What would it take for us to rapid price increases?

[Danan]

Don't we need higher interest rates to encourage savings, to enable investment?

Raising interest rates could cause havoc in the financial industry. In addition to all the big banks, governments around the world would likely go bankrupt. Also, all the big insurance companies would be in a terrible position in that case. If interest rates would rise too high, that could cause the biggest recession in the history of the US.

Now I believe that's what the economy needs. A recession is the painful reallocation of misallocated capital. Only after those resources are finally put to more productive and profitable use can the economy ever recover and start to really grow again. But let's not kid ourselves, the transition would probably be very, very painful given what a huge mess we're in.

The Fed doesn't look at it that way. They want to maximize total output measured in GDP as well as achieve "price stability" (they inofficially follow a Taylor rule). The prospect of a deflationary recession is a nightmare to them. They focus on aggregated numbers and ignore the micro economic foundations of individual behaviour. And so far, they are doing their job. GDP is growing and the general price level is relatively stable. The fact that those two numbers are completely irrelevant is a whole different issue. From their point of view there is absolutely no reason to raise interest rates at this moment. I'd say it's more likely that they come up with some way to create negative nominal interest rates than that they would raise rates above 4-5%.

 

[Zippyjuan]

In this environment, raising rates WOULD lead to higher investment.

The first step to investment is saving (producing more then you consume). These low rates are encouraging debt which is the opposite.

Yes, raising interest rates would increase savings. But would it increase investment? Only if there is a shortage of capital and there isn't. Companies look at their sales figures and their potential growth when considering investments. Unless they see more growth in sales in the future, they aren't going to invest much money (just as we see happening today- the costs of borrwing are incredibly low and there is a ton of money available but companies are unwilling to tap into it- they have their own cash surpluses as well). Increased savings means less being spent on goods and services. That means companies see reduced future growth which would make then even LESS likely to borrow and invest in capital for their company.

Articles from last year:

http://www.forbes.com/sites/afontev...-cash-abroad-as-stock-piles-hit-record-1-45t/

3/19/2013 @ 3:01PM |19,669 views

U.S. Companies Stashing More Cash Abroad As Stockpiles Hit Record $1.4T

Corporate America has dramatically increased its cash piles over the past few years, stashing more and more Benjamins every year since 2007. In 2012, U.S. non-financial companies filled their coffers with an additional $130 billion, taking their total cash to a record $1.45 trillion as the economy has stagnated and the labor market has moved sideways. At the same time, a prohibitive corporate tax scheme coupled with emerging market growth have pushed U.S. firms to keep 58% of their cash, or $840 billion, overseas.

http://online.wsj.com/article/SB10001424127887324034804578346772977321576.html

Firms Send Record Cash Back to Investors


U.S. companies are showering investors with a record windfall in the form of dividends and share buybacks, helping to propel the stock market's rally.

Companies in the S&P 500 index are expected to pay at least $300 billion in dividends in 2013, according to S&P Dow Jones Indices, which would top last year's $282 billion.

Analysts say this year's number could go even higher. Apple Inc., AAPL -0.32%for example, stands to pay out about $10 billion this year in a dividend policy initiated last year. Exxon Mobil Corp. XOM +0.51%and AT&T Inc. T +1.05%are each also set to pay dividends around $10 billion.

American corporations also announced plans to buy back $117.8 billion of their own shares in February, the highest monthly total in records dating back to 1985, according to Birinyi Associates Inc. a Westport, Conn.-based market research firm. Home Depot Inc., HD -0.15%General Electric Co. GE +0.42%and PepsiCo Inc. are among a number of large companies that announced plans last month to scoop up large amounts of their own shares.

Insufficient savings or funds are not reasons companies are not investing more money.

 

[Seraphim]

^^ Big corporate welfare queens sitting on taxpayer backed loans don't count as normal market behavior. They have all the cash because it's been stolen from the rightful owners and now those middle class people are bled dry and can't afford as much iCrap - so those few companies sitting on so much cash don't invest it.

In a REAL market, higher interest rates = more savings and investment because consumers are producing and reaping the benefits (purchasing power) and the banks make loans to companies looking to expand and startup based on the projected consumer demands.

The consumer is dead and on life support - ditto for some of the biggest Corporations in the world (that are sitting on all the immobile cash).

Thank you ZIRP...

 

[Danan]

In this environment, raising rates WOULD lead to higher investment.

The first step to investment is saving (producing more then you consume). These low rates are encouraging debt which is the opposite.

Hm, I believe you mixed up cause and effect.

Without the Fed and fractional reserve banking, increasing the supply of loanable funds (people saving and lending out this not consumed income) would result in lower interest rates on the loanable funds market which would in turn encourage investment (businesses taking out loans at lower interest rates). Debt of one group (investors) is equal to the savings of others (savers and depositors). Savings go up => interest rates go down => investments go up.

Notice, the change that occured was increased savings without a prior change in interest rates. The supply curve of loanable funds shifts to the right. What you are talking about is a movement along this curve, increased savings because of increased interest rates. But with a constant supply curve the rate could only change if the demand curve for funds would shift (to the right). Meaning that only if the investment demand at the same interest rate would increase all of the sudden on its own (all other things being equal) would your scenario work. But I don't assume that's what you meant. At least I don't see a sudden shift in the demand curve as being very likely.

In our current system with the Fed and FRB things look a little different. You don't need savings for others to invest. The Fed can create bank reserves out of thin air (and that's what they've been doing) and commercial banks can loan out a multiple of that money to investors (that's not happening right now) - without anyone ever "saving" anything. Now these investors are going to spend that money on the fixed stock of existing resources and products. Since those resources didn't suddenly increase because of what the banks did, prices for everybody are going up. Consumers who never loaned out money to anybody directly are indirectly funding investments with higher prices for goods and services. If the Fed increases the amount of bank reserves (by lowering the FedFunds rate) in times of high-powered money (which we are not in right now) the interest rate goes down, investments go up and savings go down at the same time, creating inflation in the long run.

The higher this gap between savings and investments, the higher inflation is going to get. Currently investments are not increasing enough to cause massive inflation. There are other factors in the economy (the distrust in the future because of a badly distorted economy) that stop businesses from taking on additional debt. In fact, right now everybody is de-leveraging. That's why it's true that lowering rates does not increase investments by much right now. But still, raising rates would decrease investments, at least in the short run.

 

[Danan]

In a REAL market, higher interest rates = more savings and investment because consumers are producing and reaping the benefits (purchasing power) and the banks make loans to companies looking to expand and startup based on the projected consumer demands.

There are three ways how interest rates (which are a price) can change: 1) a shift in the demand for loanable funds; 2) a shift in the supply of loanable funds; 3) a combination of the two.

"If interest rates change" is not enough to analyze the effects. The supply of loanable funds without the Fed and FRB consists of savings only. With the Fed the whole system becomes way more complex. Now the banking system can increase the supply without an increase of savings. In fact, this increase will drive down interest rates which will in turn decrease savings while increasing investment.

Dr. Garrison has a brilliant lecture on this topic (his talks are easily among the best on misesmedia, imho): http://www.youtube.com/watch?v=zhoFOyy7rbo

 

[Madison320]

In this environment, raising rates WOULD lead to higher investment.

The first step to investment is saving (producing more then you consume). These low rates are encouraging debt which is the opposite.

I agree. This is how capitalism works. Savers provide capital for businesses to invest. It's a win-win situation. But the government screws it up by lowering interest rates so that they can give a short term boost to the economy, so that they can get re-elected. Since there's no longer any savings available for investment the government tries to artificially provide it with things like QE and "investment programs". The problem is that any attempt by government to artificially provide capital causes more harm than good. Basically the capital the government provides has to come from somewhere. They either have to steal it, borrow it or print it.

 

[Madison320]

Yes, raising interest rates would increase savings. But would it increase investment? Only if there is a shortage of capital and there isn't. Companies look at their sales figures and their potential growth when considering investments. Unless they see more growth in sales in the future, they aren't going to invest much money (just as we see happening today- the costs of borrwing are incredibly low and there is a ton of money available but companies are unwilling to tap into it- they have their own cash surpluses as well). Increased savings means less being spent on goods and services. That means companies see reduced future growth which would make then even LESS likely to borrow and invest in capital for their company.

Zippy, you Keynesian Slut.

Even if there is capital for business to invest, it didn't come from savings. The government either stole it, printed it, or borrowed it. This inflicts more damage than the good the investment provides. The ONLY way to grow an economy is by investments from real savings. It's a win-win for the saver who earns interest and the business who has access to loans to grow his business.

 

[Danan]

Zippy, you Keynesian Slut.

Even if there is capital for business to invest, it didn't come from savings. The government either stole it, printed it, or borrowed it. This inflicts more damage than the good the investment provides. The ONLY way to grow an economy is by investments from real savings. It's a win-win for the saver who earns interest and the business who has access to loans to grow his business.

Yes, the purchasing power of that newly created money (or loans) is being siphoned away from all holders of money. Nevertheless, it does increase investment. Up to the point when those investments finally turn into finished consumer goods and there is no demand for them because nobody saved anything and prices were rising in the meantime.

I completely agree that the Keynesian method is doomed to fail in the long run. However, in a healthy environment lowering interest rates artificially by increasing the money supply does increase investment. It's not sustainable or desirable investment, but it's still true. If that were wrong Austrian Business Cycle Theory would be wrong too.

 

[jbauer]

QE, doesn't cause inflation. QE is meant to keep interest rates low by flooding the bond/treasury market with easy capital, thus pushing dollars into risk assets.

When the Fed unwinds QE its going to cause a rise in interest rates. Increased interest rates will dramatically hurt the bond market. Increased interest rates affect our borrowing capacity. When that happens it forces inflation up and confidence in the dollar down. If we continue to "print" it eventually will force inflation.

The interesting thing isn't will inflation happen its will it be preceded by major DEflation.

 

[Danan]

QE, doesn't cause inflation. QE is meant to keep interest rates low by flooding the bond/treasury market with easy capital, thus pushing dollars into risk assets.

When the Fed unwinds QE its going to cause a rise in interest rates. Increased interest rates will dramatically hurt the bond market. Increased interest rates affect our borrowing capacity. When that happens it forces inflation up and confidence in the dollar down. If we continue to "print" it eventually will force inflation.

The interesting thing isn't will inflation happen its will it be preceded by major DEflation.

When that happens it forces inflation up and confidence in the dollar down.

It should - in theory - cause deflation, not inflation. The only way it could be inflationary is if the fall in real output more than offsets the decrease in the money supply. Which I'll admit is possible.

 

[oyarde]

It should - in theory - cause deflation, not inflation. The only way it could be inflationary is if the fall in real output more than offsets the decrease in the money supply. Which I'll admit is possible.

Fall in output looks entirely possible to me.

 

[Madison320]

QE, doesn't cause inflation. QE is meant to keep interest rates low by flooding the bond/treasury market with easy capital, thus pushing dollars into risk assets.

When the Fed unwinds QE its going to cause a rise in interest rates. Increased interest rates will dramatically hurt the bond market. Increased interest rates affect our borrowing capacity. When that happens it forces inflation up and confidence in the dollar down. If we continue to "print" it eventually will force inflation.

The interesting thing isn't will inflation happen its will it be preceded by major DEflation.

QE doesn't cause inflation, QE IS INFLATION!!! Dammit!!!

In my opinion QE is by far the most potent form of inflation. The way I look at it, the money supply comes from the monetary base times some multiplier effect (fractional reserve banking, velocity, etc). I think the base is by far the most important factor. If you were using gold as money and suddenly someone discovered a huge gold mine that doubled the amount of gold, I would expect prices in terms of gold to double over time.

If you guys are right about all these deflationary scenarios, why have they almost never happened in the entire history of fiat currencies? Fiat currencies inflate 99.99% of the time.

Here's a really good article on this topic:

http://mises.org/daily/5052

Here's a quote from that article:

"The key point is that prices are formed with money because money is the final means of payment for goods, while credit is not. The value of each unit of money rises only when there is less money or more demand for existing money. A change in the volume of credit will affect relative prices but it will not affect the overall value of each money unit in a systematic way."

 

[jbauer]

QE doesn't cause inflation, QE IS INFLATION!!! Dammit!!!

In my opinion QE is by far the most potent form of inflation. The way I look at it, the money supply comes from the monetary base times some multiplier effect (fractional reserve banking, velocity, etc). I think the base is by far the most important factor. If you were using gold as money and suddenly someone discovered a huge gold mine that doubled the amount of gold, I would expect prices in terms of gold to double over time.

If you guys are right about all these deflationary scenarios, why have they almost never happened in the entire history of fiat currencies? Fiat currencies inflate 99.99% of the time.

Here's a really good article on this topic:

http://mises.org/daily/5052

Here's a quote from that article:

"The key point is that prices are formed with money because money is the final means of payment for goods, while credit is not. The value of each unit of money rises only when there is less money or more demand for existing money. A change in the volume of credit will affect relative prices but it will not affect the overall value of each money unit in a systematic way."

All QE is doing is forcing interest rates down and misallocating resources into risk assets. QE can only indirectly cause inflation as a byproduct. What will happen eventually is interest rates will rise despite the fact that the FED is nearly purchasing all the newly issued treasuries. The question as to whether we see inflation or deflation come as a result of unintended consequences of QE and how the FED will react.

Assuming interest rates go up at some point, will the FED purchase even more bonds or do more to "twist" the yield curve? Or will they be concerned that putting even more money into debt assets will cause interest rates to go up even further? Higher interest rates will force money out of risk assets back into debt assets.

Deflation happens if interest rates move up to fast.
Inflation happens if interest rates move gradually over several years.

The true answer to this question is whether the FED's hand get forced by the markets or are they able to raise rates over in a controlled manner.

 

[Madison320]

All QE is doing is forcing interest rates down and misallocating resources into risk assets. QE can only indirectly cause inflation as a byproduct. What will happen eventually is interest rates will rise despite the fact that the FED is nearly purchasing all the newly issued treasuries. The question as to whether we see inflation or deflation come as a result of unintended consequences of QE and how the FED will react.

Assuming interest rates go up at some point, will the FED purchase even more bonds or do more to "twist" the yield curve? Or will they be concerned that putting even more money into debt assets will cause interest rates to go up even further? Higher interest rates will force money out of risk assets back into debt assets.

Deflation happens if interest rates move up to fast.
Inflation happens if interest rates move gradually over several years.

The true answer to this question is whether the FED's hand get forced by the markets or are they able to raise rates over in a controlled manner.

How did Zimbabwe get inflation?

 

[Zippyjuan]

Hyperinflation typically arrises from a loss of confidence in the money or the government or both.

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

Their economy collapsed and then the banks followed.

On April 18, 1980, the Republic of Zimbabwe was born from the former British colony of Southern Rhodesia. The Rhodesian Dollar was replaced by the Zimbabwe dollar at par value. When Zimbabwe gained independence, the Zimbabwean dollar was more valuable than the US dollar.[3] In its early years, Zimbabwe experienced strong growth and development. Wheat production for non-drought years was proportionally higher than in the past. The tobacco industry was thriving as well. Economic indicators for the country were strong.

From 1991-1996, the Zimbabwean Zanu-PF government of president Robert Mugabe embarked on an Economic Structural Adjustment Programme (ESAP), designed by the IMF and the World Bank, that had serious negative effects on Zimbabwe's economy. In the late 1990s, the government instituted land reforms intended to redistribute land from white landowners to black farmers to correct the injustices of colonialism. However, many of these farmers had no experience or training in farming.[citation needed] From 1999 to 2009, the country experienced a sharp drop in food production and in all other sectors. The banking sector also collapsed, with farmers unable to obtain loans for capital development. Food output capacity fell 45%, manufacturing output 29% in 2005, 26% in 2006 and 28% in 2007, and unemployment rose to 80%.[4] Life expectancy dropped.[5]

The government blames most of Zimbabwe's economic woes on economic sanctions imposed by the United States of America and the European Union.[6] These sanctions affect the government of Zimbabwe,[7] and asset freezes and visa denials targeted at 200 specific Zimbabweans closely tied to the Mugabe regime.[8] There are also restrictions placed on trade with Zimbabwe, by both individual businesses and the US Treasury Department's Office of Foreign Asset Control.[9]

A monetarist view[10] is that a general increase in the prices of things is less a commentary on the worth of those things than on the worth of the money. This has objective and subjective components:
Objectively, that the money has no firm basis to give it a value.
Subjectively, that the people holding the money lack confidence in its ability to retain its value.

Crucial to both components is discipline over the creation of additional money. However, the Mugabe government was printing money to finance involvement in the Democratic Republic of the Congo and, in 2000, in the Second Congo War, including higher salaries for army and government officials. Zimbabwe was under-reporting its war spending to the International Monetary Fund by perhaps $22 million a month.[11]

Another motive for excessive money creation has been self-dealing. Transparency International ranks Zimbabwe's government 134th of 176 in terms of institutionalized corruption.[12] The resulting lack of confidence in government undermines confidence in the future and faith in the currency.

 

[Madison320]

Hyperinflation typically arrises from a loss of confidence in the money or the government or both.

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

Their economy collapsed and then the banks followed.

What causes a loss in confidence in the money, animal spirits?

According to Keynesian theory Zimbabwe should have experienced massive deflation since their economy collapsed. The reason Zimbabwe had hyperinflation is because they printed money like crazy!! In other words they had tons of QE.

 

[TheTexan]

We will see prices increase massively when the excess reserves inevitably enter the economy.

 

[oyarde]

What causes a loss in confidence in the money, animal spirits?

According to Keynesian theory Zimbabwe should have experienced massive deflation since their economy collapsed. The reason Zimbabwe had hyperinflation is because they printed money like crazy!! In other words they had tons of QE.

Loss of confidence would come from,debt, unfunded liabilities, continual deficit spending, no balanced budget , no help , no end in sight, printing , money backed by nothing , tyranical govt. ..... as you can see , all pc.'s are in place , the US , on a whole is fairly well feed & retarded.The stock market is over valued , but it is where people go to crap shoot, they can "make" no money elsewhere to keep up .

 

[oyarde]

What causes a loss in confidence in the money, animal spirits?

According to Keynesian theory Zimbabwe should have experienced massive deflation since their economy collapsed. The reason Zimbabwe had hyperinflation is because they printed money like crazy!! In other words they had tons of QE.

I will always miss hunting in Rhodesia in the dry season . It was most excellent.

 

[Madison320]

We will see prices increase massively when the excess reserves inevitably enter the economy.

I agree. And don't forget about the huge amount of reserves held by foreigners from years of our trade deficits.