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Wonkish1
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« on: October 26, 2012, 01:26:01 AM »
« edited: October 26, 2012, 01:35:32 AM by Wonkish1 »

Sorry for the book, but I think I've stumbled on something big.

I'm sure you guys know the feeling of of finally putting the last piece of a puzzle together that you've been working on for a very, very long time. A few hours ago that eureka moment happened to me.

For the last couple of years, I've been working on my complete theory of what is happening today in the US and much of the world(I know aiming high, right?) and the full answer has alluded me. I could explain many pieces of it, but a complete solution to the problem has been allusive.

I feel like I've finally arrived at that complete answer. And the reason why I'm so confident is because it answers all of the major questions(that I know of) that are confounding economists today.

Some of the questions I was able to answer over the last couple of years:
1) Why is it that Fed printing didn't lead to inflation?
2) Since Fed printing isn't increasing inflation how it could it not be a net positive in the short term?
3) How is it that the continual use of the US government's debt capacity(borrowing) isn't having a stimulative affect on the economy especially when non inflation producing money printing is largely financing that debt?
4) How is it that with all of this that GDP growth is continuing to fall?

The answers to these and other questions are actually quite paradoxical, and the false assumption at the root of the issue is the belief that cash and wealth are the same. Or by their are other(and more telling) synonyms liquidity and capital(I'll come back to this).


Here is where I'll make probably the best argument for Keynesian economics that could really possibly make(feel free to steal any of this for future discussions):

The 2 best rationales I've ever seen for Keynesian economics are as follows:
1) Let's say person A is productive and person B is less or non productive. If you transfer money(through government) from person A to person B than person A needs to again do something very productive to get the money back(when person B buys from person A). The production from this situation leads to economic growth for the betterment of everybody(now even this well put argument I could take apart as inferior, but that isn't what this piece is about).

2) Operating off of much the situation let's say the government decides to borrow money to facilitate a transfer payment. The government issues a bond to person A, person A's money flows through the government to person B. After this situation person A doesn't feel like he's lost anything because he's got a bond(which is as good as cash) and person B has the cash making him feel wealthier as well. Now this action in and of itself doesn't create wealth because wealth is production, goods, services, etc. It only makes both parties feel wealthier. Where wealth instead can be created is when Person A feeling like they haven't lost anything carries on with productive investment with the remainder of his money and person B buys the output of that investment.

Seems like a very sound argument, right?

Well what is happening today? This is where it gets interesting.

1) First the Fed prints money and buys government treasuries(and mortgage bonds, but lets keep it simple for explanation).
2) Government spends money(facilitates transfer payment) and it goes to person B from our story.
3) And what does person B do with it? He either pays down debt, pays debt service, deposits it, or buys something from person A.
4) Regardless if he deposits it or person A deposits it the money passes through the bank and ends up where all excess cash goes...on deposit at the Federal Reserve.

See the primary constraint in the US system isn't cash. It's capital. And the place where that is absolutely the most obvious is at the banks. They have capital ratios and liquidity ratios. Their steadily increasing capital rations mean that they can't just re-lend this money out. But they're also drowning in liquidity. For banks cash(not capital) feels almost endless, but since they can't lend this money out they have to instead deposit it back at the Fed where it originated from.

Question: If the Fed prints $1, $3, $5 or even $10 trillion dollars and then digs a hole and buries it can any inflation or stimulative affect occur?

Granted this printing all by itself should have a tiny bit of stimulative affect in its one cycle through the economy before it comes back, but it shouldn't be much and it should also have diminishing returns because each marginal dollar of increase in liquidity is worth less than the previous one. This explains the diminishing returns on markets of each additional QE(both in the US and Japan).

Now one might say, "Who cares? At least we get lower interest rates and those are stimulative. Lower interest rates means lower debt service which means that people have more surplus funds to spend. And lower interest rates encourage spending and discourage saving and that is a stimulative affect." Actually I instead take David Einhorn's view on this that paradoxically the opposite is true(much like how the inversion of the yield curve in 2006 seemed to increase risky lending by forcing banks to go in search of higher yield to generate enough income to maintain operations). See the reason why lower interest rates is not encouraging spending today and it did 10 years ago is because 10 years ago the lower interest rates facilitated an overall increase in private debt to consume. Today with the absence of any increase in private debt the only thing the lower interest rates are doing is facilitating yet a different transfer from savers to debtors. And paradoxically the savers are decreasing their spending because of it. Retirees on fixed income are decreasing their spending and the productive aren't engaging in capital expenditure spending. The debtors on the other hand are either paying down debt or spending on goods or services that yet again arrive in the hands of someone else that put it on deposit where the money exits the system and goes back to the Fed.

And what is the key piece that is just killing all of this? A continual drop in capital expenditure because what happens when money flows from person A to person B and person A doesn't deploy capital to produce more to get back the money? The whole idea collapses.

Why is this happening? Well we've created the situation where the best place to deploy the temporary limited capital is in existing assets. It get's deployed either straight on deposit or back into treasury bonds, into the stock market, into gold, etc. All of the same places it has been going before. And once it goes into any of those places it takes person A's cash and passes it to person C, person C passes the non productive asset to person A, and person C then deposits the cash and the money flows to the Fed and exits the system. No matter what happens the excess cash is deposited(which gets 'buried in a hole at the fed') and not invested into *new* production.

And as long as this happens you get little to no stimulative affect out of government spending and little to no stimulative affect out of QE(as they both increase the risk to the system and produce the opposite) all because everybody has mistaken cash for wealth, liquidity for capital, and transfers/transactions for production. And they've made this mistake because for the lives of almost every person, economist, investor, etc. cash and wealth moved in tandem, capital and liquidity were in more equilibrium and transfer payments actually led to someone else's production.

But these things aren't true today. Instead the thing that is missing from our system today is more capital/wealth/production.



Okay now that I've put this together lets see if anybody can throw in any holes that are reasonably and rationally explained by the theory I've outlined.
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DC Al Fine
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« Reply #1 on: October 26, 2012, 07:59:51 AM »

One small hole. Some of those "it goes to existing assets" listed actually would create production. For example say I'm a gold bug and take a chunk of stimulus money and buy gold. If enough people do this, the price of gold will rise. The high gold price means the mining companies will increase production, so they go out and purchase more equipment. The equipment manufacturer hires more workers to keep up with demand, purchase more steel and so on and so forth.

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Wonkish1
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« Reply #2 on: October 26, 2012, 09:01:58 AM »
« Edited: October 26, 2012, 09:06:36 AM by Wonkish1 »

One small hole. Some of those "it goes to existing assets" listed actually would create production. For example say I'm a gold bug and take a chunk of stimulus money and buy gold. If enough people do this, the price of gold will rise. The high gold price means the mining companies will increase production, so they go out and purchase more equipment. The equipment manufacturer hires more workers to keep up with demand, purchase more steel and so on and so forth.


Well sure and more transactions for treasuries might cause more hiring at clearinghouses. More deposits might increase the quantity of tellers. Bidding up the price of oil will increase the amount of oil production.

But...
1) In each of these cases is the increase in production occurring because the producer sees a productive investment that will last the test of time? Or is it responding to only the artificial increase of it's commodity by Fed forces?

2) Are these outcomes enough to compensate for the countervailing negative outcome of this situation? With almost all of this new cash passing back to the Fed it has no 'multiplier' effect beyond the transactions on its way to deposit account, but afterward you still have the debt and debt service. You still have additional income that in a normal economy could be put to productive use, but is instead being used to pay debt service. And the really hilarious part is that much of this debt service also finds its way to back to the Fed because it and financial institutions have been the primary buyers of the increase in Treasury notes. And this is taking up an increasing amount of the capital markets.

See this explains the massive decrease in the velocity of money we're experiencing. Normally any fall in the velocity of money doesn't completely wipe out any increase in printing because a lot of that printing will find its way circulating. In this instance the Fed printing it's wiping out itself soon after printing it because a countervailing decrease in the velocity of money is rendering it ineffective. And since the velocity of money is nothing more than a measurement for the quantity of trade all the outcome of printing is doing is stifling trade which is the exact opposite of what are intending for it to do.
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Wonkish1
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« Reply #3 on: October 26, 2012, 09:20:34 AM »
« Edited: October 26, 2012, 09:40:50 AM by Wonkish1 »

I've come to discover there are 2 potential outcomes out of monetary stimulus.
1) Is that it primarily increases the amount of money circulating which results in asset bubbles, inflation, etc. and in the process temporarily increase production.
2) That it's effect is to primarily decrease the velocity of money which only results in a relative decrease of trade in the economy(the fundamental necessity of a growing economy) stifling production.
And the key determinant of which outcome will occur is whether or not liquidity or capital is the primary constraint in the system. If liquidity is the constraint that #1 happens if capital is the constraint than #2 happens.


The central bankers are so sure of number 1 that they continue to do it over and over again with out any positive outcome.

The best evidence of this being a mistake is in Japan where one month after QE8 the BoJ announces QE9 because QE8 only boosted equity prices for 9 hours(and contrary to what you may think this wasn't a situation where QE8 was already baked into prices, QE8 was a surprise move).
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Wonkish1
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« Reply #4 on: October 26, 2012, 10:04:42 AM »
« Edited: October 26, 2012, 10:07:22 AM by Wonkish1 »

The key piece that finally put the puzzle together happened yesterday.

I had already known that practically all of the monetary stimulus was just ending up back at the Fed, but instead as a deposit by a financial institution and therefore wasn't doing much.

But I still held onto this belief that it still had to be a net stimulus because of the assumption that lower interest rates decrease debt service leaving more cash to be spent and increase the desire of people to hold risk assets. It was David Einhorn's address to the Economist yesterday that was able to jog me into thinking in a different direction.

And that is that it finally made clear that in the absence of new private debt creation through low interest rates savers and those on a fixed income would wipe out any positive coming from debtors having lower debt service. It has to. If lower interest rates induced both debtors and savers to increase spending instead of decrease saving there is no way that today we would be in the situation where companies are experiencing decreasing revenue(prior to this quarter earnings were primarily driven by higher margins not higher revenue). Instead lower interest rates in the absence of the creation of private debt is leading to savers to hoard more cash because of the perceived growth and it's causing those on fixed incomes to reduce spending because of lower their lower retirement income that low interest rates facilitate.


This where I was able to finally determine that not only was QE largely not helping, but it was actually making things worse(as they also added tail risk into the system by allowing massive amounts of latent reserves to accumulate at the Fed from financial institutions that will not stay there forever).
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DC Al Fine
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« Reply #5 on: October 26, 2012, 10:27:29 AM »

Excellent response, and I totally agree as I am no Keynesian. Hayek and other Austrians spoke of actual economic growth coming about because of real savings, which are discouraged under current monetary policy. There is next to no incentive to save much of anything at all, with plenty of incentives against.

Even though the demand for credit is greatly reduced, I still believe that interest rates are artificially low. If interest rates are not allowed to float, the Fed should raise interest rates. Alas, the odds of that happening are slim and none.
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opebo
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« Reply #6 on: October 26, 2012, 01:07:23 PM »

But why would you guys want to stimulate 'savings', whether 'real' or not?  What is missing is spending/consumption/demand.  The point is that this interest rate and Fed printing stimulus can't have any effect in a deflationary debt depression.  Now, if the money printed were literally given out (dropped from helicopters in poor neighborhoods and the like) or used to directly buy distressed assets such as houses, or to pay off the budget shortfalls of states and local governments, that would work.  But the whole point of debt deflation depressions is only direct govnerment spending can work, as 'private' investment can't happen.
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Beet
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« Reply #7 on: October 26, 2012, 01:56:26 PM »

First of all, this is a debate between two conservative schools of economics, the mainstream monetarist school, represented by the likes of Milton Friedman, and heterodox schools, or alternatively, simple guttral cries expressed in intellectual language. There is nothing Keynesian being discussed here; Keynes himself abhorred monetary policy and thought it was quite useless in overcoming depressions. Just because he understood it, it does not mean his contribution to economics can be understood by it. However, it is true that Keynesian proposals are generally 'stimulative' as opposed to contractionary, and hence it is accurate in that sense.

First though, a point about justice. Behind all the talk of numbers there is always a rightwing tendency to imply a sort of moral superiority on their part, "oh boo hoo, low interest rates / inflation are hurting the savers, the poor grandmothers on fixed income." What this misses is that most of fixed income actually goes towards the rich- the trust fund kids, others who live off their investments, and the like. By definition, a person who lives off fixed income is independently wealthy-- they do not have to work to live. The same is true of saving in general: Ebenezer Scrooge was the ultimate saver. All money saved must eventually be spent. Or else he or she is a hoarder.

Economic leftists have a different conception of justice. Our economic heores are not idlers that live off past capital, but workers who earn current income. Hence inflation that includes income inflation and increases workers' incomes and reduces their debts is good. Hence low interest rates that allow them to borrow at the least cost to themselves is good. It equalizes the difference between the poor and middle class who lack capital, and the banks whose primary asset is their capital. Our economic heroes are not those that take in money to watch numbers accumulate greedily in their savings accounts, but those who see money as a means to an ends and only oil for the engine of the real world.

Oh my, three paragraphs and I haven't even begun to respond to you. But you've essentially constructed a net and asked us to find holes in it.
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DC Al Fine
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« Reply #8 on: October 26, 2012, 02:18:57 PM »

You do realise that the rich don't fill their swimming pools with money, don't you? Savings are ultimately invested, either directly though stocks/bonds or indirectly when the bank loans out the funds in your account. Slashing interest rates cuts out this source of investment in the economy while creating speculative bubbles fuelled with malinvestment.

Economic leftists have a different conception of justice. Our economic heores are not idlers that live off past capital, but workers who earn current income. Hence inflation that includes income inflation and increases workers' incomes and reduces their debts is good. Hence low interest rates that allow them to borrow at the least cost to themselves is good.

Sure, encouraging people to rack up low cost debt is a great idea. It will help them purchase houses they otherwise couldn't afford. I'm sure there won't be any negative side effects to that /sarcasm
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Wonkish1
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« Reply #9 on: October 26, 2012, 02:28:09 PM »

First of all, this is a debate between two conservative schools of economics, the mainstream monetarist school, represented by the likes of Milton Friedman, and heterodox schools, or alternatively, simple guttral cries expressed in intellectual language. There is nothing Keynesian being discussed here; Keynes himself abhorred monetary policy and thought it was quite useless in overcoming depressions. Just because he understood it, it does not mean his contribution to economics can be understood by it. However, it is true that Keynesian proposals are generally 'stimulative' as opposed to contractionary, and hence it is accurate in that sense.

First though, a point about justice. Behind all the talk of numbers there is always a rightwing tendency to imply a sort of moral superiority on their part, "oh boo hoo, low interest rates / inflation are hurting the savers, the poor grandmothers on fixed income." What this misses is that most of fixed income actually goes towards the rich- the trust fund kids, others who live off their investments, and the like. By definition, a person who lives off fixed income is independently wealthy-- they do not have to work to live. The same is true of saving in general: Ebenezer Scrooge was the ultimate saver. All money saved must eventually be spent. Or else he or she is a hoarder.

Economic leftists have a different conception of justice. Our economic heores are not idlers that live off past capital, but workers who earn current income. Hence inflation that includes income inflation and increases workers' incomes and reduces their debts is good. Hence low interest rates that allow them to borrow at the least cost to themselves is good. It equalizes the difference between the poor and middle class who lack capital, and the banks whose primary asset is their capital. Our economic heroes are not those that take in money to watch numbers accumulate greedily in their savings accounts, but those who see money as a means to an ends and only oil for the engine of the real world.

Oh my, three paragraphs and I haven't even begun to respond to you. But you've essentially constructed a net and asked us to find holes in it.

Did you even read anything I wrote? I ask that not to be dismissive, but you took an explanation of the state of the world and the bad assumptions of policy makers on what is in essence stimulative and converted to an argument about 'economic justice' and economic 'morality'. There wasn't a single point in my post about those 2 subjects.

The only thing that could even be remotely close to a response to my post was about low interest rates and inflation 'hurting savers'. The problem is that I didn't make a moral or justice argument at all about that. I instead merely conjectured that in the present situation low interest rates are causing savers and those on fixed income to spend less which runs contrary to the popular belief of several schools of thought.

Also, if you read my post you would see that I wasn't predicting inflation in the near term and that paradoxically the printing of money is actually preventing inflation in discretionary items and incomes because its driving the velocity of money down more than it creates in additional circulating currency.


I don't want to be taken off subject, but I do want to point out that practically every single thing you wrote in your post I disagree with.
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Beet
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« Reply #10 on: October 26, 2012, 02:29:55 PM »

You do realise that the rich don't fill their swimming pools with money, don't you? Savings are ultimately invested, either directly though stocks/bonds or indirectly when the bank loans out the funds in your account. Slashing interest rates cuts out this source of investment in the economy while creating speculative bubbles fuelled with malinvestment.

Ah, finally, an anti-Keynesian idea. To get away from that amorphous term 'invest', no, not all savings are ultimately deployed (using them to buy stocks or bonds is not deploying them). Actually, the economy can operate at a level below its potential. That is the point of Keynesianism, put in layman's terms.

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Sure, encouraging people to rack up low cost debt is a great idea. It will help them purchase houses they otherwise couldn't afford. I'm sure there won't be any negative side effects to that /sarcasm
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That is not what I said- I said low interest rates equalize the relationship between those who do, and those who do not have capital, just as the concept of leverage does. But that does not mean that banks should not be properly regulated with respect to whom they give loans to, or that asset prices bubbles are not a bad thing that can be identified and avoided by policymakers. Those faulty positions are the positions of those rightwingers who believed that neo-liberal economics was the cure to everything, such as Alan Greenspan.
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Beet
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« Reply #11 on: October 26, 2012, 02:49:59 PM »

Ok, let me start to actually respond.

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This part I actually agree with. Specifically, the idea that spending is being held back by private sector debt stasis compared to ten years ago, when private sector debt was exploding.

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I agree that part of the problem is that too much liquidity is simply being deposited in the broader financial system (you say 'the Fed' but I would say all sorts of asset purchases as well). However, raising interest rates would only make things worse because it would decrease liquidity in the system, and this would have a net negative effect on aggregate demand. The goal is to increase aggregate demand. The increase in spending from those who live on a fixed income would be overwhelmed by the decrease in spending from businesses, governments, and current income earners.

I guess I agree with Einhorn and yourself more that the effectiveness of monetary policy is limited, but I think the proposed solution (raising interest rates, tightening monetary policy) would only make things worse and not ebtter.
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Beet
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« Reply #12 on: October 26, 2012, 02:58:12 PM »

Re: the velocity of money. Yes, a decrease in the velocity of money is cancelling out the inflationary impact of printing, but this decrease itself is harmless if it is only a mathematical artifact of the printing.

Take this simple equation:

Money Supply = Velocity of Money x Base Money

If Base Money increases, and the Money Supply does not increase, then, the Velocity of Money must fall. This is nothing more than a mathematical truism. It says nothing about the real economy. The Fed could print $100 trillion and store it under Ben Bernanke's mattress at midnight tonight, and the velocity of money would plummet to near zero without a single thing being different in the real economy. Not even a single Starbucks' coffee worth of difference.

The real economic concept behind why printing is not increasing the Money Supply is again-- because of the build-up of private sector debt in the years before 2008. The private sector is resistant to more leverage (rightfully so), hence the printing has a minimal effect.
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Wonkish1
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« Reply #13 on: October 26, 2012, 03:04:56 PM »

You do realise that the rich don't fill their swimming pools with money, don't you? Savings are ultimately invested, either directly though stocks/bonds or indirectly when the bank loans out the funds in your account. Slashing interest rates cuts out this source of investment in the economy while creating speculative bubbles fuelled with malinvestment.

Economic leftists have a different conception of justice. Our economic heores are not idlers that live off past capital, but workers who earn current income. Hence inflation that includes income inflation and increases workers' incomes and reduces their debts is good. Hence low interest rates that allow them to borrow at the least cost to themselves is good.

Sure, encouraging people to rack up low cost debt is a great idea. It will help them purchase houses they otherwise couldn't afford. I'm sure there won't be any negative side effects to that /sarcasm

I think you're missing the point of my post as well. Normally you're right:
1) Normally, low interest rates and money printing leads to speculative bubbles and inflation
2) Normally, capital deployed in the stock and bond market encourages others to do more IPO's, equity offerings, bond offerings, etc. which increases growth
3) Normally, cash deposited in a bank account is relent out for productive use.

And if all of these things were if fact true today growth would be higher than it is today. And on the flip side if we were to take the Keynesian belief that low interest rates and transfer payments lead to consumption which boosts the economy than too growth would be higher today.

But today none of these outcomes are true.
1) Low interest rates and money printing isn't currently brewing large scale speculative bubbles(outside of Treasuries maybe) nor inflation.
2) Capital deployed in the stock market hasn't induced more equity raising and instead we've experienced share buybacks and larger cash reserves on corporate balance sheets.
3) Cash deposited at a bank is not being relent out because banks are awash in deposits and can't lend that money out because of their need to maintain higher regulatory capital

4) The lowest interest rates in US history is not leading to a huge boost in consumption and demand that the Keynesians predicted either
5) The largest transfer payments in US history as measured by a percentage of GDP is not resulting in a more demand, or more consumption or more GDP growth either.

None of these things are happening. And no it's not just going to take a little more time for any of this to work nor is a little more of any of this going to help.


The only real dispute that was actually taking place between Keynesian policy over government spending and Supply Side/Monetarist/Austrian belief in lower taxation to stimulate growth was that for a long time they argued over how much multiplier effect would occur.

Keynesians: Take borrowed or taxed money and give it to someone poor and some productive person will have to actually invest and produce something the poor person wants in order to increase their income. The result is more production in meeting that demand.

Everybody else: Lower tax rates causing more net income which leaves more cash left over to spend on both consumption and capital investment which increases employment. As employment and incomes increase so does consumption. The net result is that more is produced as well.

In both arguments the assumption is that once that money is out there the money will continue to be spent, invested, etc. In both instances the assumption of the multiplier effect is there.

What I'm arguing is that it's the multiplier effect itself that has fallen apart in our current situation. If all this cash just ends up on deposit at a financial institution that goes to the Fed than in their is no multiplier effect. If the velocity of money has absolutely crashed there is multiplier effect.

And printing and government deficits isn't helping it. It only is adding tale risk to the situation. They aren't resulting in rising interest rates for government debt even though the supply is exploding. It isn't resulting in inflation even though the Fed has never engaged in this level of monetary stimulus ever. It isn't resulting in explosive growth of consumption even though the government has never transferred money at this rate.

Without velocity of money and without the multiplier effect all these things do nothing. Actually its these very things increased debt creation and printing that is the direct cause of a falling velocity of money.
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Wonkish1
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« Reply #14 on: October 26, 2012, 04:02:55 PM »

Ok, let me start to actually respond.

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This part I actually agree with. Specifically, the idea that spending is being held back by private sector debt stasis compared to ten years ago, when private sector debt was exploding.

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I agree that part of the problem is that too much liquidity is simply being deposited in the broader financial system (you say 'the Fed' but I would say all sorts of asset purchases as well). However, raising interest rates would only make things worse because it would decrease liquidity in the system, and this would have a net negative effect on aggregate demand. The goal is to increase aggregate demand. The increase in spending from those who live on a fixed income would be overwhelmed by the decrease in spending from businesses, governments, and current income earners.

I guess I agree with Einhorn and yourself more that the effectiveness of monetary policy is limited, but I think the proposed solution (raising interest rates, tightening monetary policy) would only make things worse and not ebtter.

2 Things.

1) Money isn't deposited in asset purchases. It buys an asset from a different person and that person either buys some other asset or deposits the money. Before and after the transaction the same amount of the asset and cash exist.

2) As I said before we're drowning in liquidity. Even if interests rates rose materially (which they won't in the near term)  it won't result in a noticeable reduction in liquidity.  The problem is not a lack of liquidity. Actually the problem is more like too much liquidity. And its beside the point the Fed likely can't raise interest rates even if they wanted to.  If they raise the FFR it likely won't change a thing because banks already have more deposits they want and they wouldn't utilize any Fed money anyway. The Fed has managed to figure out a way to remove any ability to change course in the future and contract the money supply outside of selling assets.
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t_host1
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« Reply #15 on: October 28, 2012, 10:58:55 PM »

Too wonkish1, his theory,
You have a good ability to convey your premise, it’s just that I’m having a hard time getting pass your first scenario. I understand that you do not want to go here; however, for me, it’s a futile exercise to find anything rational - outside of its use as the leverage necessary for a certain political position* to exist - about a devised economic system around non-productive humans.  Any future of an accomplished civilization will have a non-productive population near null, and, again, many do not want to hear it, that non-productiveness’**, is, what this current election, 2012, is all about.
 The “why, what for, how come” for the results of low velocity is from what I’ve heard and understood, said by others, is simply been deemed as a “capital strike”. Against what, who? …well, the current system that penalizes success, rewards non-productivity, the takers.

*The Obama Inheritance
**The Dollar Dilution “Bernanke Put” hardship for the mass’s and indentured servitude of generations to come.
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Wonkish1
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« Reply #16 on: October 28, 2012, 11:54:33 PM »

Too wonkish1, his theory,
You have a good ability to convey your premise, it’s just that I’m having a hard time getting pass your first scenario. I understand that you do not want to go here; however, for me, it’s a futile exercise to find anything rational - outside of its use as the leverage necessary for a certain political position* to exist - about a devised economic system around non-productive humans.  Any future of an accomplished civilization will have a non-productive population near null, and, again, many do not want to hear it, that non-productiveness’**, is, what this current election, 2012, is all about.
 The “why, what for, how come” for the results of low velocity is from what I’ve heard and understood, said by others, is simply been deemed as a “capital strike”. Against what, who? …well, the current system that penalizes success, rewards non-productivity, the takers.

*The Obama Inheritance
**The Dollar Dilution “Bernanke Put” hardship for the mass’s and indentured servitude of generations to come.

Well a notion of a 'capital strike' I'll acknowledge is at least a possibility, but from first glance it appears to have some holes in the theory:
1) Not all of those with capital see the US and the world as you described it. So even if we were to accept the premise that those that agree with you are refusing to deploy capital it would still mean that there would be many that don't agree with you who would instead be deploying capital.
2) Furthermore, we also know that if even a small percentage of people make a right call and a much larger percentage of people make a wrong call those that made the right one would still earn a return on their investment. So if we were to assume that capital was being held back from otherwise profitable investment than those would take that investment would see returns and see more capital move to them after positive results.
3) Since this isn't happening than there is likely some better reason as to why capital isn't being deployed.


Now I'll also add that over time corporations and peoples balance sheets should naturally improve when left to their own devices. Extra savings should improve their liquidity situation, improve their net worth, allow them to pay down debt, allow people to default and move on without the same debt burden, etc. They are also delaying purchases for things that are only discretionary in terms of timing. For example:
1) While people may always be consuming food, gas, housing, utilities, etc. they only eventually need to deal with the following:
2) Replace a car that is on its last leg
3) Buy new tires
4) Replace a roof to a house
5) Replace a oven that its on its last leg
6) Replace a piece of a machinery that is either close to salvage or substantially less efficient than something new
7) The list goes on and on.

So eventually someone that has been accumulating savings and improving their own balance sheet will be almost forced to engage in various forms of delayed expenditure.

All of the reasons above is why you normally see growth return and continue to improve as time elapses after the end of a recession. Why is it that this isn't happening this time?

One must conclude that some other force is acting on it which may include:
1) External pressure coming from outside of the US. Here is where the relatively reasonable premise that problems in Europe or China or elsewhere is causing problems in the US.
2) Some negative government policy is acting upon the economy making it worse.

Now there is a limit to how much I think 1 can effect the US economy especially considering our trade balance situation. A country that imports more than it exports and yet consumes more of its own production(primarily services) than anything else should have a limit as to how much they're impacted by stagnant or declining growth elsewhere especially when there are other developed nations of the world that are doing better such as: Canada, the Baltic states, certain portions of the Middle East, South Korea, etc.

Now in regards to #2 there is really only a few pieces that are actually changing today relative to a year or 2 ago.
1) The continued implementation of ObamaCare
2) 'The Fiscal Cliff'
3) Continued growth of the national debt
4) Fed monetary policy
5) Some additional regulatory implementation over the last year or 2

-Food stamps, unemployment insurance, etc. all were in use when growth was 2%+ so we can narrow these things down to only a few items that have changed and are continuing to change since growth was higher and somewhere in there you have your answer.

Somewhere in the above has to be causing capital investment to be a net loser or offer a lower return vs. the risk taken. And personally I think a good explanation could be that the perceived 'risk free rate' on investment is less than zero so it isn't worth it.

Essentially I believe that in certain places the pricing function has broken down. The price of money vs. the price of capital is way out of wack and is very far from equilibrium and until they arrive at some equilibrium again capital remains more valuable than money. Essentially with capital way more valuable than cash investors(particularly banks) would rather protect capital and accumulate cash.
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Wonkish1
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« Reply #17 on: October 29, 2012, 11:09:52 AM »
« Edited: October 29, 2012, 11:24:07 AM by Wonkish1 »

Money Supply = Velocity of Money x Base Money

Somehow I glossed over this one.

The problem here is that this equation does not exist in reality.

Instead the equation is:

Velocity of money = aggregate transactions / broad money supply

Or it's more measurable option: V = PY/M(price level*GDP/money supply) nor does PY/M = Base money either.

Aggregate transactions has nothing to do with base money.

Instead you may be referring to base velocity which is different.


Nice try though.


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t_host1
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« Reply #18 on: October 29, 2012, 02:23:04 PM »

Too wonkish1, his theory,
You have a good ability to convey your premise, it’s just that I’m having a hard time getting pass your first scenario. I understand that you do not want to go here; however, for me, it’s a futile exercise to find anything rational - outside of its use as the leverage necessary for a certain political position* to exist - about a devised economic system around non-productive humans.  Any future of an accomplished civilization will have a non-productive population near null, and, again, many do not want to hear it, that non-productiveness’**, is, what this current election, 2012, is all about.
 The “why, what for, how come” for the results of low velocity is from what I’ve heard and understood, said by others, is simply been deemed as a “capital strike”. Against what, who? …well, the current system that penalizes success, rewards non-productivity, the takers.

*The Obama Inheritance
**The Dollar Dilution “Bernanke Put” hardship for the mass’s and indentured servitude of generations to come.

Well a notion of a 'capital strike' I'll acknowledge is at least a possibility, but from first glance it appears to have some holes in the theory:
1) Not all of those with capital see the US and the world as you described it. So even if we were to accept the premise that those that agree with you are refusing to deploy capital it would still mean that there would be many that don't agree with you who would instead be deploying capital.
2) Furthermore, we also know that if even a small percentage of people make a right call and a much larger percentage of people make a wrong call those that made the right one would still earn a return on their investment. So if we were to assume that capital was being held back from otherwise profitable investment than those would take that investment would see returns and see more capital move to them after positive results.
3) Since this isn't happening than there is likely some better reason as to why capital isn't being deployed.


Now I'll also add that over time corporations and peoples balance sheets should naturally improve when left to their own devices. Extra savings should improve their liquidity situation, improve their net worth, allow them to pay down debt, allow people to default and move on without the same debt burden, etc. They are also delaying purchases for things that are only discretionary in terms of timing. For example:
1) While people may always be consuming food, gas, housing, utilities, etc. they only eventually need to deal with the following:
2) Replace a car that is on its last leg
3) Buy new tires
4) Replace a roof to a house
5) Replace a oven that its on its last leg
6) Replace a piece of a machinery that is either close to salvage or substantially less efficient than something new
7) The list goes on and on.

So eventually someone that has been accumulating savings and improving their own balance sheet will be almost forced to engage in various forms of delayed expenditure.

All of the reasons above is why you normally see growth return and continue to improve as time elapses after the end of a recession. Why is it that this isn't happening this time?

One must conclude that some other force is acting on it which may include:
1) External pressure coming from outside of the US. Here is where the relatively reasonable premise that problems in Europe or China or elsewhere is causing problems in the US.
2) Some negative government policy is acting upon the economy making it worse.

Now there is a limit to how much I think 1 can effect the US economy especially considering our trade balance situation. A country that imports more than it exports and yet consumes more of its own production(primarily services) than anything else should have a limit as to how much they're impacted by stagnant or declining growth elsewhere especially when there are other developed nations of the world that are doing better such as: Canada, the Baltic states, certain portions of the Middle East, South Korea, etc.

Now in regards to #2 there is really only a few pieces that are actually changing today relative to a year or 2 ago.
1) The continued implementation of ObamaCare
2) 'The Fiscal Cliff'
3) Continued growth of the national debt
4) Fed monetary policy
5) Some additional regulatory implementation over the last year or 2

-Food stamps, unemployment insurance, etc. all were in use when growth was 2%+ so we can narrow these things down to only a few items that have changed and are continuing to change since growth was higher and somewhere in there you have your answer.

Somewhere in the above has to be causing capital investment to be a net loser or offer a lower return vs. the risk taken. And personally I think a good explanation could be that the perceived 'risk free rate' on investment is less than zero so it isn't worth it.

Essentially I believe that in certain places the pricing function has broken down. The price of money vs. the price of capital is way out of wack and is very far from equilibrium and until they arrive at some equilibrium again capital remains more valuable than money. Essentially with capital way more valuable than cash investors(particularly banks) would rather protect capital and accumulate cash.
OK, it is a given that capital will chase and profit from fear, they are a minority and in the present state of commerce are the winners’. The best examples are the American auto and renewable (green) energy sectors being artificially induced/saved has only strengthen the old, legacy deep monies’. The financial service sector has commissioned and bonus out the real equity, the things of tangible use. The greed of needs capital will trump I believe 3:1 the capitulation of fears when liability of labor is at least paired down.
 My suggestion for the best place for you to find your unknown will be the increase in deteriorating destruction of motivation, the “Why do anything” factor, this of coarse beings us back to policies and perceptions.     
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Wonkish1
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« Reply #19 on: October 29, 2012, 03:57:43 PM »

OK, it is a given that capital will chase and profit from fear, they are a minority and in the present state of commerce are the winners’. The best examples are the American auto and renewable (green) energy sectors being artificially induced/saved has only strengthen the old, legacy deep monies’. The financial service sector has commissioned and bonus out the real equity, the things of tangible use. The greed of needs capital will trump I believe 3:1 the capitulation of fears when liability of labor is at least paired down.
 My suggestion for the best place for you to find your unknown will be the increase in deteriorating destruction of motivation, the “Why do anything” factor, this of coarse beings us back to policies and perceptions.     


1) Motivation of those in work likely increased after the crash

2) Green energy and auto manufacturers are small potatoes when you're talking about the entire economy. Think about this once: A handful of decisions by a board of central bankers in 2001 managed to reorient the entire economy around certain real assets and launch the greatest binge of private debt accumulation a nation and a world has ever seen. Economy changing legislation, huge debt totals, and massive amounts of monetization will trump anything that can be said about green companies, auto bailouts, and even TARP.

3) I don't necessarily believe in the notion that economic performance is negatively impacted by some cultural phenomenon, change in mind set, etc.  That said I do believe that a policy can be created that causes a rational person to choose benefits from the government instead of their own employment, but I don't think that is what is actually dragging down our economy.
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Beet
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« Reply #20 on: October 29, 2012, 04:51:21 PM »

Money Supply = Velocity of Money x Base Money

Somehow I glossed over this one.

The problem here is that this equation does not exist in reality.

Instead the equation is:

Velocity of money = aggregate transactions / broad money supply

Or it's more measurable option: V = PY/M(price level*GDP/money supply) nor does PY/M = Base money either.

Aggregate transactions has nothing to do with base money.

Instead you may be referring to base velocity which is different.

Nice try though.

Well yes, as QE affects base money, then base velocity is what is important. The point is that decreases in base velocity are a mathematical artifact of the increase in base money, and are by themselves harmless.

If you want to use broad money as your measure of money, then QE has no direct effect on broad money (M1, M2, MZM). The effect is transmitted through the money multiplier.
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Beet
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« Reply #21 on: October 29, 2012, 05:05:38 PM »

1) Money isn't deposited in asset purchases. It buys an asset from a different person and that person either buys some other asset or deposits the money. Before and after the transaction the same amount of the asset and cash exist.

It's not the transaction that matters, it's the total amount of money in the financial system. The more there is, the more asset prices are bid up. Hence, if X amount of good is produced each period, then a higher quantity of money chasing those goods would result in a higher price each period, so long as the propensity of those with money to buy those assets is the same. Lower (real) interest rates also effectively the amount of money by allowing greater leverage. But the solution is not higher interest rates, but redirecting money to the parts of the economy where it will lead to the most growth in the long run.

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Oh, sure it would. Just look at 2008.

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The FFR's impact has nothing to do with whether the banks utilize Fed money. If the Fed wants to raise interest rates all it has to do is sell Treasuries, which are in high demand. This will lower the banks' liquidity. If that fails (which it wouldn't) they could always raise the required reserve ratio. Removing liquidity from the financial system is the easiest thing in the world. It's the consequences that tend to worry policymakers.
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Wonkish1
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« Reply #22 on: October 29, 2012, 07:15:46 PM »
« Edited: October 29, 2012, 07:20:56 PM by Wonkish1 »

Money Supply = Velocity of Money x Base Money

Somehow I glossed over this one.

The problem here is that this equation does not exist in reality.

Instead the equation is:

Velocity of money = aggregate transactions / broad money supply

Or it's more measurable option: V = PY/M(price level*GDP/money supply) nor does PY/M = Base money either.

Aggregate transactions has nothing to do with base money.

Instead you may be referring to base velocity which is different.

Nice try though.

Well yes, as QE affects base money, then base velocity is what is important. The point is that decreases in base velocity are a mathematical artifact of the increase in base money, and are by themselves harmless.

If you want to use broad money as your measure of money, then QE has no direct effect on broad money (M1, M2, MZM). The effect is transmitted through the money multiplier.

What are you talking about?

I don't even know where to begin.


First of all, the velocity of money isn't just some arbitrary item with no meaning like you claim it is. That is a seriously dumb notion. I mean what do you think, the Nobel Committee just decided to give out the prize to someone who invented a formula where one variable is some arbitrary undefinable value?


So starting from square one the velocity of money is the frequency which a certain amount of money exchanges for goods. Okay simple enough right? Now you wouldn't say that is arbitrary would you?


Now I would love to here your explanation as to how Broad money / base money = frequency of transactions. Seriously, I would be unbelievably impressed if somehow you could actually explain that relationship.


In the meantime allow me to actually explain what broad money divided by base money actually means. That formula is the calculation of the liquidity leverage ratio of entire financial system. It is actually somewhat similar calculation as the capital ratio of our entire financial system.

What does the liquidity leverage ratio(aka base velocity which is actually badly worded term because it doesn't calculate frequency of anything) actually tell us? Well it tells us the following:
1) The current liquidity risk in the US financial system(which is at all time low)
2) The future leveragibility of liquidity in the future(which represents future broad money growth through the money multiplier(inflation) at some undetermined time and is at all time high).
3) The current money multiplier which is essentially a synonym for how much liquidity has been leveraged.

It says zero about the frequency of transactions today. To further reiterate that point both of these things can and have happened in the past(many times actually):
1) That the liquidity in the system is fully leveraged out, but the frequency of transactions is falling. Example: 2008.
2) The liquidity in the system is very low, but the frequency of transactions is increasing(normal recovery).

The problem with this recovery is actually that the liquidity leverage ratio of the system is very low, and the frequency of transactions is falling hence why we are seeing continued decline in GDP growth rates.

Now you then create an argument where your argument acts as an assumption to proves your own argument(aka a circular argument). That argument basically went like this:
1) Since the velocity of money is some arbitrary construct between base and broad money
and
2) Fed printing can only affect base money not broad money
Than
3) You can't use broad money in your calculation because it wouldn't have anything to with the Fed.
Never mind that 1 and 2 are completely false and created purely for a circular argument.

And never mind that the stated purpose of the Fed is to not(as you say) increase base money, but instead to increase broad money either through leveraging base money or by getting money out into the system directly through asset purchases. So what you just said runs completely contrary to what the Fed actually believes.


Instead let me introduce you to the genius of the quantity of money theory in explanatory form.

1) If people carry out the same amount of transactions as before and the money supply increases than inflation will rise.
2) If the money supply remains the same, but people increase the amount of transactions they participate in inflation will rise.
3) If people carry out the same amount of transactions as before and the money supply falls than its deflationary.
4) If the money supply stays the same and the number of transactions fall than its deflationary.

Let's also take a look at whether each of the following is true:
The money supply = GDP * Price index / Frequency of transactions   = true
GDP = the money supply * Frequency of transactions / Price index    = true
Price index = the money supply * Frequency of transactions / GDP   = true
Frequency of transactions = price index * GDP / the money supply   = true


The problem for gold bugs out there is that they see frequency of transactions as constant and they see all monetary easing going to broad money and they come to the conclusion that of course inflation must than have to rise, but that isn't what is happening.

Instead what is happening today:
1) The vast majority of money printing is not affecting broad money and is instead accumulating in the base.
2) Some of it is making it out to the broad money supply and that is why we are currently growing broad money at a higher rate than we are growing the economy.
3) But since the frequency of transactions is falling we're not registering that much in the way of current inflation.

And this causing problems because:

Δ GDP = Δ money supply * Δ frequency of transactions / Δ price index
Money supply is growing and price index is growing a bit, but a lot slower and so the frequency of transactions are falling.

Why are the frequency of transactions falling? Because in my opinion I think that a mismatch between capital and liquidity can only produce one of 2 outcomes.
1) The frequency of transactions either a) decrease less than the rate of money supply growth or b) they stay the same or c) increase as well causing inflation(P to rise) or asset bubbles(Q to rise) or both.
or
2) The frequency of transactions decreases more than the rate of money supply growth causing deflation(P to fall) or falling growth(Q to fall).



I probably should spike the football after this one, but I wont Wink
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Beet
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« Reply #23 on: October 30, 2012, 04:56:11 PM »

First of all, the velocity of money isn't just some arbitrary item with no meaning like you claim it is.

That is a seriously dumb notion. I mean what do you think, the Nobel Committee just decided to give out the prize to someone who invented a formula where one variable is some arbitrary undefinable value?

The velocity of broad money is very important and significant, yes. As is the velocity of base money, or the liquidity leverage ratio if you prefer. However, a decrease in the velocity of base money as a result of monetary stimulus is a mere mathematical artifact and therefore meaningless. It is, in the words of Keynes, "pushing on a string." The same could be said of broad money. QE has no direct impact on the quantity of transactions. If banks don't want to loan money, or if there is no demand for loans, increasing reserves can't force them to do so. On the other hand, if banks did want to make loans and there was demand for them, then the frequency of transactions would increase even without monetary stimulus.

Basically, the point is that demand for money is what determines the frequency of transactions, as well as the money multiplier, and demand for money is an independnet variable from monetary stimulus. The only argument I've seen you make contrary is to argue that low interest rates benefit debtors at the expense of savers. But the net amount of disposal income is a wash-- for every dollar that an interest-bearing account holder loses, so a loan holder gains, minus the difference that gets taken out by the financial system. Paradoxically, you seem to argue that savers are less likely to spend when their interest rates are lower, but that makes no sense. The lower the interest rate, the less reason for you not to spend. That is monetary policy 101.

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Well yes, that's because of the massive debt overhang from the past 30 years.

Looking over the rest of your post, besides the misinterpretations of what I and/or the Fed believe, I largely agree with them. What you've just explained is the Keynesian critique of monetary policy. But I'm still struggling to where you get from this to the idea that fiscal stimulus is ineffective or that we have 'too much liquidity'. Certainly, the effectiveness of monetary policy is limited, but that is just another reason why fiscal stimulus is warranted.
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Jacobtm
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« Reply #24 on: October 30, 2012, 11:23:50 PM »

But why would you guys want to stimulate 'savings', whether 'real' or not?  What is missing is spending/consumption/demand.  The point is that this interest rate and Fed printing stimulus can't have any effect in a deflationary debt depression.  Now, if the money printed were literally given out (dropped from helicopters in poor neighborhoods and the like) or used to directly buy distressed assets such as houses, or to pay off the budget shortfalls of states and local governments, that would work.  But the whole point of debt deflation depressions is only direct govnerment spending can work, as 'private' investment can't happen.

Correct.

It shows you who's in charge of our government.

When the feds "print moeny" who does that money go to?

They certainly would never dream of just mailing everyone a check for $2,500.

But they're more than happy to buy assets from investors and let them stockpile the money.
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