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Good post. It seems common for participants in an industry undergoing a bubble to concoct elaborate industry-specific theories to explain a sudden influx of new

Good post. It seems common for participants in an industry undergoing a bubble to concoct elaborate industry-specific theories to explain a sudden influx of new money when the real cause is, well, exactly that: a sudden influx of new money. Unfortunately, we've been trained to correlate the numbers in our bank accounts with actual value, but the link has been all but severed for a long time. It seems unbelievable that we as a population could keep being fooled by the same trick over and over, but when you look at the sums involved for those who benefit, it starts to make sense. This racket dwarfs even the military-industrial complex. It's rule-the-world money. In my opinion, anyone who tries to portray the situation as obscure or highly complex either has a stake or has succumbed to propaganda--printing money always causes artificial booms, and artificial booms always lead to busts. It's been true since fiat money was invented and it'll be true until we evolve beyond it.

wat55 16y ago
This is completely wrong and absurd. We've had a gradual inflation rate since the beginning of the U.S. Dollar. We were headed toward a deflation without the QEs, which would've been a disaster in a highly illiquid economy. The QEs simply brought the inflation back to a good, gradual rate, and put more liquidity into the economy so businesses can start hiring again.
- danenania 16y ago
  "We were headed toward a deflation without the QEs, which would've been a disaster in a highly illiquid economy." Right, this according to the brilliant minds who created the crisis in the first place. Clearly the financial situation is bad. Your 'good, gradual inflation rate' is WHY we're on the precipice of disaster. It's not like we now have a choice between an economic meltdown and a land full of unicorns and rainbows if only we keep stamping more paint on more pieces of paper. Our only option is damage control, but you'd rather keep piling on the damage. Google some of the predictions made by Bernanke and his colleagues in the years and months leading up to the crisis. They've been dead wrong every step of the way. Yet now we are supposed to believe that inflation is no concern when food and commodity prices are at all time highs and causing revolts around the world? Talk about absurd.
  - cpeterso 16y ago
    "Good, gradual inflation" is how The Man keeps the proletariat busy working. They can't afford to stop.
    - yummyfajitas 16y ago
      Inflation helps the proletariat, you know. Most of them are net debtors, so inflation makes it easier to pay off their debts.
      - T-hawk 16y ago
        Only if their wages also get inflated, which does not always follow with price inflation of goods. And apparently would not happen on the free market, or else the government would not have to force it with minimum wage legislation.
      - anamax 16y ago
        > Inflation helps the proletariat, you know. Most of them are net debtors, so inflation makes it easier to pay off their debts. Not so fast. Lenders factor in expected inflation, so it's only unexpected inflation that benefits debtors. And, making payments isn't the only way to handle debt - bankruptcy works too. You don't get any more "pay later" pizzas, but you get to keep the ones that you already ate. However, inflation hurts folks whose income doesn't match inflation. After they stop paying their debts, they still need to buy food. My cat's favorite food went up 25% last month. Since she was already on the cheap stuff....
        yummyfajitas 16y ago
        It's true that a higher inflation regime will not help debtors. But the net effect of an event like QE/QE2 is to help debtors.
        borism 16y ago
        But the net effect of an event like QE/QE2 is to help debtors. Let's be serious here. Net effect of QE is 0.
- yummyfajitas 16y ago
  The QEs simply brought the inflation back to a good, gradual rate, and put more liquidity into the economy so businesses can start hiring again. How is that working out so far? http://research.stlouisfed.org/fred2/series/EMRATIO http://research.stlouisfed.org/fred2/series/EMRATIO The fundamental flaw in this idea is the assumption that increased production/consumption will in turn increase employment. At the end of the last two recessions, production and consumption have increased, but employment has not. The old theories no longer work.
api 16y ago
I don't think anyone is really being fooled anymore. They just get the game, and understand that cheap-money bubbles are a normal part of that game.
- danenania 16y ago
  Well, a bubble is the result of people being fooled on an industry or economy-wide scale, so I think the fact that we still have them shows that plenty are fooled. I agree that many savvy players will participate with full knowledge of what's happening, but this only works for them because of all the suckers waiting in line.
  - okaramian 16y ago
    It's not really a result of anyone being fooled. It's rational economic behavior to get in on a bubble which is why bubbles get bigger. The people that get screwed are the ones that dont get out at the right time.
    - danenania 16y ago
      Unless you are a very sophisticated trader (and likely even then), knowingly betting that a bubble will continue to expand is just gambling. You might get lucky and exit at the right time, but it's seriously -EV. That said, I don't really think the majority of small time investors think in those terms or are at all aware of how the monetary boom-bust cycle operates, which is why they get fooled into thinking they are better off when their nominal wealth increases as their real wealth deterioriates.
      - okaramian 16y ago
        In hindsight, maybe. You only know it's a bubble when it bursts and the markets come back to earth. Outside of that it's rational to invest in something that's growing.
        danenania 16y ago
cynicalkane 16y ago
The current inflation rate suggests that the supply and demand for cash is in balance. This might not be true, but you won't disprove it with unsourced conspiracy theories.
- trotsky 16y ago
  There are a quite a number of ways to measure inflation, the fed's version of it is quite narrow. If you look at wholesale commodities there has been a dramatic increase over the past year. Here is an interesting article that appeared in the WSJ opinion section a few weeks ago. I found it to be quite insightful, and it presents a workable explanation about why we might currently be causing inflation and not wanting to admit it. The Federal Reserve Is Causing Turmoil Abroad: http://www.marketwatch.com/story/george-melloan-the-federal-reserve-is-causing-turmoil-abroad-2011-02-23 http://www.marketwatch.com/story/george-melloan-the-federal-...
  - cynicalkane 16y ago
    The fed's version is the PCE/PI, which is the most general measure of inflation that is theoretically possible. You might have that confused with the CPI, which is a different index, the one you usually see in the news. Finance is pretty easy to understand, relatively speaking, but the signal-to-noise ratio is far too high. The average finance news site tends to be a wretched hive of investment advice nuts and unreliable emotional opinionators.
    - trotsky 16y ago
      Bernanke has regularly referred to "Core Inflation" when discussing inflationary pressures. You can see his use of it as recently as Feb 3, 2011 in his speech to the National Press Club: http://www.federalreserve.gov/newsevents/speech/bernanke20110203a.htm http://www.federalreserve.gov/newsevents/speech/bernanke2011... The Fed's version of core inflation is the core PCE price index as you stated. The "core PCE price index [...] excludes the more volatile and seasonal food and energy prices" [1]. While you may reasonably take issue with my wording of "quite narrow" as I perhaps wasn't choosing my words carefully enough, core inflation/core PCE certainly isn't "the most general measure of inflation that is theoretically possible". I assume you weren't meaning to refer to "core PCE" - but never the less it is clear from federal reserve speeches that it is this measure that has been playing significantly into federal reserve monetary policy. Core inflation makes sense in trying to smooth out seasonal or short term moves. However, the effects on global food and oil commodities that are traded in US dollars seem to far exceed any seasonal or short term influences. In that case discounting food and fuel influence on actual inflation rates seems unwise. Bernanke seems to be acknowledging this. The WSJ reported on the 13th of March in an article titled "To Avert Criticism, Fed Avoids Saying 'Core'": Now, Mr. Bernanke is taking another tack in his public communications. In two days of testimony on Capitol Hill earlier this month, the Fed chairman never uttered the words "core inflation" while explaining the central bank's aims and policies. [2]. As a side note, as I've noted I'm in no way trying to put myself forward as an expert on these subjects. I get a significant amount of my financial news and analysis from the WSJ and Marketplace (public radio) (and Morgan coverage, which admittedly is not particularly hawkish here). I'm not above admitting that I could be making some serious mistakes, so if you'd like to suggest better sources of information I am all ears. [1] https://secure.wikimedia.org/wikipedia/en/wiki/Personal_consumption_expenditures_price_index https://secure.wikimedia.org/wikipedia/en/wiki/Personal_cons... [2] http://online.wsj.com/article/SB10001424052748704893604576198703033844010.html http://online.wsj.com/article/SB1000142405274870489360457619...
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wat55 16y ago

This is completely wrong and absurd. We've had a gradual inflation rate since the beginning of the U.S. Dollar. We were headed toward a deflation without the QEs, which would've been a disaster in a highly illiquid economy. The QEs simply brought the inflation back to a good, gradual rate, and put more liquidity into the economy so businesses can start hiring again.

danenania 16y ago
"We were headed toward a deflation without the QEs, which would've been a disaster in a highly illiquid economy." Right, this according to the brilliant minds who created the crisis in the first place. Clearly the financial situation is bad. Your 'good, gradual inflation rate' is WHY we're on the precipice of disaster. It's not like we now have a choice between an economic meltdown and a land full of unicorns and rainbows if only we keep stamping more paint on more pieces of paper. Our only option is damage control, but you'd rather keep piling on the damage. Google some of the predictions made by Bernanke and his colleagues in the years and months leading up to the crisis. They've been dead wrong every step of the way. Yet now we are supposed to believe that inflation is no concern when food and commodity prices are at all time highs and causing revolts around the world? Talk about absurd.
- cpeterso 16y ago
  "Good, gradual inflation" is how The Man keeps the proletariat busy working. They can't afford to stop.
  - yummyfajitas 16y ago
    Inflation helps the proletariat, you know. Most of them are net debtors, so inflation makes it easier to pay off their debts.
    - T-hawk 16y ago
      Only if their wages also get inflated, which does not always follow with price inflation of goods. And apparently would not happen on the free market, or else the government would not have to force it with minimum wage legislation.
    - anamax 16y ago
      > Inflation helps the proletariat, you know. Most of them are net debtors, so inflation makes it easier to pay off their debts. Not so fast. Lenders factor in expected inflation, so it's only unexpected inflation that benefits debtors. And, making payments isn't the only way to handle debt - bankruptcy works too. You don't get any more "pay later" pizzas, but you get to keep the ones that you already ate. However, inflation hurts folks whose income doesn't match inflation. After they stop paying their debts, they still need to buy food. My cat's favorite food went up 25% last month. Since she was already on the cheap stuff....
      - yummyfajitas 16y ago
        It's true that a higher inflation regime will not help debtors. But the net effect of an event like QE/QE2 is to help debtors.
        borism 16y ago
        But the net effect of an event like QE/QE2 is to help debtors. Let's be serious here. Net effect of QE is 0.
yummyfajitas 16y ago
The QEs simply brought the inflation back to a good, gradual rate, and put more liquidity into the economy so businesses can start hiring again. How is that working out so far? http://research.stlouisfed.org/fred2/series/EMRATIO http://research.stlouisfed.org/fred2/series/EMRATIO The fundamental flaw in this idea is the assumption that increased production/consumption will in turn increase employment. At the end of the last two recessions, production and consumption have increased, but employment has not. The old theories no longer work.

api 16y ago

I don't think anyone is really being fooled anymore. They just get the game, and understand that cheap-money bubbles are a normal part of that game.

danenania 16y ago
Well, a bubble is the result of people being fooled on an industry or economy-wide scale, so I think the fact that we still have them shows that plenty are fooled. I agree that many savvy players will participate with full knowledge of what's happening, but this only works for them because of all the suckers waiting in line.
- okaramian 16y ago
  It's not really a result of anyone being fooled. It's rational economic behavior to get in on a bubble which is why bubbles get bigger. The people that get screwed are the ones that dont get out at the right time.
  - danenania 16y ago
    Unless you are a very sophisticated trader (and likely even then), knowingly betting that a bubble will continue to expand is just gambling. You might get lucky and exit at the right time, but it's seriously -EV. That said, I don't really think the majority of small time investors think in those terms or are at all aware of how the monetary boom-bust cycle operates, which is why they get fooled into thinking they are better off when their nominal wealth increases as their real wealth deterioriates.
    - okaramian 16y ago
      In hindsight, maybe. You only know it's a bubble when it bursts and the markets come back to earth. Outside of that it's rational to invest in something that's growing.
      - danenania 16y ago

cynicalkane 16y ago

The current inflation rate suggests that the supply and demand for cash is in balance. This might not be true, but you won't disprove it with unsourced conspiracy theories.

trotsky 16y ago
There are a quite a number of ways to measure inflation, the fed's version of it is quite narrow. If you look at wholesale commodities there has been a dramatic increase over the past year. Here is an interesting article that appeared in the WSJ opinion section a few weeks ago. I found it to be quite insightful, and it presents a workable explanation about why we might currently be causing inflation and not wanting to admit it. The Federal Reserve Is Causing Turmoil Abroad: http://www.marketwatch.com/story/george-melloan-the-federal-reserve-is-causing-turmoil-abroad-2011-02-23 http://www.marketwatch.com/story/george-melloan-the-federal-...
- cynicalkane 16y ago
  The fed's version is the PCE/PI, which is the most general measure of inflation that is theoretically possible. You might have that confused with the CPI, which is a different index, the one you usually see in the news. Finance is pretty easy to understand, relatively speaking, but the signal-to-noise ratio is far too high. The average finance news site tends to be a wretched hive of investment advice nuts and unreliable emotional opinionators.
  - trotsky 16y ago
    Bernanke has regularly referred to "Core Inflation" when discussing inflationary pressures. You can see his use of it as recently as Feb 3, 2011 in his speech to the National Press Club: http://www.federalreserve.gov/newsevents/speech/bernanke20110203a.htm http://www.federalreserve.gov/newsevents/speech/bernanke2011... The Fed's version of core inflation is the core PCE price index as you stated. The "core PCE price index [...] excludes the more volatile and seasonal food and energy prices" [1]. While you may reasonably take issue with my wording of "quite narrow" as I perhaps wasn't choosing my words carefully enough, core inflation/core PCE certainly isn't "the most general measure of inflation that is theoretically possible". I assume you weren't meaning to refer to "core PCE" - but never the less it is clear from federal reserve speeches that it is this measure that has been playing significantly into federal reserve monetary policy. Core inflation makes sense in trying to smooth out seasonal or short term moves. However, the effects on global food and oil commodities that are traded in US dollars seem to far exceed any seasonal or short term influences. In that case discounting food and fuel influence on actual inflation rates seems unwise. Bernanke seems to be acknowledging this. The WSJ reported on the 13th of March in an article titled "To Avert Criticism, Fed Avoids Saying 'Core'": Now, Mr. Bernanke is taking another tack in his public communications. In two days of testimony on Capitol Hill earlier this month, the Fed chairman never uttered the words "core inflation" while explaining the central bank's aims and policies. [2]. As a side note, as I've noted I'm in no way trying to put myself forward as an expert on these subjects. I get a significant amount of my financial news and analysis from the WSJ and Marketplace (public radio) (and Morgan coverage, which admittedly is not particularly hawkish here). I'm not above admitting that I could be making some serious mistakes, so if you'd like to suggest better sources of information I am all ears. [1] https://secure.wikimedia.org/wikipedia/en/wiki/Personal_consumption_expenditures_price_index https://secure.wikimedia.org/wikipedia/en/wiki/Personal_cons... [2] http://online.wsj.com/article/SB10001424052748704893604576198703033844010.html http://online.wsj.com/article/SB1000142405274870489360457619...

111111 16y ago

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111111 16y ago