Forum Replies Created
Sellers of Gold:
1) People who bought in early, can pocket a nice profit, and don’t believe there is a big upside to maintaining their position.
2) People who need to liquidate in order to raise cash and pay off other debts or make investments necessary for the continuation or expansion of their business.
3) Gold miners
4) Over-leveraged hedge funds (might be a subcategory of #2) and other institutions.
I am sure there are a lot more – there cannot be a buyer without a seller!
[quote]Isn’t it possible that hyper-inflation can result without currency? I
mean, even in a barter-type relationship, could/does this occur? And
if so, does this mean that hyper-inflation is only dependent upon value
(of anything). If this is true then value is sentiment. If value is
sentiment then hyper-inflation is not inevitable; i.e.
sentiment is not necessarily inevitable or true to be brought about
100% of the time. It might be likely though (probability says
less < 1 ?)[/quote]
I’m no economist, but based on what I know and understand, inflation is defined as an increase in the supply of the medium of exchange. Therefore, it is always possible if the medium of exchange, be it barter or currency, be that fiat or commodity-based, increases faster than the supply of goods or services. An example of this occurring is when Spain brought hordes of gold back from the New World. They had a sound currency based on gold, yet they devalued their currency due to the disproportionate amount of gold they introduced into their economy from the new world. I think this example is in the Crash Course, or no?
I do not understand what you mean by "sentiment". Inflation refers to an inflation of the money supply. We don’t pay more because we feel our money is worth less. We pay more because producers who experience shortages raise their prices in response, either for profit our to re-invest in their productive acticities and increase supply (to meet the increased demand). This trickles down to the rest of the economy, and soon everything is more expensive. The only thing that remains the same are your hard-earned savings, which now have reduced purchasing-power.
Note that in the absence of confiscation of property through war or
forcible seizure (as a-la-Spain), a commodity-based currency cannot be introduced into
an economy without a corresponding exchange of goods and services between that economy and the economy providing the gold (or other backed-currency). In fiat-systems, forcible seizure or confiscation occurs everytime any central bank inflates the money supply, "seizing" value from all previously existing monetary units. Of course, I’m sure they don’t like to think of it that way.
[quote=r101958] We might want to point out that the $85,350 is now worth quite a bit less than it was worth when he/she originally bought the stock in 2002. So, the loss is greater than $14,650. In the current inflationary environment (discounting the last few months) one would have to realize a return of more than 10% a year (see Shadow Government Statistics for true inflation rates) in order to realize any gain from their stock holdings. [/quote]
I agree, but that is not relevant to the purposes of the discussion. The original post asked whether the collapse in asset values offsets the increase in the money supply. I was trying to point out that just because the value of a stock went down, that does not correspond to a decrease in the money supply in the economy. The investor’s original $100K was paid to the seller of the shares, they didn’t dissapear into "money heaven".
As someone pointed out, fractional-reserve banking leads to highly-leveraged banks. That is, although the bank only borrows X amount from the Fed, they are allowed to lend 10X (or thereabouts) into the economy. With the mortgage-industry credit collapse, many banks have had to de-leverage. That is, they are calling loans back, not making new loans, etc. This is referred to as a "contraction" in the money supply, and it can result in deflation. When you take leverage into consideration, you understand why only a 4-5% default rate on outstanding loans can have the same effect as a 40-50% default rate in a non-fractional reserve banking system. That’s why banks are deleveraging. They have to bring their ratio of liabilities to assets down – a lot.
If the Fed did nothing, it is feared that deflation would take hold. Prices would come down because there is less money in circulation in the economy. The money is actually really there, it’s just being held by banks and/or foreign buyer’s of US Treasury bonds. In any case, it’s not in any of our pockets chasing cars or houses or hamburgers. If deflation took hold, incomes would come down, US tax revenues would come down, and economic activity in general would come way down. This would make the credit crisis worse because everyone’s loans would become more difficult to pay off (you’re making less money but have to make the same payments). It’s a very scary downward spiral and the Fed will do anything and everything to avoid this.
So, the Fed is creating gobs of money and using it to buy US Treasuries. The US Treasury is using some of that money to buy "toxic" assets from banks, lend money to the Big 3, and coming soon to a neighborhood near you, bailing out little Johnny’s lemonade stand, probably. Upon aquiring these Treasury bonds, the Fed is inflating it’s asset collumn, which it uses to lend money (again printed out of thin air) out to banks. So you have money being added from two sources – the US Treasury in the form of buying assets from banks, and in some very scary cases, taking equity positions in companies (AIG); and from the Fed, in the form of it’s usual lending of money to banks.
The strategy is to inject enough money into the system to get the banks’ liability/asset ratios back to normal and unclog the credit freeze. Once the credit freeze is unclogged, they hope, businesses will again be able to borrow, and therefore hire, people will borrow to buy cars, houses etc, and so on and so on. Note the recent CC graph on free money from the Fed.
So where does inflation or hyper-inflation come into play? First of all, we’ve already seen how good the Fed is at timing it’s credit expansions or contractions – pretty bad. In fact, they seem to figure everything out 12-24 months after it’s already happened, so many people fear that they will overshoot and go on creating dollars long after it is necessary. Remember, easy money is what got as into this problem to begin with. Imagine what yet another bubble popping will do to us.
Secondly, all these dollars being created, like all dollars and as the CC shows, are loaned into existence. That means that after that supposed magical day when the economy has been saved, we are going to have to start paying these dollars back. That will mean higher taxes, just as our baby boomers enter their 2nd or 3rd or 4th year (depending on how long you predict this downturn will be) which will require higher taxes anyway, further dependence on owners of US debt, and further weakening of the $ as a reserve currency.
Hope this helps.
Only you can best evaluate your options and make the best decision. Based on what you’ve said, I can only say the following: right now, it seems renting is better than buying mainly because to buy means to take on an adjustable rate mortgage. If by any chance you can get a fixed mortgage, even as high as 8%, I would go for it because I believe interest rates and inflation are going to go through the roof and therefore you will be able to pay off your fixed mortgage with cheaper dollars. Otherwise, I say rent until the future becomes clearer.
Thanks for saying what I was trying to say in 1,000 less words! I have one disagreement though. When people refer to "money on the sidelines" they could be referring to one of two things: If they are referring to money that was taken out of the market, of course you are right – they could only take it out if someone else put money in – therefore, no net difference. However, they could also be referring to the stockpiling of money in 401ks and mutual funds that come from automatic withdrawals from people’s paychecks. The money managers in charge of the 401ks and/or mutual funds can and sometimes do "sit on the money". Since this is not money that came from the sale of stocks, but rather money that came from automatic deductions from paychecks or other deposits into mutual funds, then it can be truly considered "sideline" money.
Speaking of seceding from the union, does anyone have or know where to find net trade surplus/deficit for each individual US state? If things get real bad, I would not rule out the disintegration of the US. Why would states like AZ, TX, and NM keep funding the federal government when it will not even protect their borders, i.e., the US/Mexico border? I know CA also borders Mexico, but I know they’re running a defecit, so I presume they would want to stay in the union despite the border situation. I know patriotism can go a long way, but it can only go so far. Eventually, hunger and tax relief take over.
I would think States that have a trade surplus and can stand on their own would be more predisposed to secede than those that depend on the rest. I would assume Texas, Alaska, Oklahoma, and Arizona are among those, due to oil and natural gas resources, but I am not sure. Also, I remember reading somewhere that the military has an unproportional majority of servicemen and women from the South. If that’s true, they could defend their secession, should anyone wish to challenge it.
Not so long ago, I never thought these would be the topics of my thoughts.
To answer your original question:
The trillions lost by the stock market collpase were "paper gains". Therefore, increased printing by the fed will not be offset by such losses.
I am not the best at explaining this, but I will try: Neither gains nor losses are real until you liquidate your position. That about sums it up. For example, say you bought 5,000 shares of GE at $20/share in 2002 ($100,000 investment), and held it through today. In October 2007, the stock traded at 41.03. You would have shown a paper gain of slightly over 100%. If you had sold then, you would have pocketed a profit of a little over $100,000. However, if you had not sold then, and were still holding it now, your investment would be worth $17.07 a share, or $14,650 less than what you purchased it for.
This relates to net money creation or destruction as follows: Your paper gain of slightly over $100,000 was not the result or cause of net money creation. The dollars somebody would have used to pay you for those shares when they were worth $41.03/share would have been real, previously-created dollars. They only seem like "new" dollars from your frame of reference, but the dollars themselves were not "created" by GE or the market in any way. Had you sold then, your profit would have simply been the result of someone else transferring their dollars to you. What if you held your shares through today, showing a paper loss of $-14,650? Well, the $100,000 you paid for the shares are still out there, somewhere. You paid those $100,000 to somebody. If you decided to sell today, someone would pay you $85,350. What happened to the $14,650? They were not "lost" from a global economic perspective. Someone out there has your original $100,000, unfortunately that someone is just not you.
The news outlets sometimes talk about money going to "money heaven". However, I do not see how that can happen unless they are referring to unliquidated gains (don’t get me wrong, these are very important too), or using the fram of reference of each investor that lost money. Of course there is a "money heaven" for gains that were never sold, but otherwise, money can only be destroyed in one of three ways: a) you burn it/destroy it b) you hide it so well nobody can find it, including yourself or c) you increase the quantities of it so that the value of all existing monetary units depreciates.
Don’t get me wrong: paper gains have a very real effect on the economy even though they are not "real money". People and businesses leverage themselves based on the presumed value of their savings and investments, make purchasing decisions, get loans, etc. But the number of physical dollars themselves, at least in our fiat-currency economy, can never decrease – they can only get shuffled from one person to another or increased via central bank printing. In a non-fiat economy, I suppose they could decrease by being cashed in for whatever is being used to back the currency – usually gold. They could also still increase in number, but only via increases in gold (or some other hard commodity) that get deposited in banks in exchange for demand deposits (which used to be known as money).
Hope this helps, although I don’t feel entirely comfortable with my own explanation.
I also recommend The Self-Sufficient Life and How to Live It The Complete Back to Basics Guide by John Seymour.
Although I just cracked it, it is obviously a good book – crammed with illustrations and detailed farming, animal-raising and food-processing knowledge.
So far the biggest challenge I see in self-sustainment, as explained by Seymour, is that it is very difficult to grow all the things you need yourself. Also, if you are planning on "just growing tomatoes and chickens" and trading your excesses to others for different items, it turns out that you need to rotate your crops and animals – often! Otherwise, crop and animal specific pests will quickly infest whatever you are groing.
Experienced, knowledgeable farmers can and do overcome this challenge, even on small farms, just be aware that there is a lot of learning and planning to do. What I’ve read so far in this book makes me realize how incredibly ignorant and helpless I will be when the S does HTF if I don’t hurry up and "get smart".