 2011 at 3:27 PM, GNUBEE (24.16) wrote:

REc, REC, Rec, REC!

I'm with you on several of these points. Many people do not see things as they really are. They think of the US as you or me.

Yes, at this point I'd be bankrupt, but not the US. They do not have the same constraints, and who's going to start collections proceedings on the US? How's that going to work out for them?

China also must keep the status quo....why many dont get it I dont know. foriegners do not lend out of the kindness of their hearts, or even as investors. They do it to subsidize the system as it is, and continue it.

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#3) On June 10, 2011 at 4:12 PM, TheDumbMoney (58.64) wrote:

gnubee, thanks.

 @dumber

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#4) On June 10, 2011 at 4:34 PM, Borbality (50.44) wrote:

Good stuff. Freaking the F-ck out is never a good idea. 

 

 I still have a bit of exposure to crappy companies through index funds but I have to say I really won't be surprised if the junk rally continues.  I just see stocks as more attractive than cash or bonds, and there's not enough precious metals to go around.

 I am holding a lot of cash though and trying to wade my way into this mess, since I missed most of the post-2008 rally. 

 

Keep up the good work!  

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#5) On June 10, 2011 at 4:42 PM, russiangambit (29.36) wrote:

US won't go bankrupt, agreed. But an individual american still can. Does it make it any better? Not for the person who went bankrupt it doesn't.

In the end people are freaked out because they don't believe in magic and US producing trillions on demand looks too much like magic or a devil's bargain. So, they are waiting for the devil to come and demand the repayment of the trillions. And the devil is not coming. the suspense is killing them -)). (Sorry I am in the mood for some humor today).

And, of course, FED and Treasury have no guts to come out and say -  you know folks, magic really does exist. It is called the reserv currency. Because they rightly know that then they'll get clobbered for lying to the population all these years, colelcting the taxes. And from then it will be free for all.

So, instead they keep mum and let all the theories of default run wild. And then because people still think you ahve to actually earn money before you spend it ( complete nonsense in the case of the government) we are going to get austerity. I think we might be able to take all 2 months of it before we will be back to stimulus and mor QE. All will end well.

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#6) On June 10, 2011 at 4:44 PM, TheDumbMoney (58.64) wrote:

Borbablity, I have exposure to indexes of various kinds too, and other mutual funds, in my 401k.  All my references here are just to my individual stock portfolio.  I agree the market could go much higher from here.  In my view, the rally is neither entirely 'junk' nor entirely not 'junk.'  The nature of the rally has a real aspect, as earnings are truly up.  The trillion dollar question is how sustainable that up-earnings trend is though.  Have a nice weekend.

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#7) On June 10, 2011 at 4:57 PM, Borbality (50.44) wrote:

you too, DTAF.  Also agree it's not completely "junk," as real money is still changing hands and people are still buying crap they don't need.  thankfully i think it's not quite like the mid 2000s, either. 

  and you're right, we can talk about "how expensive" any part of the market is, but if earnings don't hold up that won't mean anything. And we all know how accurate projections can be (forward P/Es, etc).

 

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#8) On June 10, 2011 at 8:34 PM, HarryCaraysGhost (99.59) wrote:

Wow, awesome blog man, I fully agree. if Mr Market continues to drop I'm going on a shopping spree for quality companies with a div.

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#9) On June 10, 2011 at 8:56 PM, TheDumbMoney (58.64) wrote:

Thanks Harry.   I confess I got a bit too profane.  Sometimes, in my childish way, I get excited about all of the different ways to avoid the profanity screens while conveying nearly the full effect of profanity.  Have a nice weekend.

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#10) On June 11, 2011 at 5:02 AM, whereaminow (< 20) wrote:

Not freaking out is good advice.

Now let's get to actually interesting stuff. 

Meanwhile, people are also freaking the fluck out about the increase in bank reserves.  Large reserves do not necessarily make banks lend, and wh.......  (See this chart for the source of the freakadoodle.)  Not only are banks not inclined to lend, but the the interest the Fed pays on reserves is the tool the Fed has to control inflation, as many people have pointed out, for example here, and here (Bernanke himself).  In short, if banks start lending a ton of money, and inflation picks up because the M1 and M2 money supplies pick up, the Fed can immediately increase the interest rate it pays on reserves.  This will disincentivize lending, and be contractionary (both of the money supply and of the economy) because the banks will be able to get more money at less risk from the Fed than they will be able to get on a mortgage to grandma, so they will hold more as reserves (monetary base).

Ok, I want to make sure I follow you.

1. Fed pays interest on excess reserves, which give an incentive not to lend.

2.  Should banks feel like lending anyway, the Fed will increase the interest on the money in excess reserves.

That's the plan right?

So let's see.  The banks have an incentive not to lend. They are getting interest with no risk, sort of like getting interest to stick money in a mattress.  Now, if they start to take risks, they will get rewarded with even higher interest with no risk.

Some questions

1. Where does the money come from to pay interest on excess reserves?

2. Will there be trillions of $ sitting in excess reserves for the rest of our lives, growing through interest?  If so, what effect will that have on the market?  If not, how will that money impact the economy?

3.  Does central planning have a long history of success?

4.  Does Ben Bernanke have a long history of being right? 

5.  This seems like a textbook case of hoarding, doesn't it?

6.  Why create trillions of dollars if it is just going to sit in a vault earning interest? 

7.  How can businesses predict future costs if there is no predictable method of determining the impact these excess reserves will have on future price inflation?

I guess I will be like a good central planner and arbitrarily decide to stop here.

Don't get me wrong. I'm not freaking the fluck out.  I own gold. I'm just curious what the paper regime has in store for those that don't.

Now on to the fun stuff.  The broader market index can only rise in the long run if new money is created/enters the economy.  That can only happen if you have monetary inflation.  Price inflation would be represented in the rising prices of the stock market.

You see, I believe the market will keep rising because the money supply keeps rising. 

However, it appears (correct me if wrong) that you believe the money supply will not grow, but that the broader market indexes will nonetheless continue to rise.

That seems to be utterly impossible.  So I am curious to find out more about this.

David in Qatar

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#11) On June 11, 2011 at 10:41 AM, TheDumbMoney (58.64) wrote:

"1. Fed pays interest on excess reserves, which give an incentive not to lend." -- Wrong, partially.  The Fed pays nominal interest on excess reserves so that it has the additional policy tool, if it wants to, of raising that rate, to disincentivise lending. 

Because the interest rate on reserves is similar to the fed funds rate currently, and additionally because it is very, very low, it should not provide a disincentive to lend, but rather the opposite.  If banks started lending a ton of money, particularly in an irresponsible way, the Fed could raise the interest it pays, thereby yes, creating an incentive not to lend.   And it could start draining the reserves.

"They are getting interest with no risk, sort of like getting interest to stick money in a mattress." 

Somewhat true, but the rate of interest they are currently getting is so low that it is not intended to create any disincentive to lend, for example.  The Fed instituted the policy in I believe late 2008 in part so that it could raise the interest rate if it wanted to create more of a disincentive.  Theoretically, as I pointed out, it could also charge them for their reserves, but it has not done that.  The current interest rate is a placeholder to get the policy in place.

"How can businesses predict future costs if there is no predictable method of determining the impact these excess reserves will have on future price inflation?"  That question is a non sequitur.  There is a relatively predictable method of determining the impact these excess reserves will have on future price inflation:  the Fed will maintain reasonable price stability either by raising the interest rate on reserves, or by draining the reserves.  The bond market knows this, Jeffrey Gundlach knows this, Bill Gross knows this, which is why the bond market does not reflect the same inflation expectations as those who are hoarding gold (as opposed to the many others who are speculating on gold, since they know that many others will incorrectly want to hoard gold).  That is not to say we could not possibly have significant inflation.  The Fed might let it get up to 4-6 percent before it acted, as above and/or pulling a Volcker, if things picked up quickly enough (which is not happening).  Or as I point out, it is possible that [most likely a Republican 2012] Congress abolishes the Fed's independence and decides in its infinite ignorance to take over monetary policy, which I absolutely believe President Sarah "Paul Revere Warned the British" Palin would do.  Then, unlike with what the Fed has been doing, we would be well and truly screwed, as they really would start printing money.  I however have faith that, as they did in Fall 2008, adults will prevail in this debate. 

Finally, a brief comment on Bernanke's mistakes.  (I'll get to your other points later, I have to cleanup my house because I have like nine three year olds coming over for a playdate with my daughter.  The horror.)  The primary mistake cited about Bernanke is his comment that he didn't think subprime would take down the economy in early 2007.  This observation was outside of his area of expertise,  as he had not studied mortgage lending in detail (including all of the structured CDO stuff).  So I don't think it would be fair to say he's incompetent based on this statement.  Additionally, nobody can fully quantify or fully predict a panic, which is what we had in late 2008, and which by its nature is a somewhat irrational and unpredictable event.  And frankly, in a sense I agree with Bernanke.  Subprime didn't take down the economy.  Subprime was the catalyst that exposed the weaknesses in a totally insufficient regulatory regime, including insufficient reserve requirements, and including too much allowance for bank leverage, and including the idiotic decisions to implicitly back the GSEs, and many many other regulatory and policy failures (mostly the fault of the 1998-2006 Congresses, Bush II, and Bill Clinton) that are what actually took down the economy. 

Okay one more.  You say:  "Now on to the fun stuff.  The broader market index can only rise in the long run if new money is created/enters the economy.  That can only happen if you have monetary inflation.  Price inflation would be represented in the rising prices of the stock market.  You see, I believe the market will keep rising because the money supply keeps rising.  However, it appears (correct me if wrong) that you believe the money supply will not grow, but that the broader market indexes will nonetheless continue to rise."

This is economic nonsense.  First, you are totally discounting the impact on the market of, at minimum: 1) increasing population (which raises demand), 2) increasing productivity; 3) innovation; and 4) asset allocation decisions.   Second, yes of course I do believe the market can rise if money supply (which let's represent by M2) does not increase.  Of course it can.  For example, people can take X money out of their existing cash holding, and stick it in stock funds; because the supply of stock is "constant," (excluding new stock issuances and repurchases), that increased demand for the same universe of stocks drives up the price of stocks.

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#12) On June 11, 2011 at 10:44 AM, TheDumbMoney (58.64) wrote:

And more fundamentally as to Bernanke's comments, it is not the Fed's job to grow or maintain the economy in the first place.  That is the job of Congress, the President, and the people and their state elected representatives.

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#13) On June 11, 2011 at 6:44 PM, TheDumbMoney (58.64) wrote:

"1. Where does the money come from to pay interest on excess reserves?"  I don't understand this question.  The money comes from the Fed.  Are you asking where the Fed gets the money?  It famously owns a ton of Treasuries, on which we are paying it interest, just as one example.

"2. Will there be trillions of $ sitting in excess reserves for the rest of our lives, growing through interest?  If so, what effect will that have on the market?  If not, how will that money impact the economy?"

In answer to the first part, likely not.  The reserves are a function of the Fed's purchases of Treasury securities.  Every time it wants to purchase a Treasury security, it conjurs the money and "deposits" it in the appropriate bank's reserve account.  So the reserves are largely a function of what we call Quantitative Easing.  The reserves will naturally unwind themselves as the Treasuries and mortgage securities are paid of by we the tax payers or by the mortgage borrowers.  But not right away.  That is because the Fed has announced that it will maintain its balance sheet at the same level.  It will do that by buying new Treasury securities to replace the old ones as they expire every 90-days, or whatever their term is.  As far as impact on the market, I have explained that already; reserves impact the economy by creating more money supply if and when the banks lend money, which they are not doing in sufficient amounts to create an vast expansion of the money supply.   The point of the Fed's program is not the reserves, really; the point is to create scarcity for Treasuries, which drives up their value (drives down yields); this is why Gross is worried about the end of QE2: he does not feel their is enough exogenous demand for Treasuries absent the Fed's purchases.

"3.  Does central planning have a long history of success?"   That's not a real question.  That is a "question" expressing a point of view.  The real question is both narrower and more complex: what are the COMPARATIVE merits and problems with a centrally-planned money supply.  I think the history in this country and in other countries amply supports the conclusion that the merits outweigh the risks, but ONLY if the central authority is independent of day-to-day political pressures, which the Fed truly is (though I'm sure you do not believe that, and I won't be able to convince you othewise, so I just don't care what you think about that).

"4.  Does Ben Bernanke have a long history of being right?"  Again, not a question, a point of view.  I have previously addressed it.  Much like the CIA, his failures are trumpeted from the every newspaper, but his many successes are never reported upon, and his greatest successes are not even noted (which is why they are his greatest successes).

"6.  Why create trillions of dollars if it is just going to sit in a vault earning interest?"  Because as I explain above, they are created so that the Fed can buy Treasury bonds, thereby creating scarcity in Treasury bonds, driving down their yields, and causing people to seek yield in riskier assets.

"I guess I will be like a good central planner and arbitrarily decide to stop here."  There is absolutely nothing arbitrary about the Fed.  Whatever its other failures, the Fed successfully maintained a highly stable level of inflation for the twenty years preceding the prices, basically doing nothing by manipulating the Fed Funds rate.  You may disagree with the Fed's actions.  But they are not arbitrary.

Cheers.

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#14) On June 11, 2011 at 10:10 PM, whereaminow (< 20) wrote:

dumberthanfool,

I don't have a ton of time, but here are some notes of interest

1. The excess reserves are earning EIGHT times the rate they would earn on one month t-bills.  So it may not seem large nominally, but as far as safe assets go, it is a huge boon.  It's also primarily small bank funds. Large banks are lending.  Small banks are not.  In other words, once again the Fed has distorted the nation's capital structure.  (I know that MMT and Keynesians don't have a capital structure, but I don't know what to tell you about that.)

2. Bernanke has a long history of being wrong that goes far behind subprime.  He famously said housing is not a bubble is 2005.  He famously said that the auto manufacturers were strong right before GM went bankrupt.  He famously said that the market was great right before Lehman.  I could go on and on.  Look up the video "Bernanke in denial" on YouTube for the words from the horse's mouth. 

3.  I'm disappointed that you don't understand why the stock market rises.  The broader market index can only rise in the long run if new money is created or enters the economy.  This is far from economic nonsense.  It is irrefutable.  In fact, I dare you to write any economist in the country and ask them whether or not this is true. 

You wrote:

First, you are totally discounting the impact on the market of, at minimum: 1) increasing population (which raises demand),

Doesn't matter.  If productivity increases without a corresponding increase in the money supply, the prices of stocks in total will not rise.   

2) increasing productivity;

Again, doesn't matter.  Increasing productivity merely lowers the costs of the good in question.  If everyone increased productivity across the board, that would merely mean more goods chasing the same amount of dollars.  Prices would fall. This has nothing to do with stock prices. 

3) innovation;

Again, doesn't matter.  If you don't increase the money supply, there is no increase in total market cap.  

and 4) asset allocation decisions.  

Finally, something that actually matters in this conversation.  That is a short term decision.  The more money comes off the sidelines and into stocks, the more attractive other asset classes become.  Capital flows to the highest return.  This is only a short term fix.

The only way to perpetually increase the stock index is to perpetually inflate the money supply.  You are cheering for inflation while claiming there is no inflation.

David in Qatar

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#15) On June 11, 2011 at 10:44 PM, TheDumbMoney (58.64) wrote:

You are simply wrong about what increases market caps.  Very simplistic.

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#16) On June 11, 2011 at 10:46 PM, TheDumbMoney (58.64) wrote:

At least I hope you no longer think the excess reserves are going to result in hyperinflation.

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#17) On June 11, 2011 at 10:52 PM, TheDumbMoney (58.64) wrote:

And no, I'm not claiming there is no inflation, where on earth are you getting that?  In fact I specifically said there has been steady inflation for many years.  The fact that the stock market has gone up more than that steady rate of inflation alone puts the lie to this very silly thing you are saying.  Inflation plays a role in the increase in stock prices, but only a role.

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#18) On June 11, 2011 at 10:54 PM, whereaminow (< 20) wrote:

dumberthanafool,

You are simply wrong about what increases market caps.  Very simplistic.

Oh but I'm not. In fact, it is irrefutable.  Please tell me how the total market cap of the stock market can continue to rise forever and ever if there is no new money entering the economy.  Where will the money come from to perpetually push up the general stock price level?

You're learning something that is completely new to you.  It probably upsets you.  Don't close your mind.  Think it through.

At least I hope you no longer think the excess reserves are going to result in hyperinflation.

I never did. Look it up. Like every Austrian School economist outside of Schiff, I predicted stagflation.  I think it's rather obvious that I was correct.

David in Qatar

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#19) On June 12, 2011 at 1:25 AM, TheDumbMoney (58.64) wrote:

David, you asked me where the Fed gets the money to pay interest on reserves.  So yeah, with all due respect, no, I don't feel that I'm learning anything from.  Also, your first two or three questions in comment 10 make perfectly clear you had no clue what was going on with excess reserves before reading this post.  I'll refer back to this question in particular: "Will there be trillions of $ sitting in excess reserves for the rest of our lives, growing through interest?"  Spectacularly ignorant.  Open your mind.  Have nice evening.

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#20) On June 12, 2011 at 1:56 AM, whereaminow (< 20) wrote:

dumberthanafool,

I'm disappointed.  I had really high hopes for you, but oh well.  I'm simply probing you for information and you respond to my questions - purposefully simple questions - with rancor.  I can see that you understand the mainstream argument for manipulating the Fed funds rate.  I don't need a class on that, but I didn't mind reading your summary.  In fact, I enjoyed it.  I don't know why it is spectacularly ignorant to ask you a simple question. 

You say that the Fed is using excess reserves to buy Treasury bonds.  That's great.  Why did Bernanke need to add interest payments to this mechanism?  The Fed has never, in its history, paid interest on excess reserves.  I know that I'm spectacularly ignorant, but there are some things I know. 

Has the Fed always needed to use excess reserves buy Treasury bonds?

"Because as I explain above, they are created so that the Fed can buy Treasury bonds, thereby creating scarcity in Treasury bonds, driving down their yields, and causing people to seek yield in riskier assets." - dumberthanfool

Why does the Fed need to incentize the purchasing of riskier assets?  Isn't that what caused this mess in the first place?  And doesn't that seem to run directly counter to the incentive created by paying interest on excess reserves?  Which, as I mentioned, has never been done before.

However, we can't go any further because you respond to these questions with anger and condescending argumentation.  Did I condescend towards you at all during this discussion?  I don't believe so, but if I did I apologize.

But I do understand how it goes.  I probably upset you the most when I tried to explain why the stock market rises over time.  I'm sorry that no one ever explained to you why the stock market goes up and up and up forever.  It's not because America is super super awesome.  It's because we print a ton of money.

So now, go ahead and get it out of your system. Call me a goldbug, tell me to put on my tinfoil hat, tell me that I don't understand basic econ, tell me that I'm a fearmongerer, etc etc etc.

But after you're done with that little ejaculatory exercise that provides you with a brief feeling of superiority, can we get back to the discussion at hand?

Thanks,

David in Qatar

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