Alarm bells ring at Fed (deflation alert)

Financial Review ^

[austrianecon]

Yeah I think we do. I also agree with your reference to the asset bubbles. Really what I was trying to convey was the idea that sometimes the play of market forces trump those of the Fed. I think we also agree that we'd be far better off without a monopoly money producer?

[freeper12]

I've never bought the gold arguement before...but for the sake of argument, if someone wanted to park some money in gold, how do you do this best? buying shares in a mining company?

[fogarty]

The first thing people should focus on is getting out of debt. For a family, it is important to get out of debt (including mortgage) in any type of environment - but especially so in a deflationary environment. My wife and I are making extra payments every quarter so our 30 year mortgage is closer to a 20 year.

Gold and silver coins can be bought from Kitco or any of the major bullion sellers. It is easy enough to buy silver 1 ounce and gold 1 ounce Eagles or Maples. Gold stocks can be decent but just like regular stocks they are volatile. That's why I stick to the basics: get out of all debt and get some physical gold and silver.

[austrianecon]

No, buy gold. You can purchase gold coins and hold them. I typically have between 2-4% of my investments in gold coins. Look at it this way: an ounce of gold in 1940 (roughly) could buy you a brand new men's suit. Today, an ounce of gold could buy you.......a brand new men's suit. However, $30 (which is what a suit went for approx. in 1940) could barely buy you a pant leg today.

[Fury]

Gold and silver coins can be bought from Kitco or any of the major bullion sellers. It is easy enough to buy silver 1 ounce and gold 1 ounce Eagles or Maples. Gold stocks can be decent but just like regular stocks they are volatile. That's why I stick to the basics: get out of all debt and get some physical gold and silver

Silver coins may be the way for folks to go initially, if one must consider holding physical precious metals. It's more affordable based on the experiences of folks I know.

[Deuce]

We'd be far better off without a monopoly money producer?

Indeed. No matter which way you meant it:

1. A money producer that has a monopoly; or

2. a producer of "monopoly money"

I knew I'd like you as soon as I saw your name!

[bvw]

Not the tariffs but the political reaction to them, the tariff wars. I'll admit I'm not up on the ratios of ag to manufactured exports then and now.

[Deuce]

The bid offer spread on gold coins eliminates them as the best way to participate in the potential gold revaluation, IMO. Check out the,World Gold Council to learn why, how, and where in a well laid out explaination.

[imawit]

Okay. I agree that what the Fed is doing is not making it happen, inflation. But where is all of this additional money going ?

We do see it in the housing bubble but I would caution to quess that this one market is not going to suck up all of the newly available money.

So what is ?

New cars, new or better computers are not. It's not TV's or DVD's. It's not more vacations. And in fact all of this is the sign that the Fed's inflation plan is grossly not working.

[austrianecon]

But are not tarifs in general a political action? Do not governments institute tariffs? And if I slap a tax or tariff on your goods, will you not slap them on mine? To what purpose then does all this serve other than to reduce economic activity in general? No, I'm sorry. I mean this as no slight to you, but I think you have been somewhat misguided in your economic instruction. Tariffs are bad for a myriad of reasons. No, wait, let me back up. A general revenue seeking tariff is.......acceptable, for lack of a better term.. Special interest tariffs, and tariffs soley for political purposes are bad.

[arete]

But where is all of this additional money going ?

Swiss bank accounts?

Richard W.

[David]

"Okay. I agree that what the Fed is doing is not making it happen, inflation. But where is all of this additional money going ? We do see it in the housing bubble but I would caution to quess that this one market is not going to suck up all of the newly available money. So what is ?"

Direct answer is very simple--bank reserves; maybe to a lesser degree bonds, bond funds, and money markets--which is why (in the case of bonds and funds) long bond interest rates are going down--people are buying them.

There really isn't much additional money.

Further, my own view of the data is that personal use real estate financings are not going up a lot either. Purchase and sale financing is off because sales are also off; refi's are down because that market got saturated--everybody who was going to refi did it. If rates went down further, you might see more refi's but the cash out equity people have by and large stopped.

The retail season will end in the tank; the stocks are headed for the tank; just about everything is going to roll over in Q1 of 2003.

[imawit]

"Where is the money going ?"

Direct answer is very simple--bank reserves; maybe to a lesser degree bonds, bond funds, and money markets--which is why (in the case of bonds and funds) long bond interest rates are going down--people are buying them.

Okay, a good reason for the Fed's inflation plan to not work. All this excess money is not going into commerce.

Nother subject. Right now the refi & fi business is not subsiding in the least. Last week had all time highs in payoffs for refi and purchases of existing homes. And this info comes directly from the mortgage banks cashier. Not to say it won't subside later (January) but December is traditionally the best month of the year for mortgage payoffs/refis. And this December is heading towards an all time record. I'll keep you posted on any changes.

[bvw]

I don't know. The more general (and light) the better as any tariff, excise, retail or sales tax goes. Yet there are circumstances that have to allow for specific tariffs. Like any tax -- tariffs have their poisons, and these poisons can't be ignored -- especially with a tariff -- as it's like passing a poison to your neighbor.

A tariff has to be marketed very adeptly -- marketed to the very foreign nations you are imposing it on. That did not happen in the past to the needed degree. I do believe we are capable of doing it now.

[B-Chan]

My guess is that if a deflationary crisis began, and if the home mortgage foreclosure rate got too high, the government would simply buy up the bad mortgages at bargain-basement prices, acting as a buyer of last resort and pumping mounds of Fed cash into the mortgage market. The foreclosed properties could then be refurbished (by a federal jobs program similar to the Depression-era CCC) and sold at deep discounts. Politicians know that masses of middle-class families being thrown into the streets is the one scenario that can never be allowed to be realized; such a situation could easily turn very, very ugly.)

Remember: wealth = real property, tangible and intangible assets, and human creativity; money = symbols of that wealth. The real wealth of the country remains even in a deflationary slump; the problem is that there aren't enough symbols spread around to enable people to exchange that wealth. If a similar situation occurs today, the federal government could inject money into the economy simply by declaring an "income tax holiday" for a year or two. Allternatively, a land war in Asia could stimulate military spending, priming the pump and leading to increases in manufacturing and other military-related industries. (This is a long shot, however; modern military forces use high technology to do more with less, substituting one super-high-tech fighter/bomber with smart weapons for waves of conventionally-armed low-tech planes. This trend will only grow more pronounced as the use of unmanned aircraft, highly-automated ships, and other robotic fighting platforms grows.)

[David]

" Right now the refi & fi business is not subsiding in the least. Last week had all time highs in payoffs for refi and purchases of existing homes." Well but you are in Southern California which is really a different world.

Through business connections and otherwise, I have relationships in Dallas, Denver, Seattle, and the four-corners Oklahoma, Arkansas, Kansas, Missouri area. The trends are not identical. But in three of the four areas, the real estate financing, sale, refinancing business is in a clear downtrend. Since that is consistent with my overall view of deflation, I expect that to be the trend direction elsewhere--but California is obviously not there; and the four corners area is certainly not going down either. Maybe I am wrong.

[GOPJ]

bump

[mpoulin]

I know its not a popular opinion, but I do belive we are heading for deflation. IMO, the evidence is mounting...I do have a question however, many articles liket his refer to the ability of the govt to simply start up the printing presses and flood the economy with "free" money"...but I don't get it. I assume that the "firing up the presses" is really just an expression, but how exactly would the fed "flood" the economy with "free" money? Besides lowering interest rates, how does the fed actually increase the money supply? If they are giving away "freea" money...who do they give it too???

They create a debt on themselves by printing new Federal Reserve Notes (which are debt instruments) and use them to buy U.S. Treasury bonds (which are debt instruments).

The difference is that FRN's pay no interest, while Treasuries do.

"Modern Money Mechanics" (Federal Reserve Bank of Chicago) explains all this.

[185JHP]

He's also an "M2 M2 M2 - repeat as necessary" guy.

[Wyatt's Torch]

Reasons why there will be no deflation

Will be? Sorry, that ship sailed 5 years ago. There might not be any more deflation because the Fed now, somewhat, realizes what it did to cause this mess.

Here's to reflation.