TPS

So you believe that an increase in money can cause inflation but an increase in the flow of savings can't affect asset price inflation? Ok, have it your way. As for my other point, I guess you have a problem with facts. I provided you with a link from the Fed with the excess reserve data. It is a fact that banks are sitting on $1 trillion in reserves. If you can refute that, please do so. Just as it is a fact that tax rates have been cut and the share of income to the top is the highest it's ever been. Facts seem to make you uncomfortable, and want to return to other issues...

Do the math dude. Here's a simple example, so I hope AD can follow it... 2009 personal income = $8 tril; income share of top 20% = 50%; average tax rate approximately 25%; savings rate = 25%. So we can estimate the flow of savings from the top 20% as: Income share of the top = 50% x $8 tril = $4 tril; after-tax income = 75% x $4 tril = $3 tril; savings = 25% x $3 tril = $750 billion. Now assume the income share and tax rates were the same as they were in 1980: income share=44% and tax rate =50%. Income share= 44% x $8 tril = $3.52 tril; after-tax income = 50% x $3.52 tril = $1.76 tril; savings = 25% x $1.76 tril=$440 billion. That's an increase in the savings flow of $31 billion for the year! That is not a trivial amount. Is it any wonder Hedge Funds took off? While we can debate the underlying politics of the changes, these are essentially the correct data. It's pretty straight-forward: cutting taxes at the top combined with rising inequality has increased the amount of money chasing assets.

How else are you going to understand it?

Somewhat related to what I am currently writing about, which is a topic we debated previously. You say cheap money policies, I'd say look at changes over the past 30 years that have lead to too much money chasing too few assets. Several major related changes have taken place which have led to the taming of goods inflation, but that has been replaced by rampant asset inflation. Increasing globalization has helped seriously weaken labor's ability to bargain. Globalization has tamed wage inflation and increased the inequality of income. Goods inflation has been conquered through cheap imports and the destruction of the unionized industrial base (good or bad depending on your politics). The other side of this coin is that most of the benefits from these changes have accrued to the top 5% of the population. From 1980 to 2009, the share of income going to the top 20% has increased from 44.1% to 50.3%, but most has gone to the top 5%, as their share increased from 16.5% to 21.7%. In current $s that means an extra $200 billion per year going to the top 5%. Combine this with the trend to lower tax rates at the top (while increasing taxes for everyone else via the Social Security tax increase), and you get a massive flow of savings looking for financial returns. It is no coincidence that asset inflations--bubbles--have become more frequent and more intense. This is a consequence of the belief that increased savings leads to productive investment; it does not. Business expands because of the expectation of higher sales, not because there is an increased pool of savings--in fact, that tends to dampen demand for products. There is too much money chasing too few assets. Tax cuts for the top combined with a massive shift in the distribution of income IS a major cause of the bubble economy.

The Front Office sucks! We can't even get a 5th rounder into the starting line up. Sheesh!

Interestingly Bernanke said last week that he is not worried about commodity prices because he doesn't think firms have the pricing power to pass the costs along... Guess we'll see if B is right or wrong--if those price increases hold. You raise an issue that I tried to tell---crap! getting old--mr.end-of-the-world(what was his handle?), when he said something like "the fed will run out of jack." In a fiat currency world, the fed is never out of jack. It buys assets by issuing its own liability! If only I had that power or a printing press! i could buy up the world...assuming people accept my dollars.... But we do have to accept the fed's dollars because that's what government requires us to use when we pay taxes. The Fed balance sheet is not relevant in terms of the fed as "an on-going concern." The fed can hold assets forever if it wants, and they never have to mark-2-market. The only expenses of the fed are some buildings and people. They earn income via interest on their treasury holdings, AND they give any excess interest back to the Treasury. They will never run out of liabilities to issue in order to buy assets. It is possible for them to run out of assets to sell back into markets when they begin contractionary policy. But they don't care if they take losses because they are not a profit-making business. They work for the public good, or more accurately the banking good....

And my point all along: most of QE1 has not impacted the supply of money--the monetary base is higher though because of bank reserves. I posted a link to the fed's data on excess reserves--almost $1 trillion. QE2 is a different animal, as stated in my piece. By the way, you seem to think that commodities don't influence the CPI. They do, via changing producer prices, which are inputs into consumer prices. The Fed also looks at the PPI. I agree with your last point completely, as long as you mean M1, M2, or some broader measure of credit. The monetary base (bank reserves) can increase on a sustainable basis if banks choose not to lend. And, bank reserves can be withdrawn from they system when the fed wants to by selling treasuries.

Ok, I didn't want to do this, but here's my take on QE2. I owe credit to PPP (currently magox in particular), as the discussions here help flesh out the ideas. I seem to attract some wackos too.... QE2

This sounds familiar.... I went "all-in" a couple months ago, but it's because of what I saw wrt the $s impact on exports (My portfolio is mainly in EM, then small cap, global resources, and real return--with magox's buddies @pimco... ) I didn't think of it as "smart money" though. As for a Canadian account, I started one 5 years ago because I expected a long term decline in the $ as a consequence of its slow decline as international reserve currency. I am taking your last suggestion, my wife and I are looking at a nice piece of land near Aleghany near a lake...however, my reasons are a bit different.

The only point that goes out on a limb as a prediction is your GDP growth; everything else is in process.

Thanks. I obviously didn't focus on him often...

From what I could tell he looked ok. I don't recall seeing him get beat. Anyone tape the game and see how he did?

Gotta love this, Goldman supports QE2. Gee, I'm sure it has nothing to do with GS being one of the Fed's primary dealers, hence there are millions of dollars of fees involved? Nah, couldn't be.... Goldman

Look at what I wrote again. QE1 was a direct exchange with the (wall street) banking system, and it's had little effect because the banks are sitting on the reserves. OK? NOw, QE2 is buying treasuries from the list I mentioned, so it's a portfilio impact. YES, the FED has increased the quantity of money in someone's portfolio in exchange for a treasury, so the impact depends on what bank, investor, HF, sovereign wealth fund does with it--we agree here completely. IT's the first QE that began after Lehman that has not had an effect. Check the fed data.Fed dataThe really interesting stuff is found in the transition, summer of 2008 to the crisis. Click on the "release dates" and go back and look at how excess reserves went from a few billion to a trillion!! in a matter of months, and it's still close to a trillion. This can't be ANY CLEARER! That's included in my list on how monetary policy can impact economy. Agreed. All on my list. I have not disagreed with your scenario on commodities, I disagreed with the extent that EM growth was the main driver vs speculative investment flows--isn't that what you are now saying? This started because I disagreed with the simplistic notion expressed that stock prices rise because there's more pieces of paper circulating (money printing) relative to shares of stock. That implies investors ignore fundamental valuation principles. Increases in expected earnings make a stock worth more (or a drop in the discount factor--interest rates). It's pretty straight forward, if firms can pass along their higher (inflation-induced) costs into higher prices, then their net income and EPS increases by the rate of inflation, AND therefore stock prices for a given P-E ratio. Unfortunately people choose to believe in a fairy tale explanation, or one that was taught in an elementary school classroom--"if i give all of you more 30 pieces of paper and there are 30 pieces of gum, how much does the gum cost? Now kids, if I give you 60 pieces of paper without increasing the pieces of gum, what's the gum cost? In the real world, the FED doesn't hand out money to all the kids in the room, only to those that have a piece of paper the fed can buy...

I half expected Torbor to be the Merriman casualty.

Thanks for making my point--yes, stock prices reflect earnings. As you also suppport, stock prices will depend on wether inflation-induced costs can be passed along. If higher wage and oil costs are passed along in higher prices, then nominal earnings will rise based on a given profit mark-up. Your problem is you don't think through all of the effects. Simply take a look at the quantity of excess reserves in the banking system from the Fed's data. So, yes, I am saying that QE-ONE's impact was almost nil. The Fed swapped reserves for non-performing assets, and (MOST of) those reserves are sitting on account at the Fed--HENCE THE NEED FOR QE-TWO!!!! I do agree that low interest rates increase corp earnings after interest paid and refis help households who do refi. It's the big banks who are sitting on reserves because they are still underwater. The fed is paying interest on those reserves, so they exchanged non-performing for an asset that pays a little interest. CHECK THE FED's data!!! You are now talking about what the Fed hopes QE2 will do, and I agree with all of those possibilities. The difference between 1 and 2 is that 1 was directed at saving big banks; 2 is buying in the open market from whoever is selling--banks, investors, hedge funds, foreign holders of treasuries. So the big question is what will be done with those funds when one of those entities now has more money in their demand deposit? I think you and I agree here. Monetary policy can impact the economy in the following ways: Lower interest rates --> Good: 1. hopefully more borrowing by businesses and consumers. 2. Lower int expense for those with short loans, and increased refis for long loans 3. REduce the value of the $ --> improved net exports 4. increased stock prices as the drop in the long bond yield leads to a higher market P-E, whcich then stimulates consumption by the so-called wealth effect (at least for those with stocks). The bad: 1. As you've been preaching, expectations of higher inflation can cause investors to use those funds to invest in commodities, precious metals, etc, leading to higher commodity price inflation, higher input costs and higher costs for consumers. 2. The funds get invested overseas instead of US assets (though could have same wealth effect as foreign investments increase as the $ falls). 3. EM sovereign funds react by buying the securities to maintain the value of their currency relative to the $, holding more $ assets in sterile accounts. Of course there are, but it doesn't change the fact that stock prices (for the most part) are based on future expected earnings... What I disagree with are cavalier statements about how Fed policy impacts spending and inflation in the economy. It's not so simple for someone to say "more money chasing more goods." There is a process of how increased fed intervention influences variables, and most of those processes are indirect.

Then maybe you can all explain why stock prices were essentially flat in the decade of inflation, the 1970s?

I agree that expectations drove today's rally, as I said. I agree that the lower long term yields generated by the expectation from QE2 also affected stock prices because it pushes up the P-E on the market. I don't disagree with any of the expected effects you mention--I wrote the same elsewhere this week. I know what Bernanke is trying to do. What I disagree with is a simple caricature of how more paper raises prices of anything. Sure, someone can give an example of X goods and X pieces of paper means the goods cost X. If I increase paper to 2X, then the cost of each good is now 2X. That's not how things work in the real world though. Yes, the fed is monetizing the debt, but they are buying it in the market, so that means existing debt, not new issues. The question is what will banks, investors, and sovereign funds do with the $s? I agree with you on this. That doesn't mean that stock prices go up in the same proportion as the increase in money. As I said, the impact from inflation on stock prices comes in the form of nominal earnings--if inflation raises EPS (and that's not a given, because of increased commodity prices), then prices will rise for a given P-E ratio. G'night.

The best outcome of this election is it's the end for Pelosi. She reminds me of a former co-worker: if you wanted to make sure something got f&^%ed up, you put him in charge.

Two things drive stock prices higher: expectations of increased future earnings or lower interest rates. It's a little of both. Does anyone seriously think stock prices increased because there is more currency? Inflation's impact on stock prices comes from higher nominal earnings.

I wonder if that is possible? It seems to me that if a team simply picks up someone's contract for the remainder of it, does it give them the option?

If you didn't add the parenthetical comment I could understand your point. Your statement implies that stock prices went up without any other change in firm value--is that what you mean? Is QE2 causing the market's P-E ratio to rise because there is more paper floating around?

I remember; was just checking...

Does this mean you've changed your view on how that $1-$2 trillion (or is it 3 now?) of Fed "money printing" will impact inflation?

The so-called "dual mandates" are not its primary function, financial stability is; the Fed was created for this purpose. Next on the list is the inflation goal, because they were created to serve financial interests; hence, they have an inflation target, not an employment target. As to the current policy, I will continue to beat the drum on cutting the payroll tax because it will raise both disposable income and business profits (your supply side). That's pretty vague. What would be "unsuccessful" with respect to inflation? Higher or lower?