Deflation Coming???

[Sundance]

I talked with my brother this AM. He is a partner
for a major firm and specializes in banking law. Needless
to say he's been flying coast to coast at a rabid rate.

His opinion is that deflation and the collapse of the
commodity markets is around the corner. Although
falling prices sounds great, the repercussions will
be nasty.

Bad news for me as my business is closely tied to grain
markets.....

[Derek]

Maybe I will be able to afford deer corn now.

[JPK1NH]

The credit issue is the immediate problem and if banks don't increase their lending then there are going to be large scale failures inside of the next 30-60 days

[dragonfly]

The credit issue is the immediate problem

I guess I'm naive, but I didn't know that so many businesses borrow money to meet payroll. Is this a common practice in the business world? No wonder my attempt to start my own business was a failure.;)

[iddee]

DF, if a wholesaler stocks your store and hands you a bill which is due in 30 days, he has no operating money to replace those items until a month later, when you pay. So, yes, he goes to the bank and borrows money to operate until you pay. Then you sell that inventory and send a bill that is due in 30 days. What will you operate on until that money comes in. You must go to the bank.

[Sundance]

The credit issue is the immediate problem and if banks don't increase their lending then there are going to be large scale failures inside of the next 30-60 days

Obviously....... other threads address this well. This thread
goes beyond.

What are the effects (beside lower prices) to deflation
and commodity price collapse??

[George Fergusson]

Deflation is here. How else do you explain commodity prices? How else do you explain $79 a barrell oil?

That said, it can and will get worse. But it's not around the corner. It's here and it's happening now.

[John F]

DF, if a wholesaler stocks your store ...

This is only one way. There are other business models that do not use credit. The one Iddee describes parallels our monetary system. A business and a monetary system could operate using a savings model.

Oh, and commodity prices, silver just dropped below $10. Gold is loosing (about $55 right now for the day) and most of that is being attributed to sell off moving from gold to equities. This could be good news for the folks who were going to have to cover futures contracts as I imagine many of the holders will follow that wave and not need to find the gold.

[John F]

I forgot. The drop in commodity prices includes a component that would be a drop in demand or an increase in supply or both. So, how much is due deflation? Who knows?

For sure oil is hit with both a decrease in demand (less drivers) and an increase in supply (those pesky speculators that are dumping inventories) so that would account for some of the change in oil prices. Of course I can't tell how much, we change too many variables at once.

[Hillside]

I didn't know that so many businesses borrow money to meet payroll.

It depends a lot on what kind of business you are in. If, for example, you deal in large, very expensive equipment, you may very well be forced to operate on borrowed funds. It would be better if your business was well enough capitalized that you didn't need operating loans, but some business models require routine borrowing. Obviously, a loan is an expense, not income.

I think the big problem right now is that as the economy slides into recession, companies that have routinely made payroll without borrowing, may have to begin borrowing to get through the rough spots.

[John F]

I think the big problem right now is that as the economy slides into recession, companies that have routinely made payroll without borrowing, may have to begin borrowing to get through the rough spots.

I doubt that. Those companies would probably react quicker to the loss of demand and reduce payroll rather than borrow. Of course this is unless they can see a really big upside to borrowing.

[John F]

Wow, as I wrote that last message gold shed $15.

[drobbins]

John,

I was about to post that you better take another look
silver is down over 20%
crazy

Dave

[Derek]

What are the effects (beside lower prices) to deflation and commodity price collapse??

There will be no Cash Flow, Cash Flow, Cash Flow. People tend to Buy Gold and Treasury bonds. Not putting money in the Bank. Thus tighting how much a bank can lend.

Because the price of goods is falling, consumers have an incentive to delay purchases and consumption until prices fall further, which in turn reduces overall economic activity - contributing to the deflationary spiral.

And if my reading is correct. Deflation go's hand and hand with wide spread bankruptcies. Not just the corporate ones. The common folk too.

Prices of imported products are decreasing. Domestic producers must match these prices in order to remain competitive. This decreases prices for many things in the economy, and thus is deflationary.

Granted most of this is a cut and past from wiki. But this is very scary reading. And if you read about the Deflation of Japan in the 90's-2008. That is exactly what is happening here. Pretty much to the T.

[drobbins]

crude oil down over $9
wow

Dave

[dragonfly]

Well, if I can't afford my internet service bill, at least it's paid up for a year in advance, and I can keep tabs on you guys for awhile longer.;) That is assuming the provider doesn't go out of business.:(

Thanks iddee, JohnF and Hillside for the information.

[George Fergusson]

I forgot. The drop in commodity prices includes a component that would be a drop in demand or an increase in supply or both. So, how much is due deflation? Who knows?

Yes, I was too hasty and flippant with my initial reply, thinking about it on my way home from work. It's hard to imagine with the trillions of dollars that have been pumped into the global financial markets in the past couple of weeks that we don't have massive inflation happening, with a drop in the dollar but actually the opposite is happening. The money is disappearing, the banks are hoarding all they can get their hands on. So despite the increase in money supply we're actually seeing a stronger dollar and modest deflation. Strange situation. Still it's likely that the bulk of the drop in commodity prices we've seen recently has been due to reduced demand. We can't attribute the falling oil prices to a stronger dollar.

Somehow I think there's a relationship between the dollar, the Saudis, and the price of oil that escapes me...

Anyways, it appears the Fed is about to fire up the printing presses like there is no tomorrow (poor choice of words) so deflation fears may be unfounded: there is a disconnect in the treasuries and bond markets that I'm still looking into.. treasury rates are up.

[dragonfly]

Somehow I think there's a relationship between the dollar, the Saudis, and the price of oil that escapes me...



Don't go getting all conspiratorial on us now.;)- just kidding of course. Anything is possible.

[George Fergusson]

Wow, as I wrote that last message gold shed $15.

Judging from the concerted opinions of people whose opinions I trust, the prices of gold and silver are heavily manipulated in a generally downward direction. I don't know how, I've never bothered to look into it.

By all rights and purposes, gold and silver should be through the roof and headed for the moon by now.

[Bodo]

By all rights and purposes, gold and silver should be through the roof and headed for the moon by now.

You'd think so. Seems like something VERY strange is going on. Oil Prices are down...stock market is tanking...precious metals are going down...

My brain hurts.

[Eaglerock]

I guess I'm naive, but I didn't know that so many businesses borrow money to meet payroll. Is this a common practice in the business world? No wonder my attempt to start my own business was a failure.;)

I quess I am stupid. Where did you get borrowing money to meet payroll out of this? Originally Posted by JPK1NH
The credit issue is the immediate problem

[dragonfly]

. Where did you get borrowing money to meet payroll out of this?

It's what I've been hearing coming from the mouths of politicians and the news media.

[Derek]

I quess I am stupid. Where did you get borrowing money to meet payroll out of this? Originally Posted by JPK1NH
The credit issue is the immediate problem

It's called a "Line of Credit" every...well most businesses have one. When you can't meet payroll for example or need money to buy product because your customers are paying in 90 days and not 30 anymore you use it. There is much more detail than that. But that's it in a nutshell.

[drobbins]

I just watched an interesting piece
some suit on the tube was saying that all the outrageous leveraging that was going on in the mortgage market was creating wealth that didn't "really" exist
now that all this de-leveraging is going on it's making "wealth" disappear which makes the remaining dollars more valuable, it takes less of them to buy a widget
interesting take on things
we're certainly living in interesting times

Dave

[Barry]

Wow, some of you need to get up, turn away from the computer or TV, and go enjoy the day outside. There is life beyond the bump and jiggles of the market.

[Sundance]

Wow, some of you need to get up, turn away from the computer or TV, and go enjoy the day outside. There is life beyond the bump and jiggles of the market.


LOL............ good one Barry. It's like watching a train
wreck, you can't look away.

[drobbins]

I turned off the computer and went outside today and found that I had left 2 chickens outside last night and a raccoon killed them
I came back in and turned the PC back on
danged if you do, danged if you don't:cry:
I'm gonna kill that frickin raccoon:D

Dave

[Sundance]

Sorry Dave............ there is a raccoon corpse in my
yard this morning. The dogs killed it.

[drobbins]

thanks for cheering me up:)

Dave

[Galaxy]

John,

I was about to post that you better take another look
silver is down over 20%
crazy

Dave:no:, its not crazy. The value of the dollar is rightly based on the future productive strength of our economy. Both gold and silver took it on the chin today because the world has confidence in the US dollar rather than gold and silver.

By the way, all the talk about the Fed's mass infusion of liquidity in the system will produce inflation down the road is mis-informed. As confidence in the financial system is regained, the Fed can take the liquidity out just as quick as it put it in.

This crisis is a real-world example of the essential role that the Fed plays in a modern economy.

[Galaxy]

Wow, some of you need to get up, turn away from the computer or TV, and go enjoy the day outside. There is life beyond the bump and jiggles of the market.Very good advice. I admit I need to follow it more.

[Sundance]

It is great advise........ to be sure. But this is not just
a glitch in the system here. We're talking historical
global crashing equal to the great depression in many
respects.

But, chilling out is therapeutic, I'll be camping this weekend.

[Galaxy]

His opinion is that deflation and the collapse of the
commodity markets is around the corner. Although
falling prices sounds great, the repercussions will
be nasty.Definitely nasty. Deflation has already occurred, and is continuing to occur, in asset price (real estate, equities, commodities, oil, etc.) I doubt we will see deflation in the prices of goods and services, except to the extent that deflation in assets prices result in lower goods prices (e. g. the deflation in oil deflates gasoline prices). For substantial deflation in the prices of goods and services to occur, we would need to see decreases in labor costs. I don't see that happening.

But, deflation is a bigger concern now than inflation. The most important number to follow now is the unemployment rate. That will tell us the real damage that will be done to folks by this crisis. And, it will forecast whether deflation will occur in goods and services.

[NeilV]

"I guess I'm naive, but I didn't know that so many businesses borrow money to meet payroll."

In my line of work, I have occassion to look at balance sheets of some companies. Believe me, the crazy, stupid lending of the last 10 years was not limited to mortgages/consumer/household lending. There are plenty of small business owners who appear to have wealth, and what they really have is business debt and then a bunch of personal debt on top of that. Which is why this could get really, really ugly. When those folks get their credit lines cut off, they will suddenly be what they really are, which ain't much in the financial dept.

"Both gold and silver took it on the chin today because the world has confidence in the US dollar rather than gold and silver."

I hope you're right, but I doubt it. I fear the demand for the dollar is largely due to supply constraints on dollars, because banks are hoarding them. Money is getting scarce, but that does not mean the world has confidence in the dollar. It just means that demand on the open market is outstripping supply because the supply has suddenly been cut off. If that's what is happening, that's not exactly a good economic indicator, nor is it a sign of meaningful strength.

Useful commodity prices (oil, grains etc.) are dropping because the money supply is dropping and real demand is dropping.

Precious metals, I suspect, will get complicated. Right now, I suspect that prices for precious metals are being held down because the money supply is dropping and really wealthy people who are losing credit have to sell something to raise cash. If things get really ugly going forward, people may start to really get worried about the value of ALL currencies. (I don't want to speak for GeorgeF, but I think he is essentially concerned that the world's currencies are about to all get devalued.) If that happens, even with the global liquidity prices, some people may decide to get rid of currencies and switch to silver and gold. If that happens, the best investments in the world could be mining companies, who suddenly could have a decent price and not be bitten by high costs (from high oil prices) for the first time in a long time. Of course, if it gets that bad, they may not have many customers either.

Of course, that's just my personal theories, and there's not much reason to think that I know what I'm talking about.

Neil (fka ndvan)

[George Fergusson]

But, deflation is a bigger concern now than inflation. The most important number to follow now is the unemployment rate. That will tell us the real damage that will be done to folks by this crisis. And, it will forecast whether deflation will occur in goods and services.

How uncharacteristically pessimistic of you Galaxy. It's nice to see it mixed in with your normally over-optimistic commentary. Anyone who doesn't acknowledge serious problems facing us on many fronts is delusional, regardless of their level of optimism, eh?

[tecumseh]

derek writes:
It's called a "Line of Credit"

tecumseh: there is some confusion being created HERE from the extreme to the slight misuse of terms.

I could have begun with contrasting deflation to inflation (more blurring of terms) but instead will start with derek's snip.

some business cover day to day expenses with OPERATING LOAN. an operating loan is typically (but not exclusively) serviced via a LINE OF CREDIT based on a formalized (large time input) flow of funds statement. for a banker the flow of funds statement (projected and actual) are the most revealing financial statements in regards to how well (or how poorly) a business is being operated.

a loan on day to day expense (and yes most time it does include labor cost) is quite different from a loan for store inventory... although it is not so uncommon for both to be covered by a line of credit. the largest difference is most typically in regards to how money flows back to a bank ...ie one expense being more continuous and the other more punctuated. a banker would want repayment of loan proceeds to match this difference.

now on to inflation vs deflation. what many here seem to be describing as deflation is actually normal price fluctuation for a given commodity. both concpets (they are mirrows of each other and are contrasted to stable prices) are fairly easy terms to define....

inflation...
too many dollars chasing too few of goods.

deflation..
too few dollars chasing too many goods.

where's the rub... a individual firms need for liquidity (hoarding of cash to insure short term survival) may be creating some short term price slashing in order to generate liquidity.

the slashing of price is common to both... the time horizon (liquidity is by definition short term) is the discriminating factor.

the short term price slashing can (has) led to longer term deflation

I think??? derek also made some reference to Japan's economy in the 1990 (sometime called the lost decade) and I suspect there are very definite similarities.

[George Fergusson]

(I don't want to speak for GeorgeF, but I think he is essentially concerned that the world's currencies are about to all get devalued.)

Yeah. The amount of money of all kinds being pumped into the collective system over the past few weeks is staggering, and it continues this week in earnest.

A distressing facet of this is that the Fed is about out of treasuries, repos aren't going well, and it doesn't have much left on their balance sheet beside worthless equities and toxic waste they've taken as collateral to play with... which means it's time to fire up the printing presses. Open Market Operations have effectively stopped because the Fed is out of ammunition. This could all go very badly very quickly.

Neil (fka ndvan)

You're outa the closet! Nice :)

[George Fergusson]

"Both gold and silver took it on the chin today because the world has confidence in the US dollar rather than gold and silver."

Quoting you quoting Galaxy, my curiosity was piqued by the unexpected changes in the price of gold, my lack of an understanding of the gold market, and of course the fact that I usually don't believe anything Galaxy says :)

I've got more studying to do, but thought I'd pass on what little I've learned so far. As it turns out, the price of gold has nothing to do with people having more confidence in the dollar than in gold. As I suspected, that was a baloney opinion of someone who's fortune is invested in fiat dollars. It has to do with the fact that the price of gold isn't for real gold, it's for paper gold, gold futures actually, manipulated by COMEX fund managers.. and as you might suspect, paper gold just doesn't inspire the same confidence that real gold does. Right now, for the most part you can't buy real physical gold and if you do manage to find some Krugerands or other gold coins, on Ebay say or a coin dealer, you're going to pay a hefty premium over the COMEX (paper) gold price.

Why doesn't the scarcity of real (physical) gold drive up the cost? Simple: it's not for sale. Anyone with real gold isn't selling it... and this includes the world's central banks.

Gold (and to a lesser extent silver) is still the money of choice.

Wish I owned some.

[dragonfly]

There are plenty of small business owners who appear to have wealth, and what they really have is business debt and then a bunch of personal debt on top of that. Which is why this could get really, really ugly. When those folks get their credit lines cut off, they will suddenly be what they really are, which ain't much in the financial dept.



That's how it looks to me. Honestly, I had no idea. I always figured that successful businesses didn't have the need to go into debt. Shows how dumb I am.:s


Of course, that's just my personal theories, and there's not much reason to think that I know what I'm talking about.



Hey, it sounds as good as any theories I have heard, so don't cut yourself short.

[John F]

Right now, I suspect that prices for precious metals are being held down because the money supply is dropping and really wealthy people who are losing credit have to sell something to raise cash.

This is true to an extent. Let's pick this up with George in a bit.

If things get really ugly going forward, people may start to really get worried about the value of ALL currencies. (I don't want to speak for GeorgeF, but I think he is essentially concerned that the world's currencies are about to all get devalued.)

I know I've sounded this alarm. George in another post shows some concern about how each sovereign state is going to react in the near future. I too hope they keep it together.

Neil (fka ndvan)

Hey Neil!

It has to do with the fact that the price of gold isn't for real gold, it's for paper gold, gold futures actually, manipulated by COMEX fund managers.. and as you might suspect, paper gold just doesn't inspire the same confidence that real gold does.

Exactly, but remember a futures contract is a contract for the real deal and the holders have an option to take possession; it's just that they usually don't.

Why doesn't the scarcity of real (physical) gold drive up the cost? Simple: it's not for sale.

There is an implicit sale in the futures contract. If all contract holders decide to take possession then you will see the price rise due this demand. And for a period last week this is exactly what was happening. Then there was a move to equities and sell off of precious metals and their futures contracts to fund it. This market is another bubble; there is more gold sold on this market than has ever been refined. Keep in mind that all of the gold that has been refined by man in all of history fits in 19 semi trailers.

Also, when listening to Galaxy talk about gold he continually forgets his lessons in monetary theory and equates the argument for a monetized precious metal for the commodity. Two completely different things. We would have to argue about the use of paper as a store of value and hope he makes the connection.

Anyone with real gold isn't selling it... and this includes the world's central banks.

They will if they have to to cover a contract. Of course this mean we expect the law (government) to enforce this action.
[/quote]

[John F]

There are plenty of small business owners who appear to have wealth, and what they really have is business debt and then a bunch of personal debt on top of that. Which is why this could get really, really ugly. When those folks get their credit lines cut off, they will suddenly be what they really are, which ain't much in the financial dept.

This extends to households and is the real reason what the Fed and treasury are doing won't work. We're all debted up. We have no savings. We have no real money. When unemployment begins in earnest, folks will first turn to credit to stay afloat and these folks will be faced with giant loan rates and turndowns due their lack of cash flow. Everyone is starting to understand that those big institutions were overleveraged and are forgetting that the households were also overleveraged. What do you think the negative savings rate means?

[Galaxy]

Deflation is here. How else do you explain commodity prices?

That said, it can and will get worse. But it's not around the corner. It's here and it's happening now.


Gold (and to a lesser extent silver) is still the money of choice.

Wish I owned some.Really??? George you do know how inconstient your two statements, as quoted above, are don't you? Oh well, I won't explain why. I wouldn't want you to suffer from cognitive dissonance. :)

Hint: In times of deflation one wants to hold cash. :doh:

[Galaxy]

Yeah. The amount of money of all kinds being pumped into the collective system over the past few weeks is staggering, and it continues this week in earnest.

A distressing facet of this is that the Fed is about out of treasuries, Reeeeally??? Actually, in fact, you statement is demonstrably wrong. The Fed is not about to run out of treasuries.

How does the Fed increase (pump up) the money supply? It's open market operations buys treasuries from banks. In exchange for the treasuries that it buys, the Fed gives cash to the banks, thereby increasing the money supply.

So, in the past few weeks the Fed's treasuries, on its balance sheet, have been growing at a rapid rate.

Before one parrots the "Kill the Fed" mantra it might be advisable to actually understand how the Fed operates. A good place to start is here: http://en.wikipedia.org/wiki/Open_market_operations and here: http://en.wikipedia.org/wiki/Federal_Reserve_Bank

[George Fergusson]

Reeeeally??? Actually, in fact, you statement is demonstrably wrong. The Fed is not about to run out of treasuries.

How does the Fed increase (pump up) the money supply? It's open market operations buys treasuries from banks. In exchange for the treasuries that it buys, the Fed gives cash to the banks, thereby increasing the money supply.

So, in the past few weeks the Fed's treasuries, on its balance sheet, have been growing at a rapid rate.

Perhaps before shooting your mouth off you'd like to check the data and get your facts straight, like maybe the slosh report detailing the Fed's OMO in recent days:

http://www.gmtfo.com/reporeader/OMOps.aspx

See any treasuries in there? I don't. Only $80 billion in mortgage backed securities. Nice assets.

Then try reading some current news and commentary- this in todays FT: Repos are failing. You know why? Because banks don't want to sell their treasuries. Banks are hoarding cash, or cash-like securities:

http://ftalphaville.ft.com/blog/2008/10/10/16907/stand-and-delever/

Here's an article in the Wall Street Journal stating that the Treasury is releasing more treasuries into the market. If the Fed has plenty, why are they doing that?

WASHINGTON -- The Treasury Department, looking for more ways to ease the credit crunch gripping financial markets, said it would release a total of $20 billion more Treasury bonds into the market.

The move is intended to relieve some of the strain in the short-term lending markets, where investors have been unwilling to lend Treasury securities to other market participants over fears they won't be returned. Institutions such as banks, corporations and money-market funds borrow billions of dollars overnight using Treasury bonds as collateral, a vital cog of the financial system.

http://online.wsj.com/article/SB122351168024817561.html?mod=googlenews_wsj


The Fed's balance sheet is looking like one from the walking dead banks they've been bailing out. They've been taking anything for collateral, even equities. Now they're taking Unsecured Paper too. Sad.

[Oldbee]

Yes! Yes! Deflation is coming!! Gas prices are below $3.00 a gallon! I love it.

Who 'instigated' 'Inflation',..actually?

[Galaxy]

Perhaps before shooting your mouth off you'd like to check the data and get your facts straight, like maybe the slosh report detailing the Fed's OMO in recent days:

http://www.gmtfo.com/reporeader/OMOps.aspx

See any treasuries in there? I don't. George, you do know the difference between stock and flow, don't you?

Your original assertion concerned the Fed's stock of treasuries. See:

A distressing facet of this is that the Fed is about out of treasuries, So, your link to gmtfo.com above is misleading at best because that data refers to flow, not stock.

A "few days" of temporary flow (sloshing) information is completely meaningless when your original statement concerned the Feds stock of treasuries. Even the gmtfo.com site says this about the data in its "Report"
Interpreting the data in the Report:
"Your guess is as good as mine." See: http://www.gmtfo.com/reporeader/RepoHelp.aspx

If you wanted to provide the truth about your assertion that the Fed "is about out of treasuries", you could have provided this link.
http://www.newyorkfed.org/markets/soma/sysopen_accholdings.html

This site provides the Fed's System Open Market Account (SOMA) holdings as of Oct 8, 2008. They held, in stock, at that time $484 billion of treasury securities. It doesn't sound to me like they are "running out".

Although, the gmtfo site does not reveal who is behind it, I suspect it is another of those gold bugs that you seem so enamored with. There is this link on the gmtfo site. Could he be behind it? http://www.chrismartenson.com/
Only $80 billion in mortgage backed securities. Nice assets. Remember George, we are taking about the Fed's open market operations. If they are truly buying MBSs on the open market they are indeed getting them at bargain prices. They should buy more.

Then try reading some current news and commentary- I do and you should be sure you understand the implications of an article before you try to interpret it for us. this in todays FT: Repos are failing.
http://ftalphaville.ft.com/blog/2008/10/10/16907/stand-and-delever/ (http://ftalphaville.ft.com/blog/2008/10/10/16907/stand-and-delever/)
First, your link is not to a FT article. It is to a blog. Even if the blogger is correct, SO WHAT. If the banks want to hoard cash and not make loans, the Fed can simply go around the banks and buy short-term commercial paper directly from businesses who issue it, which they have said they will do. Guess what the banks will do when they see the Fed eating their lunch? I predict they will start loaning money. You know why? Because banks don't want to sell their treasuries. Banks are hoarding cash, or cash-like securities: Of course, I know why. I have been doing this with most of my assets since last Fall.
Here's an article in the Wall Street Journal stating that the Treasury is releasing more treasuries into the market. If the Fed has plenty, why are they doing that?http://online.wsj.com/article/SB1223...googlenews_wsj (http://online.wsj.com/article/SB122351168024817561.html?mod=googlenews_wsj)
It's very simple. The Treasury is releasing these $20 billion of securities to the market, not to the Fed. They will be used as collateral in the short-term credit markets in an attempt to "shock" the system. Obviously, the Fed doesn't need them as they hold a much greater amount, $484 billion.
The Fed's balance sheet is looking like one from the walking dead banks they've been bailing out. George, have you seen the Fed's balance sheet? And, would you know what it means if you did see it?

[George Fergusson]

George, have you seen the Fed's balance sheet? And, would you know what it means if you did see it?

Heck no.

[John F]

This extends to households ... We're all debted up. We have no savings. We have no real money...

I'm not sure what I was thinking. After seeing the President's speech this morning and really mulling over the actions of the last two days I am seeing the light. He did say that this will directly affect me. (didn't say how...?)

Happy days are here again! Get out there and do your part. Our economy needs you to heat up that credit card. As the government moves money from your savings to the bank pockets you have little choice but to borrow it back. It does no good sitting in a vault. Borrow it!

It is unpatriotic to not be carrying absolutely as much debt as you can financially bear. If you really care, you'll call your mortgager and ask them to bump you up a percentage point or two.

Spend or we all die!

[dragonfly]

I'm not sure what I was thinking. After seeing the President's speech this morning and really mulling over the actions of the last two days I am seeing the light.

I awakend to that speech this morning, and thought I was just having a bad dream.;)

[John F]

the Fed's stock of treasuries.

Ah yes. Treasuries. What backs those up?

Full faith and credit of the U.S. government.

Can't really be credit as that too is faith based so really:

Full faith in the U.S. government.

Faith in what?

Productivity of the People of the U.S.?

Well, no, that would mean that the People pay these debts voluntarily.

Faith that the government will back these debts with taxes (and inflation if needed)?

Yeah, that's the one.

And that's a good thing right?

Well, taxation and inflation through fiat are violent acts that can only be carried out by use of force. If you accept that, then yeah it's a good thing.

Use of force?

Don't pay your taxes or decide to tender your trades in something other than the fiat currency and experience the use of force for yourself.

Then it's not a good thing?

Well, violence is the number one transfer of wealth in all of history. We wouldn't be where we are (good or bad) if not for the use of violence. In fact, at one time in human history, it was essential. It is a very real and often used economic choice.

I'm confused, then it's a good thing?

Again, you have to accept it. With all of its power to transfer wealth it also always slows down economic growth. You see, when a person feels that every pie he makes is simply going to be taken away, he will stop making pies.

That doesn't seem like a good thing because to me it seems that the more force used the less that is likely to happen.

Exactly.

Then why do things happen in the U.S. economy at all?

It's a balancing act between the use of force and the human will to improve him/herself. The theives of society work very hard to find the edge of this breaking point.

But there are a lot of great things that come from this. Like highways and bridges and soon healthcare.

Well, not really. All of those things are bought with money that was taken through taxation and inflation. This means that the People paid for the good things AND paid for the thief. These things would happen cheaper through the ultimate democracy, the free market, but it is important to the thieves that you not believe this.

We paid for it anyway?

Of course, with a premium.

But some people wouldn't have paid for these things and would have used them anyway. Taxation makes this more fair. Isn't this a good thing?

No. This stance indicates that you think you know the better choices for someone else and claims a right to their property. In actuality, what you really are doing if funding something you think to be good with your neighbors money. What you are talking about is a subject known as the free rider problem. I suggest that you look up some economics writings on this subject and gain a better understanding.

Back to treasuries. What is a treasury?

It's a debt instrument and its real name is treasury bill. When you buy one you are in effect lending the government money. It is considered the safest loan to make (or investment if you prefer this perspective) in the U.S. financial system.

That gets us back to the beginning of the conversation, doesn't it.

Yep.

[dragonfly]

JohnF, excellent explanation.:)