| Suppose I define money as the price of gold and oil?
I don't think you want to start this. The mods might come and toss us all into the idiot box. |
Posted on 07/28/2008 5:21:29 PM PDT by shrinkermd
I have taken the Dines Letter off and on for over three decades. I like his literary style and his unique and useful commentary. I am not about to steal his proprietary findings and put them on the Internet. I am also not writing a testimonial for his newsletter. What I am trying to do is describe his view of the term “money supply” and how broadening it suggests we are in a steep deflation.
This sounds irrational. Most people consider “money supply” to be the total money held by the non bank public. Essentially, this boils down to currency in circulation plus that in checking accounts.
James Dines expands the concept of money supply “to any asset that can be sold reasonably quickly.” This results in besides checking accounts bonds, stocks, real estate, savings accounts and precious metals coins being the real money supply.
It is true more paper is being printed; however, there is stock market, real estate and credit crash this overwhelming government effort of maintaining and expanding the money supply.
Currently there is a net shrinking of this expanded money supply such that we are in a deflation. Since few alive have really experienced a deflation. For example, using even government statistics on inflation shows the stock market to be deflating rapidly. So much so, looked at it in this conservative estimate of inflation we are in a serious and profound bear market.
Previous stock market stalwarts such as General Motors have declined from 94 to 9 without the correction for inflation; with the correction for inflation GM approaches lower single digit status. As far as the oil stocks, in the last two years nominally both Exxon and Chevron are up only 6% and 7%; corrected for inflation they are less valuable today than they were before the run up in oil.
link? Or is this just a vanity? Or do you have a question?
One thing one has to consider as well, are energy prices.
The higher energy prices go up, the more dollars leave the country. If more dollars are leaving than it takes to cover increasing cost, you could have deflation.
Ping. I haven’t read this yet but recall from a thread a few months back that each of you had an interest in the money supply.
yitbos
I decline...but thank you for your insight.
I believe deflation can also include the decline in credit. That seems to be happening as well. What I have not been able to wrap my mind around, is what does the average middle class DO to prepare for major deflation? I have read that cash becomes king. Ideas? I think most here understand what inflation is and how to cope with it, but deflation has me unsure.
Brinker advised not to park your money in internet banks, because who answers the phone when the web site shuts down? Better to save and invest where can you actually talk face-to-face, and walk in and demand your money when the institution goes belly up.
Shrink -- why I am I so depressed?
Rhetorical question, I know the answer. I have only a cup and the ocean has seas and rivers.
No. That is someone's new definition of money supply. Some prefer the standard dictionary definition or if it is to be redefined, I like mine.
yitbos
Thought that this was about the Navajoe nation.
Carry on.
I have posted several times that we should be in a deflationary period, and really is the only way out. We loaned money into existence that can not be repaid because the value of the homes are now less than the loans. The sum of the losses is what is shrinking the oney supply, and is deflationary.
However,
the New York stock exchange, the “DOW Industrials” and such markers no longer express the portion of the marketplace, portion of the GDP or portion of American assets that they used to (in the 1920s there was little else),
and everyone, institution and individual, who has been selling NYSE, Nasdaq &/or “Dow”, or “S&P” stocks, have been buying other assets from those sales (placing their capital in other investment instruments, including commodity contracts and commodity futures contracts, as well as “hedge” funds and private equity funds); it did not leave the economy, it went to different places.
To look only at the old giant place markers and take their current market values as representing “deflation” in the U.S. economy generally is to fail to understand how much individual and institutional investment has changed and how large is the investment universe today.
Here is a good model to understand what is going on. The division of the economy into “real money” and “imaginary money”.
Real money is currency based backing of real goods and services. Imaginary money is virtual money leveraged off of currency and/or real goods and services. 2nd and subsequent stages of imaginary money are leveraged just off of imaginary money itself.
There is a real economy here somewhere, but it is only a fraction of the size of the imaginary edifice that uses it as a foundation.
Any number of post-WWII processes have been created to generate imaginary money with increasing disconnect with the real economy. But it was inevitable that the enormous growth based on imaginary money would have to end. But then what happens?
A worldwide collapse of imaginary money. Think of it as a collapse of credit at a worldwide scale, across the board, from governments to individuals.
All of a sudden, the US government must have a balanced budget, because no one will loan them money to continue to spend with glee. A penny over the much less tax revenue they bring in will not be paid.
The US government will have to print extraordinary amounts of paper money, which will not be inflationary, but to stop horrific deflation.
Right now, there are only about $830B in US banknotes in the world, but on a daily basis, the US alone has about $3T in daily transactions. If credit has vanished, transactions can only be for cash, instant debit or instant cheque.
As a rough guess, this means that in a credit-less society, the US might need $9-12T in cash, most of which would be in storage in banks and the federal reserve.
International trade pretty well dries up with a collapse of the international credit market, and if the US is smart, it will sell food in exchange for prorated amounts of US national debt. Say a bushel basket of wheat either for $10 cash, or a $1000 in relieved debt.
No trade also means that the US must in short order rebuild all its heavy industries, and regain all the work we have outsourced. But if you want to do business in the US, you will have to make it here.
In truth, if carefully managed, and the public fed and housed until the crisis abates, then we should weather the storm well, and be back on our feet before long, returning to economics as they were done before WWII.
However, if the government even tries to do the same stunts that got us in to this mess in the first place, to fix things, not only won’t it work, but there will be a lot more pain.
So good economists should steel themselves to the idea of an end to easy credit for the foreseeable future, and telling politicians what must be done to return the US and the rest of the world to non-credit economies.
| Suppose I define money as the price of gold and oil?
I don't think you want to start this. The mods might come and toss us all into the idiot box. |
Inflation is the shrinking of the everyday purchasing power of the dollar. You simply cannot buy as much today with one dollar as you could a year ago.
Equities (an investment vehicle) are not part of any ordinary market basket of posssible purchases which might be used to measure purchasing power. Neither are houses — though rents conceviably could be.
>>>Dines expands the concept of money supply “to any asset that can be sold reasonably quickly.” This results in besides checking accounts bonds, stocks, real estate, savings accounts and precious metals coins being the real money supply.
Real estate can take months to liquidate into cash... or years for citizens of Kaliforniastan.
So I think this definition of money supply is lacking.
However, I think the prediction of deflation would be the more rational way out. Zimbawbe’s approach of massive inflation is so anachronistic,cliche, and ruinous. At some point the creditor has to be the winner... else there is no game. However, I don’t think anyone can call this ballgame now.
Having bought and sold considerable real estate, I found it all depended on the asking price. RE always cleared if the price was low enough. The problem with most people they want top dollar in a declining market. Can’t be done.
Disclaimer: Opinions posted on Free Republic are those of the individual posters and do not necessarily represent the opinion of Free Republic or its management. All materials posted herein are protected by copyright law and the exemption for fair use of copyrighted works.
Then I'll define weather as the melting point of iron and hydrogen. Somebody else can define spacetime as the height of the Empire State Building and the number of minutes in a day.