Negative interest rate?

I was reading about a comment made by Harvard economist Gregory Mankiw in which he stated that a negative interest rate might be what is needed to avert a recession. I do not understand how that would avert a recession because it would destroy all incentive to save money and cause lending to businesses to stop completely since the negative rate would mean that you would lose the principle as a result of lending under the best terms.

What is more likely to happen is that massive inflation hits when the economy recovers, due to the printing presses being in high gear the past two years, and the Fed will be forced to raise interest rates. I would appreciate that since my I bonds have a negative real rate and CD's are getting 2% interest. At those rates, I would get better returns filling up a container of gas and then reselling it to a neighbor in a couple of months.

Another day, another run on the printing press

Apparently banks which can afford corporate jets and hundreds of millions in bonuses to complete morons who have run companies into the ground are suddenly afraid to lend money. This slight detail has not evaded the administration, who are now proposing another $400,000,000,000 into the black hole that is big business to increase lending. I have stopped keeping track of the waste that the government has shoveled between these corporations and the bailouts. Much of this debt is already being monetized since foreign lenders are concerned for the solvency of the US, so expect inflation to rise up again as more dollars are chasing fewer goods.

I notice the British have a lot of cartoons on this topic, but over on this side of the pond we seem to be lacking in good political cartoons on printing money. I guess it is one more area in which we have lost our competitive advantage.

Today's lesson, the equation of exchange

In today's Senate confirmation hearing, Treasury Secretary Timothy Geithner talked about how restoring the banking system could require spending "trillions of dollars." The result of such a large scale increase in the money supply is that inflation will occur due to the formula known as the Exchange of Equation. This formula, MV=PQ states that the number of dollars in circulation(M) times the number of times they change hands in a year(V) is equal to the average price of all goods sold during the year(P) times the number of goods sold during the year(Q). By definition velocity is relatively constant and only moves greatly during a recovery or a depression when people are afraid to spend money.

Using this formula, by increasing the money supply X dollars means that those X dollars are spread out by the percentage change in the money supply equalling the percentage change in price. The previous statement presupposes that Q is unchanged or drops, which is likely given the economic slowdown occurring. As a result, those trillions of dollars in new spending will end up translating into fractions of dollars and cents on goods to spread out the increased money supply over the goods produced and sold in the country. (If Q increased it would be simple arithmetic to find if P rose or fell by having %(delta)M=%(delta)P+%(delta)Q) A little inflation is a given in an economic system because goods are scarce so over time the value should rise do to increasing marginal costs to produce.

When the money supply greatly increases relative to GDP growth, however that is when problems occur. When that happens the costs of doing business increase faster than a firm can deal with so people get laid off or their real wage falls.

Peter Schiff Says The Truth in 2006

Watch someone state the obvious and get ridiculed by trickle down cultist Art Laffer. It is so sad to see a washed up economist like Art Laffer talk about how great the US economy is while debt is shooting up faster than a junkie lottery winner.

This artificially low interest is the best point of the whole video. Since the mortgages were largely adjustable, the rise in interest rates that occurs when money get tightly squeezed makes homeowners unable to repay mortgages as they maxed out thinking the ARM was set in stone. Instead, the money has dried up and retail is falling as a result.

Wealth is illusory in the modern context because the asset valuation is not based on any kind of reasonable trade standard, IE a house is worth this much because that is the stable price for a house in the area, but instead it is being set by third parties such as appraisers and rating agencies. The worst part comes from the conflict of interest that the same ratings agents get money from the firms they rate. It is like believing a fake watch it really a Rolex because the dealer says it is such. Why would a shady person at a bus stop be any less reputable doing this con game than a white collar thief on Wal Street?

Thoughts on the economic meltdown

From hearing the word on the street, I get the impression that everyone is going to bail out of stocks soon who is still in. That is only a wise idea if you need the money to live offi n the very near term. Otherwise, withdrawing the stocks locks in losses, since the stock price is only set when you sell and buy, so right now it has no value until you cash it in. Also, moving to cash right now is also a losing proposition since the interest rates at banks are in the mid fours, meaning you get a negative rate of return on cash accounts. Government CDs are also negative return gainers, so rather than fret over immediate investment I would rather see people save some money and use some of it that they can spare to buy things before the post bailout0bearstearns-aig-stimulus payment borrowing starts to really kick up the inflationary dust storm. I feel confidernt having invested in the growing wheelbarrow market. It is the next big thing in banking.

The Train is Pulling into Inflation Station

Inflation rose .6 percent last month, which anyone who has not been living in a cave knows. This is big news in a country whose recent history has been inflation in the twos per year. One good effect of this inflation rise comes in the likelihood of a Fed rate rise rising. Import prices last month rose 17%, which means that Wal Mart, Target, Costco are all gonna be raising the prices to keep their Chinese goods coming in. Hurray globalism.

Taking a break from studying

I am taking a break from studying upper level macroeconomics to report on the news of the day. First it appears that John McCain, aka the old guy running against Barack Obama, is not doing so hot . If the election were held today, he would lose 304-234 to Barack Obama, conceding formerly R states in Ohio, Colorado, Missouri, New Mexico, Iowa, and barely hanging on in Florida and Virginia.

Will this abysmal showing hold true, or is it a reflection of McCain's invisibility for months with a contested Democrat primary? We shall see

Economically the price of gas is destroying the budgets of Americans and putting our entire economic system at risk if these prices continue without real wage growth. Today I filled up and paid $91, and noticed that diesel prices are close to five dollars a gallon. Diesel prices are the more worrisome of the two since the equipment used ot harvest our food and transport it is all diesel. If farmers cannot make a profit due to diesel prices, we will be exposed to shortages for the first time in thirty years. Of course the government excludes fuel and food prices from inflation, so they claim inflation is under control. Cut out discretionary spending as much as possible is all I can say.

First Zimbabwe Post

On Friday the Zimbabwe teachers ended a strike after a 745% raise. They are now paid 3.4 BILLION Zimbabwean dollars a year, which amounts to over a hundred dollars US annually on the black market exchange rate. Periodically more stories about the hyperinflation brought about by printing money to cover debts will appear, to illustrate the final product of unsound fiscal and monetary policy.

The helicopter is fueled up and ready for takeoff

The sound you hear in the distance is the sound of your money losing value by the minute. Helicopter Ben is preared to throw some more paper at the economy in hopes of increasing stock prices come Tuesday. Of course there are always economists trotted out whenever an irrational move by the Fed comes to play up the importance of Helicopter Ben's latest paper deluge. Today's comes from the article linked above:

The Fed's rate cuts have added to the downward pressure on the value of the
dollar, which recently plunged to a record low against the euro and has fallen
sharply against the Japanese yen. The drooping dollar is stoking fears that
inflation might take off. The weaker dollar could raise the cost of imported
goods entering the U.S. and lead American companies to raise prices as
foreign-made products become more expensive.

To Hoffman, that is a case for going with the half-point rate reduction. Other analysts believe the situation is so dire that the Fed must cut deeper. Brian Bethune and Nigel Gault, economists at Global Insight, are among those predicting a three-quarter point reduction. Given the turmoil on Wall Street, there even is a chance of a 1 percentage point cut, they said.

Note that nobody says that perhaps cutting rates the first couple of times did not work so let's not further devalue the dollar again. To quote a famous saying "the definition of insanity is doing the same thing over and over and expecting different results. Oh well, tell me what you think.

The future of our money supply: