Economic Storm Clouds Gather, but Ending the Fed Provides Hope

[Zippyjuan]

See what I mean?

 

[NorthCarolinaLiberty]

See what I mean?

LOL. RPF's most negged repped member of all time shows up like clockwork to employ boring trolling technique # 4: fan the flames of real RPF members.

Sorry to disappoint you and your manager, Zip, but I actually like ACPTulsa. He could probably save some energy by not getting into it with so many people, but that's his business. Unlike you, he makes excellent posts and I learn a lot of stuff from him.

Half the crap I write here is just to entertain myself. I was laughing as I posted the barbs at ACP. I'm sure he'll come back with something. No big deal. God forbid this thread actually gets interesting.

Zzzzzzz...................

 

[Krugminator2]

Saving for the future is dollars that get stronger with deflation helps the working class. No capital gains. They only throw us a bone with a portion of our income being tax free in such instruments as 401Ks, etc. But still have to pay taxes on it when you withdraw and the dollar is worth much less by then anyway.

First of all, people should be investing in equities even in a deflationary environment. If people are going to save, they may as well maximize their wealth. Holding cash isn't going to do that. Secondly, there is nothing stopping anyone from keeping pace with inflation if they don't buy equities. Treasuries keep pace with inflation but if those are too risky you can buy TIPS which are indexed to inflation. https://www.investopedia.com/terms/t/tips.asp

 

[NorthCarolinaLiberty]

More charts that will help with this thread.

 

[econ4every1]

But he was wrong about everything. He thought monetarists believe printing lots of money always caused inflation. That isn't true at all. I posted a piece by Milton Friedman advocating QE when rates are zero where he pointed out you can print as much money as you want and not cause inflation. That's pretty big error not to know that. But then even after I posted it, he still didn't grasp that point.

But having strong opinions about monetarism while at the same time using Peter Schiff (Austrian) as an example of what monetarists believe means you are just making $#@! up.

I stand corrected, I spoke in haste about Schiff. I was wrong about him being a monetarist. However, dismissing everything I said because you found an error seems to me to be a convenient way to avoid having to discuss it with me. Your call.

As far as Friedman's quote, it wasn't clear that was the point you were making by citing that piece, I'll take a second look.

Respectfully,

E4E1

 

[Danke]

First of all, people should be investing in equities even in a deflationary environment. If people are going to save, they may as well maximize their wealth. Holding cash isn't going to do that. Secondly, there is nothing stopping anyone from keeping pace with inflation if they don't buy equities. Treasuries keep pace with inflation but if those are too risky you can buy TIPS which are indexed to inflation. https://www.investopedia.com/terms/t/tips.asp

Do you trust TIPS as being a real track of inflation?

 

[econ4every1]

Come now, I was quite clear. You even agreed with the basic premise. The value of the currency changes every day, and it never rises.

Why would you want the currency to increase in value?

Let's see if I can give an intuitive example and you tell me where you think I'm wrong.

First, in this hypothetical, let's establish an average salary of $20k (40hr work week)
Let's say $20k also happens to be the average price of a new car (giving us some idea of the value of $20k).

Now let's imagine that you buy a new car and agree to pay for it over 5 years at $333 dollars per month.

Now let's imagine that the year after you buy it, the value of the dollar rises by 25% (extreme I know, but it helps make the effect easier to see).

Is that a good thing?

At first glance, it might seem that way as each dollar you earn is worth 25% more. But why should your employer pay you 25% more? If the value of the dollar were to increase, wouldn't your employer be justified in cutting your pay by the same amount? After all, you wouldn't be earning less in real terms, you'd still be able to buy the same car for the same amount of work.

Your pay is cut by 25% and you now make $15k, still enough to buy the same brand new car (as the cost of the car declined as dollars increased in value), but there's a problem. You paid $20k for the car a year earlier, but now you earn 25% less. Even though your dollars are worth more, you make fewer of them. Your loan of $20k worked out to $333 per month which was 19% of your monthly salary, but now you only make $15k but the loan amount does not adjust, so now your payment is 26% of your salary. You lose and the bank wins. Of course, if you had any idea that dollars would increase in value over the short term, you wouldn't make such a purchase as that would entail too much risk. This would result in decreased demand for items financed with debt and decreased demand results in increased unemployment.

Sound like a good thing? Maybe, but think about all the jobs lost in high ticket items as only people that could afford to save large sums of money could save up for cars and houses. People who live with moderate to low incomes where virtually everything taken in is spent back out, wouldn't have the ability to save. If something happened that couldn't be paid for and had to be financed (surgery, a broken heating system, transmission failure), these debts would cost more over time as the dollar appreciates.

Now you might be thinking that your boss wouldn't cut your pay, but of course, he would. He, like you, would have loans he has to pay and they don't adjust for deflation. He'd have to cut your pay to cover the increased long-term costs he'd have to take on.

If the money was commodity based and there was no tax the amount of commodity (like gold) would fluctuate based only on the value set in the markets. Banks would have no ability to predict future increases or decreases in value and lending would all be very short term.


The next question is, how might a currency increase in value? In order to increase its value, there would have to be less of it circulating in the economy for each person trying to earn it. This would be fairly simple. The population has increased by 100m people since 1980. If the same amount of money were in today's economy as there were in 1980, we'd have massive deflation as the competition for dollars would increase by roughly 30%. But if there is less money per person and there is more competition for it that would mean increased unemployment. Increased unemployment would lead to less demand for goods and services and you're in a deflationary spiral as the value of each dollar rises by productivity decreases.

Thoughts?

Respectfully,

E4E1

 

[econ4every1]

Do you ask your boss for a raise every day to compensate for the value of your salary declining?

No of course not. However, I know that inflation is fairly steady whatever it is so I'm sure to ask for enough money to support my lifestyle. If I feel that my job isn't giving raises to keep pace with inflation, I look for another job.

As far as the money I earn, that's fairly simple. I don't save my money in dollars. Somone Mentioned Treasury Inflation Protected Securities. I split my retirement accounts between safe and highly aggressive assets. I earned 16% last year on my aggressive assets and about 3.8% on my safe investments. Whatever inflation is, I'm certain I beat it.

Clearly money being used to repay debt is not being spent on other things by the person or entity which is repaying the loan.

Taxes and spending aren't connected any more than the faucet and the drain in your kitchen sink are connected. The government spends independently (sort of) what it collects in taxes.

Though that money is still being taxed from our pockets and is not being spent on stuff by the government, it's dishonest to imply that money disappears altogether.

It's not...Let's try this...


Hypothetically, If I am the government and I make $1 appear in your account (you are in the private sector), you are +$1 and I, as the government are -$1.


If I tax you $1, how much money do I have?

 

[Zippyjuan]

Why would you want the currency to increase in value?

Let's see if I can give an intuitive example and you tell me where you think I'm wrong.

First, in this hypothetical, let's establish an average salary of $20k (40hr work week)
Let's say $20k also happens to be the average price of a new car (giving us some idea of the value of $20k).

Now let's imagine that you buy a new car and agree to pay for it over 5 years at $333 dollars per month.

Now let's imagine that the year after you buy it, the value of the dollar rises by 25% (extreme I know, but it helps make the effect easier to see).

Is that a good thing?

At first glance, it might seem that way as each dollar you earn is worth 25% more. But why should your employer pay you 25% more? If the value of the dollar were to increase, wouldn't your employer be justified in cutting your pay by the same amount? After all, you wouldn't be earning less in real terms, you'd still be able to buy the same car for the same amount of work.

Your pay is cut by 25% and you now make $15k, still enough to buy the same brand new car (as the cost of the car declined as dollars increased in value), but there's a problem. You paid $20k for the car a year earlier, but now you earn 25% less. Even though your dollars are worth more, you make fewer of them. Your loan of $20k worked out to $333 per month which was 19% of your monthly salary, but now you only make $15k but the loan amount does not adjust, so now your payment is 26% of your salary. You lose and the bank wins. Of course, if you had any idea that dollars would increase in value over the short term, you wouldn't make such a purchase as that would entail too much risk. This would result in decreased demand for items financed with debt and decreased demand results in increased unemployment.

Sound like a good thing? Maybe, but think about all the jobs lost in high ticket items as only people that could afford to save large sums of money could save up for cars and houses. People who live with moderate to low incomes where virtually everything taken in is spent back out, wouldn't have the ability to save. If something happened that couldn't be paid for and had to be financed (surgery, a broken heating system, transmission failure), these debts would cost more over time as the dollar appreciates.

Now you might be thinking that your boss wouldn't cut your pay, but of course, he would. He, like you, would have loans he has to pay and they don't adjust for deflation. He'd have to cut your pay to cover the increased long-term costs he'd have to take on.

If the money was commodity based and there was no tax the amount of commodity (like gold) would fluctuate based only on the value set in the markets. Banks would have no ability to predict future increases or decreases in value and lending would all be very short term.


The next question is, how might a currency increase in value? In order to increase its value, there would have to be less of it circulating in the economy for each person trying to earn it. This would be fairly simple. The population has increased by 100m people since 1980. If the same amount of money were in today's economy as there were in 1980, we'd have massive deflation as the competition for dollars would increase by roughly 30%. But if there is less money per person and there is more competition for it that would mean increased unemployment. Increased unemployment would lead to less demand for goods and services and you're in a deflationary spiral as the value of each dollar rises by productivity decreases.

Thoughts?

Respectfully,

E4E1

Some only see the price side of things. A falling dollar meaning lower prices. They assume that their wages stay the same. Since I make the same amount of money and everything is cheaper it must be wonderful. Price deflation tends to be associated with economic declines like recessions. Fewer people able to purchase the same amount of goods and services they used to.

 

[oyarde]

Do you trust TIPS as being a real track of inflation?

Well ,it uses the consumer price index basket ........ so , no , I would not . It also contains useless items like college tuition , landline telephones , recreation ( lots of slackers in america I guess ) , womens underwear , night wear , pet services, lawn care services , pet products ,candy , film processing , delivery services , lamps , processed fish ( no thanks ) weirdo shit like " misc. personal services " , I guess that could be massage parlor hand jobs , but you should have a locked in rate with your regular girl .

 

[Danke]

More charts that will help with this thread.

[h=1]Japan’s Prisons Are a Haven for Elderly Women[/h]

Lonely seniors are shoplifting in search of the community and stability of jail.

https://www.bloomberg.com/news/features/2018-03-16/japan-s-prisons-are-a-haven-for-elderly-women​

 

[Danke]

[FONT=&quot]The world’s most powerful banker sees chance of “market panic”[/FONT]
[FONT=&quot]Simon Black[/FONT]
[FONT=&quot]
[/FONT]
[FONT=&quot]April 5, 2018[/FONT]
[FONT=&quot]
[/FONT]
[FONT=&quot]Santiago, Chile[/FONT]
[FONT=&quot]
[/FONT]
[FONT=&quot]The most powerful banker in the world, JPMorgan Chase CEO Jamie Dimon, just released his annual letter to shareholders.[/FONT]
[FONT=&quot]
[/FONT]
[FONT=&quot]Behind Warren Buffett’s annual missive, Dimon’s letter is probably the most read and deliberated executive report out there.[/FONT]
[FONT=&quot]
[/FONT]
[FONT=&quot]For one, Dimon is one of the most connected and respected men in finance.[/FONT]
[FONT=&quot]
[/FONT]
[FONT=&quot]And given his bank’s massive size (it earned $24.4 billion on $103.6 billion in revenue last year) and reach (it’s a giant in consumer/commercial banking, investment banking and wealth management), Dimon has incredible visibility and intel on what’s going on around the world.[/FONT]
[FONT=&quot]
[/FONT]
[FONT=&quot]This year Dimon used a large chunk of his 46-page letter to share his thoughts on government and public policy, saying it’s hard to look at the last 20 years in America “and not think that it has been getting increasingly worse.”[/FONT]
[FONT=&quot]
[/FONT]
[FONT=&quot]And if you’d like to hear how Dimon suggests we fix regulation, immigration, taxation, infrastructure, education and every other problem in America today, it’s all in there.[/FONT]
[FONT=&quot]
[/FONT]
[FONT=&quot]I’m not really interested in his political views. Dimon runs one of the biggest banks in the world, so I’m much more interested in his insights into the economy and financial markets.[/FONT]
[FONT=&quot]
[/FONT]
[FONT=&quot]Fortunately, Dimon didn’t waste all of his letter on politics.[/FONT]
[FONT=&quot]
[/FONT]
[FONT=&quot]He says the US economy seems healthy today and he’s bullish for the “next year or so.”[/FONT]
[FONT=&quot]
[/FONT]
[FONT=&quot]He sees lower unemployment, higher capital spending, wage growth, low housing supply and “relatively strong” consumer and corporate credit aiding growth.[/FONT]
[FONT=&quot]
[/FONT]
[FONT=&quot]Well, it’s easy to have rose-colored lenses when your profits come from lending money… because there’s more debt in the world today than ever before.[/FONT]
[FONT=&quot]
[/FONT]
[FONT=&quot]Both corporations and consumers are sitting on a record amount of debt. And as I pointed out earlier this week, the fastest growing bank asset last year was subprime loans… meaning that the quality of debt is getting worse and worse.[/FONT]
[FONT=&quot]
[/FONT]
[FONT=&quot]Then there’s the US government, whose debts just passed $21 trillion for the first time in history.[/FONT]
[FONT=&quot]
[/FONT]
[FONT=&quot]And they’re projecting adding another trillion dollars of debt each year into the foreseeable future.[/FONT]
[FONT=&quot]
[/FONT]
[FONT=&quot]Later in his letter, Dimon admits that the US is facing some serious economic headwinds today.[/FONT]
[FONT=&quot]
[/FONT]
[FONT=&quot]For one, he’s concerned the unwinding of quantitative easing (QE) could have unintended consequences.[/FONT]
[FONT=&quot]
[/FONT]
[FONT=&quot]Remember- QE is just a fancy name for the trillions of dollars that the Federal Reserve conjured out of thin air.[/FONT]
[FONT=&quot]
[/FONT]
[FONT=&quot]According to Dimon [my emphasis added]:[/FONT]
[FONT=&quot]
[/FONT]
[FONT=&quot]Since QE has never been done on this scale and we don’t completely know the myriad effects it has had on asset prices, confidence, capital expenditures and other factors, we cannot possibly know all of the effects of its reversal.[/FONT]
[FONT=&quot]
[/FONT]
[FONT=&quot]We have to deal with the possibility that at one point, the Federal Reserve and other central banks may have to take more drastic action than they currently anticipate – reacting to the markets, not guiding the markets.[/FONT]
[FONT=&quot]
[/FONT]
[FONT=&quot]To that point, the Dow dropped over 700 points intraday on Monday. Then it dropped over 500 points on Wednesday, before ending the day slightly higher.[/FONT]
[FONT=&quot]
[/FONT]
[FONT=&quot]But this extreme volatility does suggest the bull market is nearing its end… if it hasn’t ended already.[/FONT]
[FONT=&quot]
[/FONT]
[FONT=&quot]And if we see the bottom fall out in stocks, you can be sure the Fed will change course, as Dimon suggests.[/FONT]
[FONT=&quot]
[/FONT]
[FONT=&quot]While nobody has a crystal ball when it comes to the markets, Dimon seems pretty sure we’re in for more volatility and higher interest rates. Again, given his position, he knows what he’s talking about.[/FONT]
[FONT=&quot]
[/FONT]
[FONT=&quot]One scenario that would require higher rates from the Fed is higher inflation:[/FONT]
[FONT=&quot]
[/FONT]
[FONT=&quot]If growth in America is accelerating, which it seems to be, and any remaining slack in the labor markets is disappearing – and wages start going up, as do commodity prices – then it is not an unreasonable possibility that inflation could go higher than people might expect.[/FONT]
[FONT=&quot]
[/FONT]
[FONT=&quot]As a result, the Federal Reserve will also need to raise rates faster and higher than people might expect. In this case, markets will get more volatile as all asset prices adjust to a new and maybe not-so-positive environment.[/FONT]
[FONT=&quot]
[/FONT]
[FONT=&quot]Now– here’s the important part. For the past ten years, the largest buyer of US government debt was the Federal Reserve.[/FONT]
[FONT=&quot]
[/FONT]
[FONT=&quot]But now that QE has ended, the US government just lost its biggest lender.[/FONT]
[FONT=&quot]
[/FONT]
[FONT=&quot]Dimon thinks other major buyers, including foreign central banks, the Chinese, etc. could also reduce their purchases of US government debt.[/FONT]
[FONT=&quot]
[/FONT]
[FONT=&quot]That, coupled with the US government’s ongoing trade deficits (which will be funded by issuing debt), could also lead to higher rates…[/FONT]
[FONT=&quot]
[/FONT]
[FONT=&quot]So we could be going into a situation where the Fed will have to raise rates faster and/ or sell more securities, which certainly could lead to more uncertainty and market volatility. Whether this would lead to a recession or not, we don’t know.[/FONT]
[FONT=&quot]
[/FONT]
[FONT=&quot]We’ll leave you with one final point from Jamie Dimon. He acknowledges markets have a mind of their own, regardless of what the fundamentals say.[/FONT]
[FONT=&quot]
[/FONT]
[FONT=&quot]And he sees a real risk “that volatile and declining markets can lead to a market panic.”[/FONT]
[FONT=&quot]
[/FONT]
[FONT=&quot]The most powerful banker in the world believes we’ll see more volatility and higher interest rates in the future. And he sees a chance of an all-out panic.[/FONT]
[FONT=&quot]
[/FONT]
[FONT=&quot]Given that scenario, I’m happy to watch this from the sidelines. As we’ve talked about before, this is a really good time to think about increasing your cash position.[/FONT]

 

[econ4every1]

Are you saying bondholders only ever use the money from bonds which are cashed in on other forms of savings? Can some of that be capital investment in the private sector? Or are you saying government should never commit money to paying down its debt because some of those bondholders are overseas, so that money goes to benefit some economy other than our own?

No, that's not what I'm saying.


First, let's be clear, bonds are an anachronism that exists because, at one time, dollars did represent something of real value (before 1934). Today, bonds are little more than an operation that offsets spending, they do not "fund" it, though spending without taxes would be a problem, let me explain.


Let's go back to the sink analogy. If I add water to a sink by opening the faucet (spending), I don't need to put water down the drain (taxes) in order to make the facet work, the two aren't directly connected. However, the capacity of the sink is the constraint on how much water I can put in the sink before it overflows (inflation). Once the sink is full, in order to add more water to the sink without causing it to overflow, I have to open the drain and drain away an amount equal or greater of water than what I want to add back in.


Can you see the indirect connection? The faucet and drain aren't connected, but the sink is the thing that ties the two together, thus there is an indirect connection between the faucet and the sink and taxes and spending.


The drain does not constrain the faucet in any way. There is nothing that would prevent the faucet from running as much as it wanted, even if the drain were closed. The result would simply be that the sink would overflow. Since overflowing is bad, the size of the sink is the constraint. The size of the sink represents potential productivity and the water in it represents how much of the economic activity is utilizing the productivity that exists.

Productivity = Size of the population x Per-person productivity/ unemployment.

If the "sink" (productivity) is half full (economic activity) then 1/2 of the nations potential productivity is lost. This would result in massive unemployment.


Of course, resources (land) factor in productivity as well, as land is the root of all productivity, but I'm trying to keep it simple. Since in the US land is not generally a problem, it does not create a significant inflation constraint, but it might in other smaller countries (like Japan) and can in specific industries in the US.


Thus, if the population increases, or per-person productivity increases (or both) the "sink" will hold more "water" as potential productivity increases.


So the system of spending and taxes is connected, but indirectly.


The faucet is the government's spending
The drain is government's taxing
The sink is the inflation constraint
The size of the sink depends on the nation's productivity.


Bonds are difficult to analogize, but Bonds would be like taking some of the water out of the sink and freezing it into ice cubes which are saved taking them out of the sink making more room for more water but being able to return them to the skink and turn back into the water at some point in the future.

In keeping with this analogy...


When the government repays its debt "ice" is added back into the sink. The ice becomes water and the sink fills (increasing inflation potential), however, the government is always coordinating its operations and removes the same (or more) water to make ice (bond sales) to ensure it has the room in the sink (the economy) and does not create uncontrollable inflation.


Here is a random copy of the daily Treasury statement. This confirms exactly what I just said. Bond issues (new ice) always exceeds ice being added back to the sink (Bond redemptions).

The hardest thing for most people to wrap their head around is that when the nation went off of the gold redemption in 1934, the government no longer required taxes in order to spend. The dollar became fiat at that moment. We used gold as a "backing" which was just an artificial constraint the government placed on itself (this fixed the size of the sink). Gold was supposed to be used as the international money. When governments ran an account deficit they may be asked at some point to "true" up. And that's exactly what happened when France held out its hand and wanted US gold. Nixon said no thank you and the rest is history.

The point is, from the Mid 1930's to 1974 bond sales were used for the same reason I pointed out above except the size of the sink was fixed, not to our productive output, but based on the amount of gold we had. Bonds worked the same way then as they do now. During WWII, the government convinced everyone to do their patriotic duty and help pay for the war effort by buying government bonds. The reality is that telling people that they needed to help pay for the war effort was a lot sexier (and intuitive) than telling people they needed to buy bonds to prevent inflation to make room for more money created and spent out of thin air.

The truth is, there was nothing at that time that prevented the government from creating as much money as it wanted, well, except that pesky self-imposed gold backing restraint (and the real inflation constraint). So when anyone purchased a bond, they weren't giving the government money, the government could already create all the money it wanted. Buying bonds removed water from the "sink" to make room for money spending. The savings rate during that period hit record highs as "cash" was converted into savings and removed from circulation in the form of savings (bonds).

After the war, all that spending had created industry. Industry that converted quickly from making machines of war to making cars, washers, and dryers, toasters and tricycles. Lucky for us, the US private sector was drowning in savings (historically speaking) which is why the 1950's and 60's, just 15 years after the nations highest ever debt to GDP had been achieved, were some of the best years in this nation's history economically.

 

[econ4every1]

Some only see the price side of things. A falling dollar meaning lower prices. They assume that their wages stay the same. Since I make the same amount of money and everything is cheaper it must be wonderful. Price deflation tends to be associated with economic declines like recessions. Fewer people able to purchase the same amount of goods and services they used to.

Quite right!

 

[Zippyjuan]

Quite right!

Some like to point to charts like this

to say the dollar isn't worth anything. After all, look at how much prices have increased in the last 100 years! We must be much worse off than we were back then! But it ignores how much wages rose during that time. Dollar is just a medium of exchange and its value is determined by supply and demand. I prefer to use a different unit of measure- one hour of labor. How long did you need to work to get the things you want? One third of our time used to be spent working just to acquire enough food to eat. Today that is down to about eleven percent of our labor going to food. That means we have more "time" to spend on other things. Few could afford a car- now most houses have two or three. A phone was a rarity as was even internal plumbing. Radio was expensive. You might have listened to one, but it was probably at somebody else's house or a store. Now you have the entire world on your phone. Only about ten percent had a phone 100 years ago.

 

[econ4every1]

Both corporations and consumers are sitting on a record amount of debt. And as I pointed out earlier this week, the fastest growing bank asset last year was subprime loans… meaning that the quality of debt is getting worse and worse.

Private debt is the real issue, not public debt

For one, he’s concerned the unwinding of quantitative easing (QE) could have unintended consequences.

I admit that I'm not sure if I am aware of all the possible consequences of unwinding QE. At the end of the day, it's just a swap of real assets now owned by the Fed back to the private sector. This will have the effect of adding real assets and removing dollars from the economy.

Recent spending pledges to add over a trillion to the debt will probably help with that, but the devil is in the details as it's not just money added to the economy, but who benefits from it.

Remember- QE is just a fancy name for the trillions of dollars that the Federal Reserve conjured out of thin air.

Yes, all US government money is created by debt out of thin air. However, the Fed balances its debts with assets, when it unwinds its position its assets decline equal to its debts.

One thing I bet few of you have ever thought about is the fact that the assets the Fed is holding are now earning $300 billion dollars a year, almost all of which is given back to the Treasury. That may sound like a good thing. That the government has more money, but as I've tried to point out, the government cannot have more or less money, it creates money out of thin air. The government can only have more or less debt.

So the $300 billion in money earned on assets held by the Fed is $300 billion not being earned by people in the US private sector. That takes money out of the economy and when money isn't spent incomes are reduced.

To that point, the Dow dropped over 700 points intraday on Monday. Then it dropped over 500 points on Wednesday, before ending the day slightly higher.


But this extreme volatility does suggest the bull market is nearing its end… if it hasn’t ended already.


And if we see the bottom fall out in stocks, you can be sure the Fed will change course, as Dimon suggests.

We know what's causing the volatility in our markets, Trump and his Twitter account. His latest is threating a trade war with China.

Though, having said that, I agree that assets are overvalued as easy money made possible by Fed policies have induced increased risk in financial markets.

While nobody has a crystal ball when it comes to the markets, Dimon seems pretty sure we’re in for more volatility and higher interest rates. Again, given his position, he knows what he’s talking about.

Higher rates will reduce leverage as interest rates creep closer to yields and people sell off to repay debts used to buy assets in the first place.

One scenario that would require higher rates from the Fed is higher inflation:


If growth in America is accelerating, which it seems to be, and any remaining slack in the labor markets is disappearing – and wages start going up, as do commodity prices – then it is not an unreasonable possibility that inflation could go higher than people might expect.

There is still a reasonable amount of slack in the nations productive capacity.

As far as interest rates, they have both an inflationary and deflationary effect. Inflationary because the cost of borrowing increases, but deflationary because as rates rise fewer people borrow. Overall I think interest rates have a greater deflationary effect as they rise.

As a result, the Federal Reserve will also need to raise rates faster and higher than people might expect. In this case, markets will get more volatile as all asset prices adjust to a new and maybe not-so-positive environment.

This is the real unwinding of the GFC

Now– here’s the important part. For the past ten years, the largest buyer of US government debt was the Federal Reserve.


But now that QE has ended, the US government just lost its biggest lender.

So?

Dimon thinks other major buyers, including foreign central banks, the Chinese, etc. could also reduce their purchases of US government debt.

Which in turn would reduce the trade deficit... It's cause and effect.

That, coupled with the US government’s ongoing trade deficits (which will be funded by issuing debt), could also lead to higher rates…

Of course, they are "funded" by debt. Every year we export $700 billion dollars into the accounts of foreign bank holders. If we didn't create new money to replace the money lost to foreign interests, there'd be no money left here.

Course, as I said, if China stops purchasing our debt, they're exports to the US will decrease. That will reduce the trade deficit and cut the amount of money needed to make up for the loss of dollars into foreign accounts.

So we could be going into a situation where the Fed will have to raise rates faster and/ or sell more securities, which certainly could lead to more uncertainty and market volatility. Whether this would lead to a recession or not, we don’t know.

The best indicator of a recession is if the government's deficit dips below 2.9% of GDP, you can be pretty sure that a recession is coming. Course there are some modifiers to that, but if you're looking for a general rule, that's probably as good as any.

 

[econ4every1]

Australia and China are both deeeeep in private debt. They both largely avoided the GFC by encouraging private sector borrowing. China and Australia are heavily linked to each other, so when one falls, the other will most likely fall as well.

Though I can't say I have any special insight into how China and AU will affect the US and the rest of the world in the event they experience an economic crisis I'd speculate, If there is a precipitating event to another financial crisis in the US in the next few years, Chian AU will be the cause, that's my prediction.

 

[acptulsa]

No of course not. However, I know that inflation is fairly steady whatever it is so I'm sure to ask for enough money to support my lifestyle. If I feel that my job isn't giving raises to keep pace with inflation, I look for another job.

Some only see the price side of things. A falling dollar meaning lower prices. They assume that their wages stay the same. Since I make the same amount of money and everything is cheaper it must be wonderful. Price deflation tends to be associated with economic declines like recessions. Fewer people able to purchase the same amount of goods and services they used to.

So, we have a guy in IT who's rightly convinced that his mad skillz in a hot field will allow him to ask for raises often enough to keep up with inflation, at least for now, and is more interested in his car loans than his fellow man who may not have the aptitude for a hot field. Which is how most people believe most libertarians think. And we have the guy who has argued in the past that dollar devaluation doesn't decrease real wealth suddenly admitting that a currency of rising value would represent a raise in wages. And he's saying that cutting the wages of workers is easy, and no employer will be reluctant to do it and potentially lose their best employees.

And nobody mentions the fact that, with sound money, banks and finance companies can loan money for less interest, because the money repaid will be worth about the same as the money loaned years earlier. So the argument is, those guys think wages never change but wages can change. Bank loan interest, on the other hand, never changes and can never change.

Well. This went nowhere.

 

[econ4every1]

...and is more interested in his car loans than his fellow man...

Setting aside that you don't know me, you don't know my motivations and, well, that's a pretty crappy thing to say. What would lead you to this conclusion?

 

[Ender]

Trade Wars

https://goldswitzerland.com/trade-wa...ld-500-silver/

US WAR DRUMS
Whenever a nation starts fighting with other countries, it is always done from a position of weakness. US debt has been running out of hand for a long time. Federal, state, corporate, personal, mortgage, auto, student etc, etc, they are all escalating exponentially. On top of that the US budget deficit will be in the trillions for the foreseeable future and the trade deficit was $600 billion in 2017 and could soon be one more trillion dollar deficit.

Starting wars is an Indication of the final stages of a troubled empire. The wars and interference in countries like Iran, Libya, Ukraine, Syria and Yemen are all part of that. The appointment of hardliner John Bolton as National Security Advisor as another perilous sign that the US is on the war path again.

So is policing the world’s financial system and so is protectionism and trade wars. These are all desperate measures of a country in a terminal decline. And it is certainly not a coincidence that this trade war started right before the oil trading in Yuan begun. Eventually this will lead to the demise of the dollar and a major power shift from West to East as well as much higher gold prices.

Nor is it a surprise that Silk Road countries have been buying major amounts of gold in this century. As the graph shows, the gold holdings of Russia, Turkey, India and China have increased 7 fold since 2004 from 5,000 tonnes to 35,600 tonnes. The question is how much is actually left in Western Central Banks of the 23,000 tonnes that they allegedly hold.


THE US BLAMES EVERYONE ELSE
The whole world is living above its means but the US is the worst culprit. So what is the US doing about it. Well there is no question of adjusting your spending in line with your expenses. That would be much too simplistic. Instead you blame the whole world that it is their fault and that they must be punished. And this is exactly what Trump is doing now. It is China’s and everybody else’s fault that a major part of US manufacturing has moved to low cost countries. And it is these countries’ fault that the US is living above its means and borrowing and spending more that it earns. Therefore these nasty countries must be punished. And that is the reason the US has started a trade war. Trade wars are almost without exception a desperate measure taken by an ailing economy. A trade war, especially between the two biggest nations in the world will indisputably lead to a downturn in world trade and therefore also a major global economic downturn.

TRUMP’S TRADE WAR AND NIXON’S DOLLAR WAR
The desperate measures the US is currently taking reminds me of Richard Nixon in August 1971 when he blamed the whole world for the dollar being attacked. President de Gaulle of France was clever enough to see what was happening and asked for payment of the US debt to France in gold. Since the dollar was backed by gold, sovereign states could demand payment in gold at that time. With the US currency under pressure, Nixon abandoned the gold backing of the dollar on August 15, 1971. That was the beginning of the end for the US economy and also the world economy. A credit expansion and money printing bonanza started that has continued until this day. This has made a very tiny minority very rich and lumbered the rest of the world with a debt that they neither will nor can repay.

But here is the important point. Trump’s desperate measure to save America will be seen as the nail in the coffin for the US and the world economy. And here we can draw a parallel to 1971. The US was in a similar situation then as it is now. Deficits were increasing and the dollar was falling. So what were the consequences of Nixon’s fatal decision. The dollar collapsed. I was in Switzerland at the time and saw the dollar fall 63% against the Swiss franc between Aug 1971 and January 1980. During that same period gold and silver surged. Gold went from $35 an ounce to $850 or up 24x. Silver went from £1.60 to $50, up 31 times.