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Maybe it is not an anomaly, but a message: the huge amount of liquidity pumped into the system is going to break soon in the form of hyperinflation. [0] [0] ht

Maybe it is not an anomaly, but a message: the huge amount of liquidity pumped into the system is going to break soon in the form of hyperinflation. [0] [0] https://www.google.de/amp/s/seekingalpha.com/amp/article/4045250-velocity-money-mean-u-s-inflation https://www.google.de/amp/s/seekingalpha.com/amp/article/404...

partiallypro 8y ago
The Fed is planning to shrink its balance sheet by $2 Trillion between now and 2022. They've already shrunk it by almost $350 billion (basically, shredding digital cash.) It is more likely the global economy is more fragile than the Fed realizes (due to China) and we will experience asset deflation, not inflation. We likely (imo) won't see any significant velocity of money changes in the US until well after the unwind is complete. Because banks, while flush with cash, are still hesitant to lend during the unwind and high yield credit markets are not doing well at all. I suspect we could see a mild recession with little Fed action other than just pausing their unwind for a while, unless there is some serious crisis (which I can't see happening unless the high yield credit market were to completely implode.) One problem that could allow that to happen, is if oil were to completely and utterly nosedive and make a lot of oil service companies with high debt loads default. Again, I doubt this. I am not a doom and gloomer, I think we are about to enter a recession/bear market but the "great recession" has gotten something in people's heads that every recession must be a systemic collapse instead of a resource reallocation...
- ryacko 8y ago
  If we have deflation with rising incomes, there would be no issue. If there is deflation with declining incomes, it would create a downward spiral, potentially.
  - partiallypro 8y ago
    Real incomes have fallen during/after virtually every US recession; at least in -real- terms. Nominal incomes almost never fall and just remain flat. Monetary theory is complex, but what the flow of credit remains in tact. https://fred.stlouisfed.org/series/MEHOINUSA672N https://fred.stlouisfed.org/series/MEHOINUSA672N https://fred.stlouisfed.org/series/MEHOINUSA646N https://fred.stlouisfed.org/series/MEHOINUSA646N The only way I can see hyperinflation in the US is some cataclysm or inability to service debt through normal means. Most countries that have hyperinflation generally have massive debt loads they are printing out of with no economic output to back it up. They also are usually very centrally planned economies or war torn.
    - ryacko 8y ago
      Not necessarily, the whole reason we invaded Iraq was to maintain the petrodollar. The Saudis would be richer if they unpegged the Riyal and exclusively sold their oil in their currency. The world is essentially the US economy.
    - ThrustVectoring 8y ago
      When employers contract their payroll, they do so with layoffs rather than pay cuts. The reasons for this are fairly complex, but if we take this as a given it implies a lot about our monetary policy. Specifically, it argues for something like NGDP targeting, so that employers as a whole continue to have enough money to avoid layoffs even as total real wages decline.
- gammateam 8y ago
  Bonds also mature. The Federal Reserve’s balance sheet primarily contains bonds. They just get the principle back and the balance sheet is reduced. They dont have to sell on the open market.
AnthonyMouse 8y ago
That article (from just shy of two years ago) seems flawed. The premise seems to be that higher interest rates would increase the velocity of money, which would cause a lot of inflation given the current (large) money supply and low velocity. But higher interest rates reduce inflation, because their dominant effect is to cause people to borrow (i.e. create) less money, or pay back (i.e. destroy) money they've already borrowed, as soon as the interest rate exceeds the time value of the thing they borrowed the money to do. That does increase the average velocity of money, because the money that gets not-borrowed or destroyed is the money with the least productivity, i.e. the money that was just sitting around doing nothing. The lowest velocity money. So when that money is destroyed, the average velocity of the remaining money is higher. But the average velocity of the remaining money hasn't actually changed, you've just destroyed the lowest velocity money. V times M is lower, not higher, because the dominant consequence is less M, not more V.

partiallypro 8y ago

The Fed is planning to shrink its balance sheet by $2 Trillion between now and 2022. They've already shrunk it by almost $350 billion (basically, shredding digital cash.) It is more likely the global economy is more fragile than the Fed realizes (due to China) and we will experience asset deflation, not inflation. We likely (imo) won't see any significant velocity of money changes in the US until well after the unwind is complete. Because banks, while flush with cash, are still hesitant to lend during the unwind and high yield credit markets are not doing well at all. I suspect we could see a mild recession with little Fed action other than just pausing their unwind for a while, unless there is some serious crisis (which I can't see happening unless the high yield credit market were to completely implode.) One problem that could allow that to happen, is if oil were to completely and utterly nosedive and make a lot of oil service companies with high debt loads default. Again, I doubt this. I am not a doom and gloomer, I think we are about to enter a recession/bear market but the "great recession" has gotten something in people's heads that every recession must be a systemic collapse instead of a resource reallocation...

ryacko 8y ago
If we have deflation with rising incomes, there would be no issue. If there is deflation with declining incomes, it would create a downward spiral, potentially.
- partiallypro 8y ago
  Real incomes have fallen during/after virtually every US recession; at least in -real- terms. Nominal incomes almost never fall and just remain flat. Monetary theory is complex, but what the flow of credit remains in tact. https://fred.stlouisfed.org/series/MEHOINUSA672N https://fred.stlouisfed.org/series/MEHOINUSA672N https://fred.stlouisfed.org/series/MEHOINUSA646N https://fred.stlouisfed.org/series/MEHOINUSA646N The only way I can see hyperinflation in the US is some cataclysm or inability to service debt through normal means. Most countries that have hyperinflation generally have massive debt loads they are printing out of with no economic output to back it up. They also are usually very centrally planned economies or war torn.
  - ryacko 8y ago
    Not necessarily, the whole reason we invaded Iraq was to maintain the petrodollar. The Saudis would be richer if they unpegged the Riyal and exclusively sold their oil in their currency. The world is essentially the US economy.
  - ThrustVectoring 8y ago
    When employers contract their payroll, they do so with layoffs rather than pay cuts. The reasons for this are fairly complex, but if we take this as a given it implies a lot about our monetary policy. Specifically, it argues for something like NGDP targeting, so that employers as a whole continue to have enough money to avoid layoffs even as total real wages decline.
gammateam 8y ago
Bonds also mature. The Federal Reserve’s balance sheet primarily contains bonds. They just get the principle back and the balance sheet is reduced. They dont have to sell on the open market.

AnthonyMouse 8y ago

That article (from just shy of two years ago) seems flawed. The premise seems to be that higher interest rates would increase the velocity of money, which would cause a lot of inflation given the current (large) money supply and low velocity. But higher interest rates reduce inflation, because their dominant effect is to cause people to borrow (i.e. create) less money, or pay back (i.e. destroy) money they've already borrowed, as soon as the interest rate exceeds the time value of the thing they borrowed the money to do. That does increase the average velocity of money, because the money that gets not-borrowed or destroyed is the money with the least productivity, i.e. the money that was just sitting around doing nothing. The lowest velocity money. So when that money is destroyed, the average velocity of the remaining money is higher. But the average velocity of the remaining money hasn't actually changed, you've just destroyed the lowest velocity money. V times M is lower, not higher, because the dominant consequence is less M, not more V.