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Printing Money

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March 06, 2009 – Comments (16)

Here's the first I've seen on actually printing money...

Interesting it is the pound.  The pound is the currency I have spoken out against the most.

This is the type of thing that concerns me a great deal.  

This isn't my currency, but this type of thing would have me looking at where to put my cash.  I still would not rush, but I would be working to get out of cash.

 

16 Comments – Post Your Own

#1) On March 06, 2009 at 6:17 AM, kaskoosek (58.06) wrote:

The US is not too far off.

The hip new word for printing money is "Quantitative Easing".

Federal reserve buying assees is very similair.

 

 

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#2) On March 06, 2009 at 6:19 AM, kaskoosek (58.06) wrote:

Assets

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#3) On March 06, 2009 at 8:02 AM, Aerius (83.67) wrote:

Dwot, you follow Mish right?

Printing money might not necessarily have the inflationary effect everyone's expecting since it's the destruction of credit that's the driving force behind deflation.

What it does do is allow the government to tax and redistribute money however they want.

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#4) On March 06, 2009 at 9:37 AM, 4everlost (29.39) wrote:

Thanks for the post, 1 rec.

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#5) On March 06, 2009 at 9:48 AM, outoffocus (23.08) wrote:

Federal reserve buying assees is very similair.

Fruedian slip?

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#6) On March 06, 2009 at 4:45 PM, norm246 (87.85) wrote:

What does 'destruction of credit' mean in everday language?

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#7) On March 06, 2009 at 4:46 PM, norm246 (87.85) wrote:

every day

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#8) On March 07, 2009 at 2:13 AM, dwot (49.06) wrote:

Aerius,

Yes, I read Mish and yes credit destruction is faster then this printing, but it is still something to watch and be cautious about in my view.

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#9) On March 07, 2009 at 2:52 AM, lucas1985 (< 20) wrote:

What does 'destruction of credit' mean in everday language?

It means bankruptcy and writing off debt. When you write off debts, you also write off savings since both are basically the same thing. Your debts are the savings of someone else.

This is what you need to begin the recovery: wipe out debt/savings (since they're unsound) to create a clean balance sheet for households, corporations and the government. Unfortunatelly, the status quo (Reaganomics, current bankruptcy laws, coventional wisdom) has a hard time accepting that. For example, inflation can help you to earn your way out of debt without having to become a slave of your creditors. But inflation is bad for those living in the FIRE economy (i.e., the ones holding financial assets). Also, inflation is close to a sin for the academic and politic status quo: The Chicago School, right-wingers (neocons and libertarians alike) and so on.
So, those with financial claims to wealth would rather prefer to compound their bad bets and put you in a soup line instead of being morally and intellectually sound i.e., writing off their bad bets and allowing you to eat decently while earning your way out of debt.
Neocons and libertarians will continue to blame goverment intervention, the GSEs, the CRA, irresponsible homeowners, Social Security, the unions, FDR and so on. Both will say that Greenspan (a confessed admirer of Ayn Rand) is a Keynesian. The libertarians will go further and blame the Fed, fiat money, fractional reserve backing, etc.

They can't accept that their ideology (efficient market hypothesis, rational expectations, moderm portfolio theory, financial deregulation, financialization, etc) has generated financial institutions "too big to fail" while leveraging the common man savings' on junk derivatives and burdening the real economy with debt (leveraged buyouts, privatization, tax deduction on interest-bearing debt, stagnant or falling wages forcing homeowners to take out the equity in their homes just to keep going or running into massive credit card debt, etc)

http://en.wikipedia.org/wiki/Financialization

http://www.michael-hudson.com/interviews/0902TaxProgramRecoveryItulip.html

http://debtonation.org/

http://economix.blogs.nytimes.com/2009/01/09/an-economists-mea-culpa/?hp

http://www.timesonline.co.uk/tol/comment/columnists/anatole_kaletsky/article5663091.ece

http://www.henryckliu.com/

http://www.debunkingeconomics.com/

http://www.finfacts.ie/irishfinancenews/article_1014734.shtml

http://en.wikipedia.org/wiki/Post-Keynesian_economist

http://www.amazon.com/Socialism-after-Advances-Heterodox-Economics/dp/0472069519

 

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#10) On March 07, 2009 at 9:23 AM, outoffocus (23.08) wrote:

For example, inflation can help you to earn your way out of debt without having to become a slave of your creditors.

How does devaluation of money help you "earn" your way out of debt? If your money is worth less today than it was yesterday, you did nothing to "earn" that. 

But inflation is bad for those living in the FIRE economy (i.e., the ones holding financial assets).

And exactly what percentage of this country doesnt own fire assets? Few people or businesses actually own hard assets.

So, those with financial claims to wealth would rather prefer to compound their bad bets and put you in a soup line instead of being morally and intellectually sound i.e., writing off their bad bets and allowing you to eat decently while earning your way out of debt. 

So people should be able to run up whatever debts they want just to have them written off? Its a two way street.  It is just as immoral to run up debts willy nilly and not pay them off as it is to want to "put people in a soup line" in order to get their money back.   When people go into debt, that means they used money they did not "earn". They spent money that did not belong to them. Therefore they have a responsibility to pay ever dime of that money back.  They shouldnt need  someone to devalue the currency in order to pay it back.  If you can't pay it back dont borrow it. 

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#11) On March 07, 2009 at 1:05 PM, lucas1985 (< 20) wrote:

How does devaluation of money help you "earn" your way out of debt?

When expectations of inflation are built into an economy, wages are adjusted. A rising income makes the debt load much more bearable. In other words, inflation erodes the value of you debts as your debt/income ratio becomes lower and lower. This happened in the 70s and is one of the causes of the growth in the 80s (everyone had a clean balance sheet and thus could take new debt to expand investment and consumption)

Today we've hit a global debt wall, similar to the ones in the 20s and in the 1870s (arcane financial instruments, weak regulation, promises of a new economy, rampant speculation, widespread fraud, insane leverage and so on)

http://www.michael-hudson.com/articles/financial/090217OligarchsEscapePlan.html

And exactly what percentage of this country doesnt own fire assets? Few people or businesses actually own hard assets.

Wage earners and business owners don't own financial assets in a meaningful scale. If they can increase their wages and profits they can rebuild their savings without having to gamble their retirement bidding up the prices of stocks, bonds and real state.

So people should be able to run up whatever debts they want just to have them written off?

Debt forgiveness isn't a new thing. It has been practiced at every turn of history by different cultures. The Babylonians discovered that the mathematics of interest-bearing debts aren't compatible with economic growth (exponential growth vs linear growth)

http://www.michael-hudson.com/articles/debt/CompoundInterest1.html

http://www.michael-hudson.com/articles/debt/CompoundInterest2.html

Also, you're repeating a classic right-wing talking point about "irresponsible homeowners" Sure, lots of Joe Sixpacks speculated in the real state bubble and others siphoned their home equity to "keep up with the Joneses" and/or have an upper-class lifestyle. But the majority of your fellow citizens were tricked into shark/subprime loans originated by private lenders (not subjected to the CRA by the way) which were being crowded out of the prime mortgage market by the GSEs. And others were forced to suck their home equity to cover medical costs (you know, healthcare costs have been rising at an astonishing rate and lots of Americans are uninsured) or just to keep the standard of living enjoyed by their parents 40 years ago. I don't need to remind you how real wages (i.e., wages adjusted for inflation) have stagnated in the last 30 years and the increasing concentration of wealth in few hands.

.

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#12) On March 12, 2009 at 1:30 PM, OleDrippy (35.08) wrote:

Lucas1985: very articulate argument, though I disagree with you. My disagreement is a matter of ideology, though. My ideals are that savers should not be punished for the benefit of consumers and debtors, that people have the right to keep what they earn to the greatest extent possible, and that we be allowed to make mistakes and FAIL (and that includes bankers).

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#13) On March 14, 2009 at 3:13 PM, norm246 (87.85) wrote:

Thanks for the above discussion. Do people who obtain their savings from large inheritances, speculation or obtaining large bonuses from running their banks into the ground have the same moral right to protection from inflation as Joe the plumber?

i.e, I suspect there are a large number of wealthy people who have done SFA in the way of honest work. Do we have to stand in a soup line to protect these people's wealth? 

 

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#14) On March 14, 2009 at 7:54 PM, lucas1985 (< 20) wrote:

@OleDrippy,

Lucas1985: very articulate argument,

Thanks.

My ideals are that savers should not be punished for the benefit of consumers and debtors.

You're essentialy proposing to bail out savers, which is what the government is trying to do (i.e., preventing bank runs) By keeping insolvent banks alive, the government is bailing out depositors and others with seniority in the capital structure (bondholders for example). I've got some catch-22 questions for you:

- Are depositors more important than taxpayers?

- How do you have a working financial system when depositors are (partially or totally) wiped out? How fast can you recreate trust after a failed financial system?

My solution for the current financial mess would be a re-edition of the one pursued by FDR: audit thoroughly every major bank, then put those in really bad shape under government rule to chop them in digestible pieces. The ones with likely prospects of surviving this mess should receive fresh capital plus some support for asset prices and bondholders should get a nice haircut in addition to debt/equity swap. Reducing the liabilities side of the balance sheet is of the utmost importance to cushion against future write offs and provide ample amounts of loanable funds. There are two main ways of shrinking the liabilities: selling assets (it can't work in this market) to pay debt or reducing debt through agreements with debtholders. If banks aren't forced to sell assets at depressed levels it would create some sort of price floor. If banks receive a massive amount of fresh equity through debt/equity swaps and government funds they can weather the storm without sinking. Of course, all of this would require ample government and society oversight. If you wonder why bondholders haven't been touched, you need to read more ;)

When the financial markets get some stability, a modern version of Glass-Steagall would be enacted to prevent systemic risk in the future.

Disclosure: Since I live in Argentina, I have first hand knowledge of banking crisis, depositors being wiped out and taxpayers bailing out savers (and bankers).

@norm246,

Do people who obtain their savings from large inheritances, speculation or obtaining large bonuses from running their banks into the ground have the same moral right to protection from inflation as Joe the plumber?

Straight to the head :) Do you want to punish irresponsible (and criminal) bankers who awarded large bonuses and golden parachutes to themselves? Just unleash inflation. The supply of TIPS and other inflation-indexed instruments isn't big enough to protect those vast amounts of money parked in fixed-income instruments. In the meantime, use your increased income to pay down debt, rebuild your savings and jump start consumption and investment. Deflation is good for the wealthy, it allows them to amass assets at rock-botton prices. Inflation is fair to almost everyone.

If you mostly agree with this reasoning, you'll see one of the main flaws in Austrian economics (and to some extent in neoclassical/Chicago economics). To the Austrians, money is mainly a store of value/wealth, so inflation (and taxation) is confiscation of wealth for them. Marx, Keynes and others saw the flaw in this assumption and correctly guessed that such monetary theory would lead to everyone trying to amass financial assets which would be protected from loss of value and then live off of them. In other words, it would lead to capital acumulation and concentration of wealth in few hands. Those at the top of society would save most of their income, retiring capital out of the economy and leading to disinvestment and recessions.

That's why the state theory of money is much more rational and fair to the average man. Money becomes a nice tool for doing transactions (e.g., paying taxes, trade) and bookkeeping. Accumulation of financial assets becomes unnecessary. Wealth becomes much more than your net worth, it involves your quality of life and other things.

Concluding: hyperinflation is bad because it destroys the foundations of the economy (currency, trust, price signals, etc) and deflation/disinflation is bad because it redistributes wealth to the already wealthy. Moderate inflation is the healthy middle-ground: it encourages consumption and investment, it slowly erodes the debt load and it promotes savings thanks to the relatively high interest rates (even if the real interest rate is close to zero or negative)

 

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#15) On March 15, 2009 at 1:18 AM, norm246 (87.85) wrote:

<<<Deflation is good for the wealthy, it allows them to amass assets at rock-botton prices. Inflation is fair to almost everyone. >>>

Interesting point.  

 

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#16) On March 15, 2009 at 1:22 AM, norm246 (87.85) wrote:

Oops. Copy and paste doesn't work. The point I was interested in comes from Lucas, who stated that "Deflation is only good for the wealthy, and inflation is fair (equally bad) for almost everyone".

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