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inflation
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32 / M / Atlanta, GA
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Posted 5/30/09 , edited 5/30/09

supermalv wrote:

Thank you again for clarifying. About the neo-classical theory of inflation.. So the whole thing boils down to sticky wage price then? I still don't understand this. Well.. I understand but still not 100% fully grasp the concept.. but uhh.. I think the other topic at hand is more important to discuss.. the central bank.

I read somewhere that since the existence of the central bank we actually have MORE recession than before it didn't. Whether it is true statistically or not I haven't confirm. Is it? I mean the fed was created in the 30s.. and since then we have.. great depression, the 1937 depression, 1945, 1953, 1960, 1961, 1969, etc etc. Providing that there hasn't been more recession than before it's existence.. Many recessions actually did occur.


I've tried to confirm this in the past, but couldn't easily find any pre-central bank data. Be sceptical of anyone making the claim.

Here's a scatterplot I made of GDP growth, year over year, as early as I could go back.



I pulled this data from the Bureau of Economic Analysis a little while back, so it won't have the current ression on it. Still, notice the trend from unsteady growth the steady stable growth. The economy certainly isn't become more volatile, but less volatile as time has progressed. That may or may not be attributable to the Federal Reserve.


So is it not fair to say that.. The central bank is ineffective at doing what they're doing?

And to your next point.. ah! this is something called the fractional-reserve banking isn't it. I just finished reading about it also. But anyway, yeah. From what you wrote.. The conclusion is that central bank have to exist because they act as lender of the last resort.. am I correct?

Well instead of creating central bank, why don't the government just illegalize banks from lending money they don't have? I mean that's what happens in fractional-reserve banking isn't it? Then the bank don't have to worry about bank runs because they have all the money people need for withdrawals.

Banks lend out money so they have none left. It's not quite the same as lending money they don't have.

Asset-liability mismatch is what happens when you receive payments from your investments at different times than you owe money to people. For example, you receive payment on the first of the month from your mortgage investments, but owe your depositholders an interest payment once every quarter, and they can demand a percentage of their deposit back (say 70% of the deposit) at any time.

So, you owe a liability that can be withdrawn at any time and only have money coming in at discrete times. Money doesn't come in evenly, and sometimes borrowers can default so not enough will come in. That's the basic problems a lender of last resort exists to correct.

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Posted 5/30/09

crazykl45 wrote:


I've tried to confirm this in the past, but couldn't easily find any pre-central bank data. Be sceptical of anyone making the claim.

Here's a scatterplot I made of GDP growth, year over year, as early as I could go back.



I pulled this data from the Bureau of Economic growth a little while back, so it won't have the current ression on it. Still, notice the trend from unsteady growth the steady stable growth. The economy certainly isn't become more volatile, but less volatile as time has progressed. That may or may not be attributable to the Federal Reserve.



But regardless of the volatility of the GDP growth, recessions still happened.

And recessions is one of the worst thing that can happen to the economy. So that means central bank isn't doing much to prevent economical disaster like recessions am i correct?

Let me phrase this as exact as i could. The creations of central banks. Doesn't help prevent economic crisis. Or am I still wrong in saying this?



Banks lend out money so they have none left. It's not quite the same as lending money they don't have.

Asset-liability mismatch is what happens when you receive payments from your investments at different times than you owe money to people. For example, you receive payment on the first of the month from your mortgage investments, but owe your depositholders an interest payment once every quarter, and they can demand a percentage of their deposit back (say 70% of the deposit) at any time.

So, you owe a liability that can be withdrawn at any time and only have money coming in at discrete times. Money doesn't come in evenly, and sometimes borrowers can default so not enough will come in. That's the basic problems a lender of last resort exists to correct.



I understand but if they implement full-reserve banking that wouldn't happen in the first place won't it?

They won't have deposit holders. Money-lending institutions will essentially be their own deposit holder. Therefore, eliminating the need of central bank.

The fractional-reserve banking is potentially inflationary. Because what they're doing is essentially expanding the money supply. So instead of supporting fractional-reserve banking by having expensive bailouts, why not just eliminate fractional-reserve banking altogether?
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Posted 5/30/09
it seems we got bunch of potential economist and financial advisors
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Posted 5/30/09 , edited 5/30/09

supermalv wrote:

What causes inflation? is inflation natural? if so how?

I define inflation as in that time when prices of things goes up. And the value of your money go down. Is this natural?

The way I see it the only way prices can go up can go by two things:

1) a sudden increase in demand and not enough supply of goods: like if oil production is shortened, less supply of oil, with the same demand to use oil in everyday life will guarantee that the prices of oil increases.

2) a sudden increase in the supply of.. Money: like what happen when someone counterfeit a currency. He buys goods with that money, adding supply of money in circulation and therefore devaluing it.

Or is there another way that inflation could happen besides those 2? and why do I keep hearing that inflation is actually the fault of people in the working class? normal average joe like you and me? They keep saying that we became a generation that borrows too much. We don't live within our means. Stuff like that.


In a free market system inflation is in fact caused by the average consumer. In a socialist society the value of merchandise is determined by the government’s need to generate income. So, if a nation decided it wanted to start a new social program granting minority welfare benefits to homosexuals the government would have to create that money by increasing the prices of certain goods. However, in the American system an item is only worth as much as people are willing to pay. In this way it is the consumers who decide the value of goods. In other words, inflation begins whenever people are willing and able to pay more for less. That’s why the United States economy is actually characterized by low inflation rates.

Today inflation is out of control for a variety of reasons. To understand the major causes I think it’s a good idea to take a glance at our modern economic history.

Looking back to the Carter administration, the government put the American citizen into debt by skyrocketing taxes. The hope was to generate more money for the funding of social programs. However, because taxes had increased the people had less money. People with less money become frugal. The consumers weren’t able to afford typical luxuries that were being taxed, so the government wasn’t generating more money. It responded by increasing taxes even further so that it could raise the money even in light of fewer purchases. This only exacerbated the situation.

Take a glance back through history and you’ll see more of the same. Prior to the revolution, for example, the French government was trying to drag itself out of debt by raising taxes. People became more conservative with their income and taxes were raised even further. Eventually a single loaf of bread cost a week’s wages.

The Regan administration corrected this error in America by lowering taxes to record lows and making up for this money by sacrificing social programs such as welfare. The idea was that whenever a there’s a strong economy there’s more opportunity and social programs such as welfare aren’t as necessary. Regan’s plan started the longest period of economic growth in American history, which ended with the Clinton administration.

By lowering taxes Regan put more money in the hands of the consumers. This allowed them to get out of debt. Once out of debt the consumers were able to spend more money on leisure items which put money in the hands of businesses and allowed them to grow. The low taxes also allowed for the creation of new companies and thus new jobs which meant even more money circulating.

This raised the annual wages of the middle and lower class citizens, allowing for Regan to do something brilliant. He began to steadily raise taxes. The people were used to living in certain conditions, but they were making more money than necessary to live in such conditions. So, by minutely increasing taxes he allowed them to maintain a prospering lifestyle without mitigating the economic growth.

This system was so effective that George H.W Bush kept the economy prospering despite military actions in Panama AND the Middle East. However, the system was broken when Bill Clinton came into office and sharply increased taxes with the hopes of creating better social programs.

Imagine being sent out into the world on a fixed annual income of 120 grand. Now imagine that suddenly lowered down to 60 grand a year. Now, making 120 grand you might be willing to-say, buy a house for 500,000.00 because on a payment plan you can afford it. Making 60 grand you may be less willing to spend that much money, but the change was so sudden people weren’t given much chance to adapt. Normally, this would simply require a transitional period but there was one more factor in play.

Clinton’s administration pressed for less stringent credit and down payment requirements for middle and lower class Americans. The inflation had begun because the people could afford to spend more money, but they were no longer able to do so. The less stringent credit and down payment requirement allowed mortgage brokers to offer citizens with low credit scores in the market for a home adjustable rate loans with low initial payments, but exploding interest rates

Banks also took advantage of this. You see, the American people were used to their low-tax lifestyles. They were used to living with more money. Normally the decrease in consumer income would simply require a period of transition but now whenever they ran out of money they could just pull out their credit cards. Banks took advantage of this in the same way that mortgage brokers did.

The idea was to keep them in debt so they’d continue paying money. In fact, banks use the term “dead beat,” to describe customers who pay off their credit card debt ever month because it prevents the bank from making addition money of said customer. However, what we ran into was collective delusion. People, because they had credit cards, were convinced they could afford to live as if they still had their higher income. As a result they were willing to pay more for merchandise so the inflation didn’t go down as the availability of money did.

This is what caused the economic crises. (Among other factors, such as the Bush administration’s failure to provide government oversight.) In other words, the inflation is our fault because we decided the items were worth more because we –thought- we could afford more than we really could. THAT’S what people mean when they blame the average Joe.

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Posted 5/31/09

SeraphAlford wrote:





So the bottom line is that... the recent economic recession happened because we used the debt service too much, therefore, depleting goods, because people haven't adjusted to bill clinton's decision to suddenly raise up taxes.

well could be. could be. that's plausible. very pro-conservative but plausible indeed.

but you know what's even more plausible? maybe the US is in deep recession from the fed's string of bad decision to have to keep having expensive (2 trillion dollars) bail outs for broke banking institutions like fannie and freddie. Which stems from it's (the fed) insistence to keep an unsound banking practices like the fractional-reserve system that makes those banking institution's risky investments even more riskier. (sub-prime mortgage derivatives)

Guess who's gonna pay for those bail-outs? Yep. The tax-payers. Adds more to the national debt. Fed just swap those 2 trillion dollars for a US treasury bond. And voila those banks are back in operation. And you know this is a fact too. It's all over the news.

But. I will not be audacious enough to say that the government was the cause of inflation. Because, as we all know. The government always have their people's best interest at heart. Surely.

But with the creation of this.. 2 trillion dollars suddenly floating into the circulation. Do you really think those 2 trillions contributed nothing to inflation a.k.a when the money loses it's purchasing power?
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Posted 5/31/09 , edited 5/31/09

supermalv wrote:


But regardless of the volatility of the GDP growth, recessions still happened.

And recessions is one of the worst thing that can happen to the economy. So that means central bank isn't doing much to prevent economical disaster like recessions am i correct?

Let me phrase this as exact as i could. The creations of central banks. Doesn't help prevent economic crisis. Or am I still wrong in saying this?

Do you know anything about collateralized mortgage obligations? Anything at all? CMOs and other mortgage backed securities wound up going sour and taking down the US financial and world markets.

CMOs are not something the central banks have been allowed regulate. They're a special "subsidiary company" set up by various banks and lending institutions( like Fannie Mae), which don't have to be run like a bank, or even be well capitalized. Since they're treated as derivative securities they fall under a particular accounting standard known as mark-to-market which basically enables banks to take massive write offs on them if they can't be sold, even if the CMO isn't necessarily losing the bank that owns it any money. So, the losses they have stated aren't necessarily losses in the strictest of senses. They're "accounting" losses. Not economic losses.

Of course, if a CMO is a company with money of it's own, it can default on it's debt as well. Which is where we come to the idea of asset-liability management. CMOs tried to use mortgages as assets to create a guaranteed income stream for it's creditors. Insitutions like pensions, mutual funds, insurance companies were the creditors of these CMOs.


I understand but if they implement full-reserve banking that wouldn't happen in the first place won't it?

They won't have deposit holders. Money-lending institutions will essentially be their own deposit holder. Therefore, eliminating the need of central bank.

The fractional-reserve banking is potentially inflationary. Because what they're doing is essentially expanding the money supply. So instead of supporting fractional-reserve banking by having expensive bailouts, why not just eliminate fractional-reserve banking altogether?



I'll be pretty blunt. You yourself have benefited tremendously from fractional reserve banking. Society as a whole has benefited and would look remarkably different if this system were eliminated. Your entire life has been built on debt. the school you went to, the roads you drive on, the business you work at, the home you live in. Hell, even the clean water you drink and the energy you use to run your computer is created because people borrowed to do business. If you took away banking from society, people wouldn't be able to get enough resources together to get any of it accomplished. It's because the risk of lending is too high for individuals. We'd all be back to farming.

That said, certain companies should be required to have more reserves. The CMOs that broke the market are technically independent companies of banks, so they're not regulated the same way. I'm pretty sure they don't have to have any reserves. Most CMOs probably had some reserves, but did not carry enough to ward off the risk of rising defaults. Then, the subprime mortgage crisis comes, defaults on mortgages rise and defaults by CMOs rise. Some CMOs go bankrupt. Others have strong parent companies which can absorb the loss.

Fannie Mae and Freddie Mac actually made a ton of these CMO things. Look at where they are now.
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Posted 5/31/09 , edited 5/31/09

supermalv wrote:

So the bottom line is that... the recent economic recession happened because we used the debt service too much, therefore, depleting goods, because people haven't adjusted to bill clinton's decision to suddenly raise up taxes.


Did you even read my post, or just skim it? Like I said, there are many factors in play here. Neither conservatives nor liberals are faultless.


but you know what's even more plausible? maybe the US is in deep recession from the fed's string of bad decision to have to keep having expensive (2 trillion dollars) bail outs for broke banking institutions like fannie and freddie. Which stems from it's (the fed) insistence to keep an unsound banking practices like the fractional-reserve system that makes those banking institution's risky investments even more riskier. (sub-prime mortgage derivatives)


A man pulls the trigger to his 45 while it points in your direction. Now if somebody asked me how you died I would of course go to the first source and say it was the man. That’s common sense, so why are you blaming the bullet? The Bail Outs would’ve never been necessary if it weren’t for the factors I was discussing in my previous post.

Do you even know what Fannie Mae is? It’s FNMA’s common name. The Federal National Mortgage Association was founded in 1938 as a part of FDR’s New Deal system. The hope was to extend mortgage to lower income families. In 1999 Clinton signed a bill allowing commercial banking firms to offer risky investment services. He also pressured Fannie Mae to extend mortgage loans to less-credit-worthy buyers.

Daniel Mudd, CEO of Fannie Mae, later testified to his protests: “We also set conservative underwriting standards for loans we finance to ensure the homebuyers can afford their loans over the long term….”

But, they were no long to do this because they’d been forced by the Clinton administration to extend those loans. Without this available the people would not have been able to attain the loans they could not afford. In this way the government is at fault, but at the same time the people should’ve been more responsible for their own money and do not have the right to blame the government for their own irresponsible spending. Inexorable the company broke because the buyers could not afford to pay their loans. As a result we were forced to bail them out so as to avoid economic upheaval that would make this recession look like the Regan era.


Clinton has actually admitted that he’d know his plans were risky and that they’d back fired defending himself by saying: “But let's go back to where we were at the time. At the time, they had lots of money, were making lots of money…. And, at the time, we had a balanced budget and a surplus and a rapidly growing economy in other areas.”


Guess who's gonna pay for those bail-outs? Yep. The tax-payers. Adds more to the national debt. Fed just swap those 2 trillion dollars for a US treasury bond. And voila those banks are back in operation. And you know this is a fact too. It's all over the news.


Oh, yes, and the news would NEVER overly simplify a complex issue to make it more approachable to the average audience.


But. I will not be audacious enough to say that the government was the cause of inflation. Because, as we all know. The government always have their people's best interest at heart. Surely.

But with the creation of this.. 2 trillion dollars suddenly floating into the circulation. Do you really think those 2 trillions contributed nothing to inflation a.k.a when the money loses it's purchasing power?


I never said that, and honestly I'm starting to question your reading comprehension. Like I said, there are many factors. I was simply explaining how somebody can blame the American people-who DO hold some of the responsibility rather you like to admit it or not.

If you want to know who’s really responsible for the economic recession:



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Posted 5/31/09

crazykl45 wrote:

Do you know anything about collateralized mortgage obligations? Anything at all? CMOs and other mortgage backed securities wound up going sour and taking down the US financial and world markets.

CMOs are not something the central banks have been allowed regulate. They're a special "subsidiary company" set up by various banks and lending institutions( like Fannie Mae), which don't have to be run like a bank, or even be well capitalized. Since they're treated as derivative securities they fall under a particular accounting standard known as mark-to-market which basically enables banks to take massive write offs on them if they can't be sold, even if the CMO isn't necessarily losing the bank that owns it any money. So, the losses they have stated aren't necessarily losses in the strictest of senses. They're "accounting" losses. Not economic losses.

Of course, if a CMO is a company with money of it's own, it can default on it's debt as well. Which is where we come to the idea of asset-liability management. CMOs tried to use mortgages as assets to create a guaranteed income stream for it's creditors. Insitutions like pensions, mutual funds, insurance companies were the creditors of these CMOs.


That's a very valid point.

But I just want to point out that.. it doesn't matter if they loan it through CMO or directly, they still did something to the depositor's money. That's something that the fed CAN regulate.

(This is unrelated btw. Uhmm.. Do they still allow the bank to loan out sub-prime mortgages? It's been said that's the cause of the problem right? Are they still legal for banks to do so? I hope not. That'll be very unwise to do so)


I'll be pretty blunt. You yourself have benefited tremendously from fractional reserve banking. Society as a whole has benefited and would look remarkably different if this system were eliminated. Your entire life has been built on debt. the school you went to, the roads you drive on, the business you work at, the home you live in. Hell, even the clean water you drink and the energy you use to run your computer is created because people borrowed to do business. If you took away banking from society, people wouldn't be able to get enough resources together to get any of it accomplished. It's because the risk of lending is too high for individuals. We'd all be back to farming.

That said, certain companies should be required to have more reserves. The CMOs that broke the market are technically independent companies of banks, so they're not regulated the same way. I'm pretty sure they don't have to have any reserves. Most CMOs probably had some reserves, but did not carry enough to ward off the risk of rising defaults. Then, the subprime mortgage crisis comes, defaults on mortgages rise and defaults by CMOs rise. Some CMOs go bankrupt. Others have strong parent companies which can absorb the loss.

Fannie Mae and Freddie Mac actually made a ton of these CMO things. Look at where they are now.


I'll address the first point first.. fractional reserve banking does make credit more easily available. Now I know you've been trying to say that recession and fractional reserve banking aren't related. And some of these explanations have been quite valid indeed.

But regardless how banks loan out their depositor's money (whether through CMO or directly). You can't take away the fact that it does mutliply the risk they take 9x.

Moreover, I apologize if I sound crude but isn't that exagerating too much? Like uhh.. it almost sounds like you're saying money-lending won't exist at all if full-reserve is implemented. Now correct me if I'm wrong but.. Banks have existed up to the 1800 without implementing the fractional-reserve banking. You know. The goldsmiths with their gold vaults.

If we were doing just fine for so long without fractional-reserve back then (and obviously the 1800s weren't full of people that only do farmings). Then how can you say that we'll go to the catastrophe without it now? I just don't understand.

I can't see why people should trade the risk of potentially bailing out 2 trillion dollar debt, for a way-too-easy-to-get credit due to fraction-reserve. The effect is still the same. We'll appear prosperous with all the roads and the school and the healthcare(?) etc. But at the price of going bankrupt and lots of unemployment later?

Anyway. With the second point.

I agree wholeheartedly. If full-reserve can't be implemented, they should at least rise the fraction of the deposits by like.. heaps.. 50 or 60 percent or something.

And what's more is that.. Banks shouldn't be affiliated with these risky investment firms because we see what happen now with the real estate market crash. The feds should NOT oversee something like this again! it's 2 friggin trillion dollar loss. It's not like a million or two. This is some serious stuff that they can't afford to just say.. whoopsie, didn't see that coming.
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Posted 5/31/09

SeraphAlford wrote:

Did you even read my post, or just skim it? Like I said, there are many factors in play here. Neither conservatives nor liberals are faultless.


No I actually did read the whole post. I usually summarize long posts just to clarify if I get the other person's point of view correctly. I'm guessing I didn't? lol


A man pulls the trigger to his 45 while it points in your direction. Now if somebody asked me how you died I would of course go to the first source and say it was the man. That’s common sense, so why are you blaming the bullet? The Bail Outs would’ve never been necessary if it weren’t for the factors I was discussing in my previous post.

Do you even know what Fannie Mae is? It’s FNMA’s common name. The Federal National Mortgage Association was founded in 1938 as a part of FDR’s New Deal system. The hope was to extend mortgage to lower income families. In 1999 Clinton signed a bill allowing commercial banking firms to offer risky investment services. He also pressured Fannie Mae to extend mortgage loans to less-credit-worthy buyers.

Daniel Mudd, CEO of Fannie Mae, later testified to his protests: “We also set conservative underwriting standards for loans we finance to ensure the homebuyers can afford their loans over the long term….”

But, they were no long to do this because they’d been forced by the Clinton administration to extend those loans. Without this available the people would not have been able to attain the loans they could not afford. In this way the government is at fault, but at the same time the people should’ve been more responsible for their own money and do not have the right to blame the government for their own irresponsible spending. Inexorable the company broke because the buyers could not afford to pay their loans. As a result we were forced to bail them out so as to avoid economic upheaval that would make this recession look like the Regan era.


Clinton has actually admitted that he’d know his plans were risky and that they’d back fired defending himself by saying: “But let's go back to where we were at the time. At the time, they had lots of money, were making lots of money…. And, at the time, we had a balanced budget and a surplus and a rapidly growing economy in other areas.”


That's great. I didn't know that.


I never said that, and honestly I'm starting to question your reading comprehension. Like I said, there are many factors. I was simply explaining how somebody can blame the American people-who DO hold some of the responsibility rather you like to admit it or not.


cool!
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