25
Aug
2011
Is This the Inflationary Big One?
I elaborate on the trends in excess reserves and money stock that Wenzel first noted. If for no other reason, you should click the link to see the graphic they put with the article.
5 year inflation swaps: http://www.bloomberg.com/apps/quote?ticker=USSWIT5:IND
10 year Fed TIPS breakeven: http://www.bloomberg.com/apps/quote?ticker=USGGBE10:IND
Treasury yield curve: http://www.bloomberg.com/markets/rates-bonds/government-bonds/us/
Hmmm. HIstorically low interest rates, yet low and falling inflation…. It’s not like this has been the pattern for years.
Right David S., and I think bonds are in a bubble. Maybe I’m wrong, but telling me bond prices are high–and that “the market” expects them to remain high–doesn’t prove me wrong.
Well, the bond prices are controlled by the Fed, so I have no idea how they can be in a bubble unless high inflation becomes a problem, which it hasn’t since 1983.
How many years do you have to be wrong before you throw out your model?
David S. wrote:
Well, the bond prices are controlled by the Fed, so I have no idea how they can be in a bubble unless high inflation becomes a problem, which it hasn’t since 1983.
OK, so now we come to your real critique. If you’ll permit me to paraphrase:
“Bob you unscientific moron! You’re warning that we’re going to have the worst inflation in decades. But that will only happen if we have the worst inflation in decades. You’re so stupid.”
ROFLMFAO. You are really patient and a tad too civil for some people.
” Is This the Inflationary Big One?”
No. But I give you credit for showing you’re cards.
“I think bonds are in a bubble”
How can an asset when principle and interest is known and guaranteed can be in a bubble?
What’s funny Mr. Murphy is this essay has some MMT taint to it. Great progress! Who said you can’t teach an old dog new tricks 🙂
I do, however, believe you are doing your readers a great disservice by not pointing this out.
http://www.google.com/hostednews/ap/article/ALeqM5jk-288HA_BrYFziVcx_TefY1OgrQ?docId=dde4d2d1a118426d80f6d0f411998cbd
You gloss over this when you say ‘some economists would look at the above chart and see people pulling new money into existence’ but it’s pretty clear when you pay close attention to bank behavior the reality is the banking system is being flooded with very expensive deposits, and required reserves can spike from risk aversion as much as it can from loan growth.
How can an asset when principle [sic] and interest is [sic] known and guaranteed can [sic] be in a bubble?
Current bond yields do not reflect the likelihood that either the principal won’t be repaid, or will be repaid in much, much cheaper dollars. That is why it’s a bubble.
Among other reasons, the Treasury could create an unlimited amount of treasury bonds if it chose to, so by definition, a bubble is impossible.
AP what in the world are you talking about? I’m saying I think US Treasury yields are going to spike at some point in the next 5 years, such that people holding them are going to get crushed when it happens. (Maybe not every last person, who can afford to hold them to maturity, but a lot of people who will see the value of their assets drop sharply in a day.)
To prove how wrong I am, you’re saying that the Treasury can always enter the markets and try to borrow an infinite amount of money? (!)
That does appear to be a recurrent theme, not just AP Lerner but others as well. Fundamentally, that’s what the big question really is, “Does the barrel have a bottom?”
Common sense would say, yes every barrel has a bottom, but then the counter argument comes back, “this is a very big barrel”. I’ve watched this circle round for months now.
“To prove how wrong I am, you’re saying that the Treasury can always enter the markets and try to borrow an infinite amount of money? (!)”
Yes, since the treasury spends first, then ‘borrows’ second. Thus, the ‘borrowing’ is nothing more than a reserve drain. I thought you boned up on MMT? Treasury bonds fund exactly zero spending. Zero. Zippo. It’s a monetary operation.
This actually goes back to the very first time I posted on your blog. How did the Treasury fund TARP without increasing taxes and/or borrowing before? The bill was passed, and a huge check went out the door before treasury auctions were increased and deficits were already rather large.
Falling inflation?
PPI has gone from 3.6% in January to 7.2% in July
CPI has gone from 1.6% in January to 3.6% in July
If that’s falling I would hate to see rising inflation. I think you might need some help looking at numbers and graphs.
Dan, lol. you guys need to learn how science works. tell me when you can quit your job because you are a day trader.
(Thanks everyone, that was my impression of David S. Next up: Imagine Elvis at a Mises Circle. I think it would go a little something like this…)
The issue with focusing too much on the PPI is it leaves out the largest piece of producers cost structures: labor costs. This is why there is very little relationship between PPI and CPI. It helps to dig a little deeper into the details of these data releases vs. just focusing on the headlines.
I do dig into the details every time I look at my expenses rising.
The data you quote looks pretty unconvincing to me Bob. Excess reserves are down 0.3% from the first entry in the table to the last. It looks like it just leveled off, not started to drop. Am I missing something? Is there some reason the excess reserves should be continuing up, so that leveling off is a drop vs this expected baseline or something?
That said, I see that the fed just added the August 24th data point which is clearly down, making things look more ominous.
Have you ever heard of anyone actually talking to the banks and trying to find out directly what their policies are and when/if they have changed lending policy? Are we talking about a handful of huge banks that have most of those reserves, or is it distributed across 1000’s of banks?
In all seriousness, he can’t even interpret a simple graph. Numbers, graphs, and pretty much anything that can qualify as evidence is completely foreign to these extremist Austrians/supply-siders.
required reserves jumped up to 81635 with today’s numbers
excess reserves dropped to 1577806 with today’s numbers
M2 13 week SA is climbing at 12.7% (it was 5.1% on the June 30th report) with today’s numbers
It sure looks like excess reserves are leaking into the system and causing M2 to soar from the data were seeing.
Look, you don’t understand the transmission mechanisms of monetary policy, so give it up. Forward-looking inflation metrics are falling, so what do you think your clumsy observation’s worth?
Well if I’m right about inflation continuing to get worse than it will be worth a little something to me.
So, in your opinion, the CPI and PPI will be lower in December than they are now?
“When the Fed buys an asset, it writes a check on itself. This action creates new electronic reserves in the banking system. For example, if the Fed buys $10 million in mortgage-backed securities from Joe Smith, then Smith will deposit the check in his own checking account. His bank will credit Joe Smith’s checking balance by $10 million, but at the same time the bank’s account with the Fed itself will rise by $10 million too.”
Mr. Murphy, you do realize you have just proven what I have been saying all along, that QE is nothing more than an asset swap, and it does not add net new financial assets to the private sector, right? Joe Smith starts with $10M in assets, and ends with $10M in assets. No change in net assets. Yes, his interest income and duration composition are different, but no net new financial assets have been created. Why you think this is inflationary is beyond me, but it appears you have finally realized the Fed does not simply print money, but actually performs asset swaps. MMT is rubbing off on you!!!
He is about to come out of the closet.
Are the total amount of dollars and credit (represented as federal reserve notes, electronic entries, fiduciary media, etc) increasing?
M2 is soaring over the last two months
Because of this
http://www.google.com/hostednews/ap/article/ALeqM5jk-288HA_BrYFziVcx_TefY1OgrQ?docId=dde4d2d1a118426d80f6d0f411998cbd
Really? Explain why the last 3 reported weeks have shown falling DD and rising M2.
August 1, DD=712.9 and M2=9156.1
August 8, DD=704.7 and M2=9195.7
August 15, DD=693.2 and M2=9234.8
So DD have decreased at almost a 50% annualized basis over the past 3 weeks.
M2 has increased at almost 15% annualized over the past 3 weeks.
It was an asset swap where IOU notes backed by strapped householders losing their jobs (i.e. junk mortgages) were swapped for equal denomination of IOU notes backed by the Federal Reserve (and ultimately backed by US government tax collection).
If the mortgage debt had been marked to market (as per standard accounting practice) it would have cost the Fed a lot less, and cost the banks a lot more.
Some may disagree with Bob about inflation, but we must all agree that the image with the article was worth the click. It certainly made me smile.