Roubini: Gold Standard Fans Are ‘Lunatics and Hacks’

Moneynews ^ | 28 Nov 2011 | Forrest Jones

[Toddsterpatriot]

Why do you worry about the relative increased cost of a short term loan over the continuous purchasing power erosion of a lifetime of savings?

30 years of 3% deflation leaves your house worth 40% of what you paid. It makes your last payment 250% of your first. I could show you actual numbers, if you don't understand.

How do computer companies profit in an environment where they borrow to invest, and yet the price of the product they sell goes down at a higher than 3% annual rate?

How will farmers profit when their product will decrease at 3% a year, forever? Or an auto company?

Does Apple make money selling the same Ipod that gets 3% cheaper each year? No, they sell newer, more expensive products, because they would go broke selling Ipods cheaper every year.

Do you think a home purchased for $100k today is worth twice as much when it sells for $200k after 30 years of 3% inflation?

No, but I think a mortgage payment that gets 3% more expensive each year is a bad idea, especially when the house loses 3% in value each year.

You think they could obtain the same price, absent the Fed printing the money (thereby inflating the money supply) to meet their price?!

Yeah, $1 billion in bonds is worth $1 billion, whether the Fed buys it or Fidelity does.

I explained to you how JPM uses subsidiaries to acquire and profit from the Fed's monetary creation.

Try again. JPM had a bond yielding 1.87%, now they have cash yielding 0%. Where is the profit?

[Gunslingr3]

30 years of 3% deflation leaves your house worth 40% of what you paid.

It puts the nominal price at 40% of the original price, not the worth. Your continued inability to grasp this distinction is why you are confused.

Do you think 30 years of 3% inflation leaves your house worth >230% of what you paid? If you sold the house, and the prices of everything has risen 3% for 30 years, can you obtain 230% more goods and services in the economy after this inflationary appreciation in price?

Whether inflation, or deflation, changes the price, the worth is a relative measure, and the price of everything having gone up (or down) would leave it worth the same.

30 year mortgages and enormous house prices are simply a function of our inflationary environment. There is no reason to assume either would (or should) exist in an environment of stable money.

You again ducked my questions. I can't help you understand until you can find the answers therein: How do computer companies profit in an environment where they borrow to invest, and yet the price of the product they sell goes down at a higher than 3% annual rate?

Try again. JPM had a bond yielding 1.87%, now they have cash yielding 0%. Where is the profit?

JPM has one subsidiary buy the bond, and then sell it to the Fed, recovering the cash. It deposits the cash at another subsidiary to generate loans. Now it has the cash, and the deposit upon which it can generate new loans, due entirely the Fed's creation of more money.

The reason this is different than if JPM's subsidiary didn't just deposit the cash first is that the money from the Fed is NEW MONEY that didn't exist before the swap (a purchase of the bond by anyone else would have necessarily lowered deposits at their financial institution). That's how JPM profits off the new money, they get it first and turn it into a deposit that they can in turn loan to the public.

[Toddsterpatriot]

It puts the nominal price at 40% of the original price, not the worth.

Since you paid the original price with ever more valuable currency, you've lost money. You really don't understand?

I'll try harder. You make $50,000 a year and take out a $150,000 mortgage at 4.5% for a $187,500 house. $37,500 down-payment, good job! Your payment is about $9000 per year for interest and principal. About 18% of your income.

After 10 years of 3% deflation, your income has dropped to about $37,200. Your house is valued at $139,500 and your payment is now 24.2% of your income. Don't worry, your mortgage balance is down to $120,000. Your equity is $19,500, good job!

10 more years of the same and your income is down to $27,700 and now your payment is 32.5% of your income. Don't worry, your mortgage balance is down to $73,300 and your house is worth $103,800. Your equity is up to $30,500.

After the last 10 years of your mortgage, your income is $20,600 and your payments in the last year were over 43% of your income. Your house is worth $77,200. Your total payments were over $273,000 plus the $37500 down-payment.

JPM has one subsidiary buy the bond, and then sell it to the Fed, recovering the cash.

Sounds like a wash to me.

It deposits the cash at another subsidiary to generate loans.

It can do that by selling the bond in the open market or by never buying the bond at all. Still no profit for being the first to sell to the Fed.

Now it has the cash, and the deposit upon which it can generate new loans, due entirely the Fed's creation of more money.

Or due to never buying or due to selling the bond to Goldman.

That's how JPM profits off the new money, they get it first and turn it into a deposit that they can in turn loan to the public.

Yeah, they have cash at 0%, instead of a bond at 1.87%. Still no profit there. If they wanted to loan to the public, they'd sell the bond instead of waiting for the Fed to buy it.