TPS

I agree the trade deficit thingy is a structural problem, but not in the way you view it--as an over-consumption problem--that's simplifying it as well. The middle/lower classes, especially those with families, won't change consumption based upon a VAT because they spend everything they earn. The structural issue is that we have ensured they shop at place like Walmart, and that's where most of the trade def with China comes from. Why? Because we don't mass produce most of those products domestically anymore. That's the problem I have with the currency issue: even if the yuan appreciates, all that will happen is that Walmart will buy in other asian or Latam countries that haven't appreciated. On a more radical note, why do we need american households to save more? There certainly is NO lack of funds in US financial markets right now, but there is a lack of demand in goods markets.

Either way, investors are making bets. This morning's FinTimes has an article which highlights the current environment and the bets that investors are making: Deflation or Inflation? A quote: What I wrote yesterday:

Cool, we're saying the same thing, we simply use different vocabulary. Everyone understands that commodity prices are based upon global demand. No secret there. We disagree on which factor is currently having the greater impact on prices, global demand or speculative investment flows. I say it's speculators right now; doesn't mean that won't change when globabl growth spreads.

For both, it depends, and you need to work through the processes to understand under what conditions it does happen. You can't simply say the FED has printed money--there is a process (ok, you will still probably say it...). I've tried to explain to you one of the processes of QE's impact, that of swapping banks' dead assets for reserves (and the FED pays interest on those reserves, which is another reason why banks are content to sit on them). Other possibilities of QE: 1. Directly funding the US Treasury. As I said, this directly injects spending into the economy, but the FED, for the most part, has stayed away from this. 2. Buy MBS, T-Bonds or other long term assets in the various markets from "investors" to drive down long term rates. In this case the investor has made a decision to sell because they want to take profits or re-weight their portfolio. In either case the impact depends upon what the investor decides to do with their "cash." Buying more MBS, buying stocks, buying commodity futures, etc. This will drive up prices of those assets. The FED's actions also raise bond prices and lowers yields. With lower rates, those who can afford to, refinance as you indicate. Refinancing substitutes a lower interest rate asset on the bank's balance sheet for a higher one; and raises the discretionary income of the borrower. Households and businesses will have more net income if they refinance. This is one of the transmission mechanisms of monetary policy. However, this mechanism isn't always caused by monetary policy. For example, a recession will reduce long term interest rates without any action by the FED. Your questions: Commodity prices are currently rising mainly from increased investment funds flowing into these markets and the belief that inflation will come back with a vengeance in the not to distant future because of QE. While there have been some supply issues, most of the price increases have come from these speculative guesses. Right now there is a disconnect between true underlying demand (from industry) for commodities and investor speculation based upon expectations about inflation. Actual inflation will depend on how long it takes for the economy to respond to low interest rates. If we experience a Japan-like decade, then those bets will be wrong. If the FED starts directly financing the Treasury, then they'll be a bit closer. To answer your question: for a given supply, commodity prices can increase by 1) investors allocating more funds--speculating--on comodities; or 2) the actual demand for commodities by industry, which is based upon growth. In case 1, there are no new $s created, there is a re-allocation of investors' funds; in case 2, the money supply increases with economic growth--in the first case you will not find an inverse relation; in the second case you will. #2. The dollar. How do dollars get into the hands of foreigners? They run a trade surplus with the US (our deficits). They then have two choices: China can, for example, 1) sell the accumulated $s from their surplus on the FX market, which would cause the $ to depreciate against the yuan; or 2) if they wanted to maintain an artificially higher $ in order to maintain their export-led growth stratey, then they will use the accumulated $s to buy $ assets. This is what a lot of emerging market economies are doing, and it's what Krugman is talking about. This game has been going on for over 10 years, which is why Japan and China both hold some $3-4 trillion in $ assets. As long as they are willing to keep holding them in order to keep their exchange rates under-valued against the $, then the game continues. So, to answer your question: it depends. As long as those countries want the game to continue, it will continue. Which means they could be holding $5 trillion in a few years, and the $ won't fall against those currencies. On the other hand, if they decide NOT to hold $s, then we'll see your "inverse relation." But, once again, it's a process. You seem to think that money falls from trees, but only in the extreme case of the FED directly financing the Treasury is this the case. The majority of FED actions impact financial markets and asset prices, which in turn implies there is an impact on the portfolios of financial institutions and wealth managers (China's sovereign fund is also one), the impact on the real economy depends on whether banks lend and how the economy respondes to lower rates. This is the part you seem to ignore in your analysis.

Find a quote where I said money isn't circulating at all. That's just plain stupid. I guess you fail to see that my statements that the majority of the $1 trillion that went to banks in QEI is sitting as excess reserves is the same thing as saying there is no velocity of circulation for that money. Inflation is within the bounds of the FED's current target. I understand that commodities are used as a hedge against inflation and many investors are betting that QE will have that impact. Their actions are causing commodity prices to rise, that's the point I've made. It's that simple.

Yes, I saw that you finally stated "print doesn't mean actually print." Although I'm not sure why you felt the need to state that after my quote about excess reserves...?? Also, I am not saying there is NO money being created. I am saying that a big chunk of the QE is sitting in the excess reserve account. Look at the FED data. If you need a link I'll provide it. And, what I have said all along, is that until banks start lending to businesses, consumers and governments, that money will not get circulated--which means velocity of circulation. What do you think velocity means? At least you realize it's not a constant. As for inflation, what have I said all along? We will not see inflation until demand, spending by all sectors of the economy, picks up and unemployment falls. My position all along is about describing the process of how reserve creation by the FED (aka QE) actually translates to money in circulation for spending purposeses (which relates to velocity). IT's that simple. You've described a process of how low interest rates and refinancing can stimulate more spending, and I completely agree with that process--for those who can refinance, it reduces expenses and increases available income without increasing one's income. What I've tried to explain is that when the FED swaps reserves for assets with the banking system, money has not been put into circulation yet. When the banking system uses those reserves to lend for spending, that's when it becomes "printed money" (and influences velocity). It's that simple. It works differently if the FED directly buys treasuries from the government, as I've said. It also works differently if the FED buys an asset from an investor. The impact will depend on what that investor chooses to "reinvest in." But that's another story. We disagree about what's driving commodity prices. I think they are being driven more by speculators, you don't. Time will tell on this.

Do you just cut and paste or do you read things first? Here's the key part you pasted: Exactly what I have been saying--you dolt!You'll note your quote also states what I have been saying--QE increases EXCESS RESERVES IN THE BANKING SYSTEM. What you don't understand is that those reserves are held electronically on account at the FED. They only get into circulation when banks make loans--which it seems you are finally starting to get. You should also look up the definition of the money supply, which, for M1, is currency held by the public (in circulation) + checkable deposits (and a few other small components). Reserves held by banks are part of what's known as the "monetary base." Excess reserves, part of the monetary base, represent potential loanable funds, not money in circulation. That's what I've been saying all along, which YOU CAN'T seem to COMPREHEND. If you actually read and comprehend what I wrote, you would've seen that I said, "if the FED directly finances government spending by buying T-Bonds/Bills then it IS printing money." Excess reserves of banks represent potential money creation, and YES, there is close to $1 trillion sitting on account--ELECTRONICALLY- at the Fed, stagnating until banks lend. Your statement that "energy and food aren't included in the measure of inflation" leads me to believe you really don't know what you're talking about. The CPI DOES include E&F. What many analysts CHOOSE to focus on is a sub-set of the CPI called "core CPI," which excludes E&F. They focus on this measure because E&F are so volatile changes in their prices can create significant movements from month-to-month. You might want to check out the BLS web site and actually look at the CPI before you blather on about it. BLS

So when you use the term print, you don't necessarily mean on pieces of paper--that is, you don't really mean the word "printed"? Clarify that please. If you are agreeing with me that that the FED has credited banks' accounts at the FED in your definition of "print," then I guess we agree. But it's not clear what you mean. First, I think you are confusing effects here. I've always said that the FED attempts to control the economy by changing interest rates, and it typically does so by setting and controlling the Fed Funds Rate. In these extreme times, they have tried to bring down longer term rates. They continue to intervene in markets to lower interest rates because the indirect mechanism of lower interest rates has had little effect--there's no loan demand. I'm glad you are finally understanding the way monetary policy impacts the economy, which is through lower interest rates, which is what I've always stated. Money does not fall from trees and into the hands of businessess and households, it is "created and released" when banks make loans. Excess reserves sitting on account at the FED represent the ability of the banking system to make loans, and only when they do, will money be "relased into the economy." Ahhh...here's the nugget. Where is that money now if it's not being released into the economy? Do you really believe there are stacks of notes laying around somewhere? Go back and read everything I've ever stated on this subject. I've alwasy said inflation won't happen UNTIL the economy recovers and resources become scarce--the unemployment rate falls and capacity utilization rates increase. Nice to see that you finally understand how monetary policy impacts the economy through interest rates. If your argument is that the FED has printed money which causes inflation, then how can an increase in interest rates reverse that process? As for Dudley, he never said print, he said easing. The only time the FED "prints" money, in a way, is if they directly lend to finance federal government spending. I assume you were looking in the mirror...

MT was rignt about QEI, as it was a blanket swap of reserves for worthless mortgages. If QEII is about buying long term US T-Bonds, then his point is ludicrous. On Hyper-inflation, until people understand the "nature" of modern money and banking, they will continue to believe the US is on it's way to the Zimbabwe outcome--it's not. The FED has not printed money. Does anyone here understand this? The FED bought bad assets and credited the "reserve account" of banks which are HELD on account AT the FED. The FED now pays interest on excess reserves equivalent to the T-bill yield, so banks are indifferent about using these to buy Treasuries themselves. Almost the entire $1 trillion "given to the banks" through buying MBS is made up of these reserves. Only when banks use those reserves to lend to someone or thing that will spend it, will we see inflation. As long as there are excess labor and capital resources, it won't happen. That said, we are seeing investors increase funds flowing to commodities (including gold), making bets that these prices will rise. Commodities are the next asset bubble.

Probably means they will continue to run their version of a 4-3, rather than the 3-4?

Wouldn't disagree with criminal charges. I think FDIC is going after funds any way it can, and in some way hoping to send a signal about "moral hazard" (a slightly weaker attempt than what Paulson did with Lehman...).

It's about time someone had the balls to do this. Way to go Sheila. Bair

I certainly support the new regime, and still do for the most part. What (now) worries me about the so-called "chix" regime is that it seems it takes them too long to see the obvious. I can give them a slight pass (so to speak) on Edwards, as mabye Gailey thought he could work out his problems. But Lynch vs. Jackson? Did they not look at the tape from last year? His jersey's in the HoF for chistsake! Make this guy the focus of your offense like last year Chan and we'll start winning games (assuming the defense can hold teams to under 30 points...). The Bills will win this week and Jackson will be the main reason why--thus shutting up the me-diots about the Lynch trade.

Not saying it all went, just saying there was a big movement into REITs, which helped make the hot markets even hotter.

Maybe the work at ILB will help his run D skills, as I think he was mainly a "get after the passer" DE in college. Would be a great story if this works out, at least for Moats...

Study I thought this was my line? Nice article. It's too bad they didn't inlcude data on how much money flowed into REITs, but those were some mighty fine returns. I do recall, that with the Enron/Worldcom, etc scandal and the tech bubble burst, a lot of was reluctant to go into stocks. Real Estate became one of the investments of choice. Maybe I'll check the Flow of Funds data and see if I can get that.

Ok, Take government out of the picture--no interest deduction, no implicit backing of gses, no cra, etc. Are you saying a bubble in housing could not be possible?

As I said, I don't know what caused the problems at N-rock. I do know that there was a housing bubble in the UK and in many EU countries. So I guess the real issue I was trying to get at: were governments in those countries also pushing homeownership for low-income residents?

Well I guess we'll have to agree to differ on which source we think is more reliable: Fed researchers vs Washington Post journalist and Ayn Rand institute member. We agree here: Monetary policy has very little effect during a serious recessions when loan demand is flat (which is why there is velocity has slowed and the "money multiplier" is non-existent). I think in my pm to you I mentioned I believe that investors are speculating in commodity futures which could mean a bubble is brewing there. The dollar decline is something the economy needs, as exports have been one of the few bright spots. The other point of disagreement I have is your view of money, specifically that you think the Fed has "printed" money, but we've certainly been down this road before, so I won't rehash.

I have news for you, all economic discussions are political, and all economists, just as everyone else does, have a political bias. Do you think your link was not biased? Because the real unemployment is close to 15%.

Where did I say you said "only"? I know you realize there were a lot of factors, but you did say it (CRA) "played a huge role." As for your articles, from the first one: While they had "goals" the government set, they were pushed by banks to buy their crap, so they could keep the bubble going and continue to generate the fees from the loans. As it also says, they entered the subprime market in 2006/7, and the bubble was already in progress. One might conclude from this article that Fannie went into the subprime market mainly to boost its earnings on higher interest loans becuase of the accounting scandal in which they overstated earnings. your second article is an editorial by someone from the Ayn Rand institute. Very objective. Try reading something a little more objective: Fed president Sure, government policies support homeownership, they always have. You seem to think there were significant changes in those policies that were the "root cause" of the bubble; I disagree. There was a bubble across all segments of the market. Like any bubble, or ponzi scheme, you continually need more players to keep it going. The mortgage finance industry paid a lot of money to pols to keep it going too. An interesting question, that I don't know the answer to: as I recall, the first casualty of the crisis was a British bank (Blackrock?). How was its failure related to the real estate bubble in the US?

They both refer to the impact on savings, not consumption. First, are you saying there was only a bubble in poor neighborhoods? Was it poor blacks and mexicans who bought all those houses in Las Vegas, Florida and California? Is buying a house the only way to invest in housing assets (REITs for example)? I'm talking about all of the **** created based upon the price of the underlying assets--that's what bubbles are about. Speculation about some underlying asset that drives financial assets related to the real asset to higher and higher levels, which drives the price of the underlying assets higher, which drives the paper assets higher, which.... I'm not denying there was some impact, but not the main impact. CRA applies to financial institutions that take in deposits, so they are required to lend some % in the communities where they take in those deposits. The majority of sub-prime loans were generated by mortgage finance companies which are NOT covered by CRA. Even many Wall Street IBs bought their own finance companies to fuel their MBS and derivative markets. The FED and FDIC have done the research (and published papers), and from this both Bernanke and Bair, both appointed by Bush, have testified that the primary factor was not CRA, rather it was predatory lending, securitization, and lax regulation. The right pushes this as the main issue because it plays into the anger of their targeted constituents. I'm not making a subjective claim about those tax cuts, I'm trying to explain how one can make the argument that they impacted the bubble (which I do happen to believe though). This all goes back to a comment by PastaJoe.

You chimed in on the response I gave to GG, which means you got on board the new topic. I'm happy to get back to the original--friggin' hijackers! I don't think we were debating Clinton originally either. The debate, from my end, was whether tax cuts for the wealthy (a part of supply side theory, not the whole of it) can add fuel to the bubble? My contention is that cuts to households at the top create a greater pool of savings which are used for financial investment, which can fuel a bubble. Unless you are a small business owner, savings of households are used to buy financial assets, which increases the demand for those assets (which is NOT the same thing as real investment). Tax cuts for those who save a greater proportion of their income add more fuel to asset prices/bubbles, than tax cuts for those who spend all of their income. That does not mean the tax cuts caused the bubble, rather they add to it. There is nothing at all absurd about that argument--it's a fact that the rich save more than the poor. Btw, the argument about tax cuts for households is not the same as supply-side tax cuts for businesses. There is a marginal impact on real investment from reducing the after-tax return on those productive investments. Gee, such an unbiased source.... This quote about the possibility of increased taxes: "That means small business owners have no idea come January how much capital they will have available to pay their workers and make investments." I thought workers were paid out of pre-tax income? He also says the #1 impediment from government is taxes (I'm sure that's true). However, surveys say the #1 impediment for small businesses at the moment is lack of demand/sales, which is the #1 impediment to investment right now.

Yes, it's a bit more complicated than saying it was the tech boom, but the Roubini link (you can ignore the equations) has a good discussion and links to the debate of the period (including some WSJ editorials).

I knew I should've thrown the "natural rate" term in... I'm not talking about the source of the expansion in the 1990s, which of course was the tech bubble. Up until the mid-90s the so-called "natural rate of unemployment" or "non-accelerating inflation rate of unemployment (NAIRU) was believed to be between 5-6%. In the past, when Unemployment (U) approached 5-6%, the FED would raise rates to slow the economy down. Since inflation was tame in the 1990s, the FED believed that NAIRU was lower, and let the expansion continue. The point is that the FED decides when to let the party stop by raising rates, and in the 1990s they let the party continue because the inflation barrier changed. Maybe you need to do a little more homework... To save you some time, here's a little primer on the debate from that period by Roubini: Nairu