An explanation of the problems with the banking system.

[carmen510]

Well, your bankruptcy policy has one flaw:

Not Doing Anything will cause the bankruptcies, in which we let the banks taking huge amounts of risks fail, thereby eliminating these debts but causing a huge deficit of consumer confidence, lengthening the recession and probably making it worse.

So we get stuck with 2 or 1 if we don't wish to lengthen the recession. However, remember that while this recession may seem like the end of the world, it will get better. That has been the case for nearly every economic crisis since they were happening.

 

[Neomega]

Perhaps, but inflation is much, much easier to contain than deflation. Contrast Volker's success in 1981 with Japan's 'lost decade'. I'd rather see inflationary pressures than deflationary pressures.

Is there any particular reason you prefer U6 over U3 in the unemployment statistics?

America suffering through a period like Japan's lost decade would be better than the hyperinflation we will encounter, and depression any way.

Not Doing Anything will cause the bankruptcies, in which we let the banks taking huge amounts of risks fail, thereby eliminating these debts but causing a huge deficit of consumer confidence, lengthening the recession and probably making it worse.

That has been the case for nearly every economic crisis since they were happening.

Nothing like this has ever happened, this is not natural, nor normal, nor do the current actions of the US Fed have any positive outcomes in history, the only outcome, when something like this is done, is hyperinflation.

Does that graph make it look like we are doing anything that has been done before, on any level?

 

[Gogf]

i am a teenager. i would be willing to bet that i know more about stock exchanges than 95% of the population of the UK. since the "experienced" pundits don't know what's going on, how about letting someone else try to explain? this is ignorant and ageist. don't discount information on the premise that the person saying it is young, or old or liberal or conservative. judge on the quality, evidence and relevance of the information.

get off your high horse and stop judging the book by its cover.

Except that "as an investor..." is an ethical appeal and therefore invites exactly the kind of criticism LightFang made.

 

[Teeninvestor]

Perhaps, but inflation is much, much easier to contain than deflation. Contrast Volker's success in 1981 with Japan's 'lost decade'. I'd rather see inflationary pressures than deflationary pressures.

Is there any particular reason you prefer U6 over U3 in the unemployment statistics.

I was just pointing out that U6 was available as well. Inflation is not necessarily easy to contain; Remember, the 1970's were a decade lost to inflation as well. It wasn't exactly the best. and the 1970's were not hyperinflation. Hyperinflation would wipe out the liquid wealth of the US. Put it simply- all SS trust funds, savings, 401k's, etc... ALL ZERO.

 

[Cutlass]

If we have hyperinflation, we will have not only that but also the destruction of our currency, as well as the loss of foreign investors of any faith in our "financial system" whatsoever. All the liquid wealth of this country will be wiped out.

You keep making assumptions that a hyperinflation will just be pushed year after year after year. There is simply nothing to back that up that assertion. Nothing that has happened so far, or is expected to happen, or that the government has any likelihood to do in the future, is likely to result in hyperinflation. In the long run the government, and the Federal Reserve system, is far more dedicated to keeping inflation in check than they are to let it run wild. They are even prone to excessive inflation fighting at the expense of their other responsibilities. That is one thing that happened during the Great Depression.

Maybe there will be inflation. In the long run there is always some. And as long as it is low, it's not really harmful. Even if it's temporarily higher, that's not a disaster.

Deflation, on the other hand, cannot really be combated by any tool available to the government. And long term stagnation is the best case scenario for what happens when you have deflation. Depression is a very strong possibility.

During deflation personal and business income fall. But loans are made in nominal dollars. What that means is that the real costs of loans go up as the currency deflates. And that means that more and more loans are forced into default, and more and more banks and other financial institutions will become insolvent.

With inflation, the real costs of loans declines over time. Which means that the loans can be more easily repaid. banks, unsurprising, don't like this. But the loans get repaid, and the banks stay in business.

Accounting is really unforgiving on this point. Either the loans are repaid, or banks can't survive.

Now in both deflation and inflation lending eventually slows, and then stops if it gets too much out of control. But lending can continue and banks can remain solvent with fairly significant inflation. It cannot with deflation.

The reason, in part, that the foreign exchange rate of the US$ has not collapsed, despite all the extra spending, is that the US has historically been pretty good at getting it's inflation under control compared to other nations. And there's really no reason to think that in the long run that we won't reestablish that.

I was just pointing out that U6 was available as well. Inflation is not necessarily easy to contain; Remember, the 1970's were a decade lost to inflation as well. It wasn't exactly the best. and the 1970's were not hyperinflation. Hyperinflation would wipe out the liquid wealth of the US. Put it simply- all SS trust funds, savings, 401k's, etc... ALL ZERO.

If inflation is too high for too long, assets denominated in constant dollars lose their value. But stocks will go up to match other price levels. There are a lot of reasons that inflation stayed high through the 70s. But sometimes these things happen, and nothing can be done about it. With deflation wealth is wiped out as well.

So the question becomes were do we stand to lose the least. And the way we stand to lose the least is to prevent deflation and depression, get the banks back on a sound footing, and get the world economy growing again as soon as possible. And just live with the consequences of whatever inflation we can't stop.



OTOH, in my more bitter moments, I can't help but think that people with the most saved dollars are responsible for creating this mess, so they deserve what they get.

 

[Teeninvestor]

OTOH, in my more bitter moments, I can't help but think that people with the most saved dollars are responsible for creating this mess, so they deserve what they get.

This is the kind of thinking that got us into this depression. If our government had been fiscally responsible and saved like China and Japan, and our people prosperous and saving, then no depression can harm us.
Think about it. If everyone has saved 2 yrs' income, and our politicians didn't spend out of control, what kind of depression can harm us?

If inflation is too high for too long, assets denominated in constant dollars lose their value. But stocks will go up to match other price levels. There are a lot of reasons that inflation stayed high through the 70s. But sometimes these things happen, and nothing can be done about it. With deflation wealth is wiped out as well.

No its value is increased. That's the whole point of deflation.

Now in both deflation and inflation lending eventually slows, and then stops if it gets too much out of control. But lending can continue and banks can remain solvent with fairly significant inflation. It cannot with deflation.

Deflation will destroy our banking system. Inflation will destroy the wealth of the people + destroy our banking system indirectly by foreign investors losing faith in it. The banking system can always be reestalished as long as there are savers. It takes a generation to recreate the wealth that is destroyed through hyperinflation. US dollar's gold standard collapsed in 1971; the dollar's value has plunged since.

Anyways, I tend to think since at least we "proclaim" we are a free market economy, lets actually try to be one and reward the ones who were diligent and hardworking! eh?

Perhaps, but inflation is much, much easier to contain than deflation. Contrast Volker's success in 1981 with Japan's 'lost decade'. I'd rather see inflationary pressures than deflationary pressures.

If inflation gets out of control it will eventually result in the destruction of all liquid wealth. The only recovery that can result is using foreign currency, which will show to the world the US is crumbling. New nations, who work and save and compete, will replace us easily. Deflation on the other hand, rewards diligent savers, who will at one point invest in a house whose price is too low, or a stock at 52 week low. Eventually, this will encourage investment and recovery.

Except that "as an investor..." is an ethical appeal and therefore invites exactly the kind of criticism LightFang made.

Investor is a guy who puts money into a company. That's about it.

 

[civhelp121]

"Deflation on the other hand, rewards diligent savers, who will at one point invest in a house whose price is too low, or a stock at 52 week low. Eventually, this will encourage investment and recovery."

Deflation rewards nobody. Deflation is accompanied by massive layoffs and failing buisnesses, if someone who saves a large amount of money gets fired, then all their dillagence will not do them anything since nobody can survive on savings alone.

 

[Teeninvestor]

Deflation rewards nobody. Deflation is accompanied by massive layoffs and failing buisnesses, if someone who saves a large amount of money gets fired, then all their dillagence will not do them anything since nobody can survive on savings alone.

You think businesses will not go bankrupt during hyperinflation????

 

[Cutlass]

it doesn't occur to you that if you build up equity in an asset, like a house or a business, and you have deflation, that all that equity is taken away?

Deflation redistributes wealth just as much as inflation does. Only it destroys wealth even more thoroughly. The main difference being that deflation redistributes wealth towards the people who caused the deflation while inflation redistributes wealth away from the people who caused the inflation.

A lot more justice that way.

Do try to keep in mind while you are so concerned with the value of our foreign debt that under your deflation plan we would have no choice but to default on the debt as a whole.


As for the pre-crisis debt, you'll get no argument from me (or most people around here) that is was extremely irresponsible. However all that debt was created for the purpose, and all it accomplished, was to redistribute wealth into the hand of the people who's wealth you are so determined to protect now. Inflation would actually help the future generations pay for what was taken from them.

What you are proposing is morally equivalent to a thief coming into your house and stealing something, and then the thief goes to the police to report it, and the police escort the thief back to your place and helps him take some more.

 

[Teeninvestor]

As for the pre-crisis debt, you'll get no argument from me (or most people around here) that is was extremely irresponsible. However all that debt was created for the purpose, and all it accomplished, was to redistribute wealth into the hand of the people who's wealth you are so determined to protect now. Inflation would actually help the future generations pay for what was taken from them.

What you are proposing is morally equivalent to a thief coming into your house and stealing something, and then the thief goes to the police to report it, and the police escort the thief back to your place and helps him take some more.

The debt redistributed wealth into the hands of people who DESERVED it. WHO WORKED AND SAVED AND ARE THE BACKBONE OF THE COUNTRY. Inflation would destroy the credit of our country(or what's left of it) and what will happen is that America will just be another empire swept into the trash bin. All that we have that is competitive is the USD- we get wealth "redistributed" from Japan, China, that way. By getting them to finance us through treasuries. If hyperinflation were to occur and all that investment from foreign countries were to be wiped out as well as the wealth of the people- what will be left of America???

A broken manufacturing industry that can't compete on the world market???? A dollar that has no value whatsoever???? A collapsed social welfare system???(Since all social security funds will be wiped out)???? Can you imagine the carnage???
I doubt America can even survive as a nation after this turmoil.

Deflation on the other hand, is something we've been through before. And we know how to combat. By wiping the banking system free of bad loans and reselling to the world market, we will restore and reward good financial practices. We will be honest with taxpayers'money. By punishing debt-taking behavior and rewarding saving, we will restore this country's work ethic. That is the only thing that can keep America even afloat.

As for the pre-crisis debt, you'll get no argument from me (or most people around here) that is was extremely irresponsible. However all that debt was created for the purpose, and all it accomplished, was to redistribute wealth into the hand of the people who's wealth you are so determined to protect now. Inflation would actually help the future generations pay for what was taken from them.

The moral thing to do is to repay your debts and not take the money of others, as America has too long depended on.

Deflation redistributes wealth just as much as inflation does. Only it destroys wealth even more thoroughly. The main difference being that deflation redistributes wealth towards the people who caused the deflation while inflation redistributes wealth away from the people who caused the inflation.

Well geez I suppose not paying for another guy's mortgage is morally wrong....

Do try to keep in mind while you are so concerned with the value of our foreign debt that under your deflation plan we would have no choice but to default on the debt as a whole.

As Adam Smith said, hyperinflating your way out of debt will leave you ruined as a nation. The US can't continue like this, relying on credit from others.

 

[Cutlass]

The debt redistributed wealth into the hands of people who DESERVED it. WHO WORKED AND SAVED AND ARE THE BACKBONE OF THE COUNTRY. Inflation would destroy the credit of our country(or what's left of it) and what will happen is that America will just be another empire swept into the trash bin. All that we have that is competitive is the USD- we get wealth "redistributed" from Japan, China, that way. By getting them to finance us through treasuries. If hyperinflation were to occur and all that investment from foreign countries were to be wiped out as well as the wealth of the people- what will be left of America???

A broken manufacturing industry that can't compete on the world market???? A dollar that has no value whatsoever???? A collapsed social welfare system???(Since all social security funds will be wiped out)???? Can you imagine the carnage???
I doubt America can even survive as a nation after this turmoil.

Deflation on the other hand, is something we've been through before. And we know how to combat. By wiping the banking system free of bad loans and reselling to the world market, we will restore and reward good financial practices. We will be honest with taxpayers'money. By punishing debt-taking behavior and rewarding saving, we will restore this country's work ethic. That is the only thing that can keep America even afloat.



The moral thing to do is to repay your debts and not take the money of others, as America has too long depended on.



Well geez I suppose not paying for another guy's mortgage is morally wrong....

The debt took money from people not even born yet and gave it to worthless parasites who wasted every friggin penny of it. There is no evidence that even one penny of the $10 trillion debt run up under 3 Republican presidents since 1981 was ever invested. There was no work to earn it. There was only elect corrupt and incompetent policitos to take it from others.

[bitter moment] you elect economic laissez faire conservatives, and a rational person expects the economy to go to hell in a handbasket. This is the choice that they made: this is the results that they got. If they don't like the results that they got, then maybe next time they'll think of the consequences of their actions. I doubt that though, because the most notable character trait of such people is an utter disregard for anything resembling personal responsibility.

But the real point is, they should be the absolute last people we give a damn for. This is their fault. Why should the rest of us pay the price for their greed and laziness? They should suck it up and deal with it. [/bitter moment]

 

[Teeninvestor]

you elect economic laissez faire conservatives, and a rational person expects the economy to go to hell in a handbasket. This is the choice that they made: this is the results that they got. If they don't like the results that they got, then maybe next time they'll think of the consequences of their actions. I doubt that though, because the most notable character trait of such people is an utter disregard for anything resembling personal responsibility.

To be fair, I am not a republican supporter. In fact, though I dislike both parties in the US(I live in Canada) I tend to think the democrats are better. At least they are honest in that they are wasting the public's money. Bill Clinton, in my opinion, was a relatively excellent president.

The Republican party is not even close to laissez faire. If US had real laissez faire, they wouldn't be in this predicament. The US should solve its problems by first passing some spending /debt controls- this is something every country should pass. Put spending under control, put debt under control and please repeal some of the thicket of unaffordable social programs and corporate subsidies we've passed so we can actually repeal this debt. I prefer repealing subsidies(such as the ones to GM). Oh ya, and please make the money supply fixed- if theres one thing we've learned, its the Fed can't control money correctly. Oh ya, and save 5% of income every year- this will give gov more leverage during a depression(they can self-finance during these years, giving the people a gigantic tax cut).