40 billion a month, open ended.
I didn’t expect something so aggressive. This is big news.
CAD is up over 1.03 U.S.
Thoughts?
Implications?
Um. Gold just jumped 2% in about 10 minutes, and silver up 4%. And will likely keep going up as everyone searches for a “safe haven” investment.
I expect the stock market to gain some ground (relative to the dollar), while the dollar index drops quite a bit.
Both short term and long term.
I’m not really sure how this will affect the EU… probably send some major ripples and throw the Euro out of whack for awhile.
I also expect significant foreign investors to take advantage of the currency debasement to purchase US assets, once the dust settles and the dollar drops.
[quote]tmay11 wrote:
Thoughts?[/quote]
I don’t think it helps confidence, and already poor confidence coupled with an Obama (read: government spending like drunken sailors) win in November pretty much assures stagnation in wages and private employer hiring.
So in short, this helps people’s portfolio and Obama’s re-election bid more than America, as the “bump” in economic headlines will be good press.
I reserve the right to be totally wrong.
I’m pretty much over my head at this point, but as I understand it, the price of essentially everything just went up, with a particular emphasis on imports (oil)?
[quote]countingbeans wrote:
[quote]tmay11 wrote:
Thoughts?[/quote]
I don’t think it helps confidence, and already poor confidence coupled with an Obama (read: government spending like drunken sailors) win in November pretty much assures stagnation in wages and private employer hiring.
So in short, this helps people’s portfolio and Obama’s re-election bid more than America, as the “bump” in economic headlines will be good press.
I reserve the right to be totally wrong.[/quote]
I mean, I really like the concept of injecting capital into the economy to increase the amount of economic exchange. The more exchange there is, the more real wealth gets created. I just don’t think this will do that.
I think there’s still way too much uncertainty, and people (read: corporations), are going to stick with financially conservative strategies, rather than genuinely innovate and expand markets.
So from an “economic stimulus” standpoint, I think this will pretty much flop.
[quote]LoRez wrote:
I mean, I really like the concept of injecting capital into the economy to increase the amount of economic exchange. The more exchange there is, the more real wealth gets created.[/quote]
Agree, but I’ve been reading lately that where this capital is going already has plenty of liquidity. There is just no movement.
agree as well.
[quote]I think there’s still way too much uncertainty, and people (read: corporations), are going to stick with financially conservative strategies, rather than genuinely innovate and expand markets.
So from an “economic stimulus” standpoint, I think this will pretty much flop.[/quote]
Yup agree again. There will be some movement in the market, taken way out of context by “regular” folks as a sign of some great economic imporvement.
But companies will still sit on their reserves and wait for the meltdown the Government is too broke to prop up to come along. And keep making money in foreign markets where they can.
As of early August, wages are down and spending is stagnant. Which means stupid American’s didn’t learn a damn thing about 2008/2009, or like our government, believe money grows on trees.
God I have become a negative nancy lately, lol.
[quote]smh23 wrote:
I’m pretty much over my head at this point, but as I understand it, the price of essentially everything just went up, with a particular emphasis on imports (oil)?[/quote]
Well, technically, it means there’s now more money for banks to loan out. But since smaller banks borrow from bigger banks that borrow from even bigger banks that borrow from the Fed, you probably won’t see this money in terms of improved consumer loan rates.
In a very real sense, it mostly just means corporations can borrow money easier than before. Which means they can theoretically expand business and create more jobs. It also means they can get funding to buy more supplies and tooling to make whatever it is they make.
It’s sort of a roundabout way to enable businesses to do more business. At least if everything works according to plan.
But, because it simultaneously reduces the value of the dollar (if you print money out of thin air, each dollar now has progressively less value), it means a lot of stuff now becomes more expensive, relative to the dollar. In reality, the inflationary impact takes a long time to show up, it’s not instant by any means.
This is as simple of an explanation as I can come up with right now:
So lets say you raised chickens. And you needed gas. And lets say that someone was willing to trade you a gallon of gas for 3 chickens. You were used to “paying” 3 chickens for a gallon of gas.
So in terms of dollars, let’s say a gallon of gas is worth $4. And each chicken is worth $1.33. Since buying gas with chickens is pretty unreasonable (and is negotiable, since not everyone wants a chicken), that’s where the money comes in. You sell 3 chickens to someone who wants them, you then take that money and buy a gallon of gas.
Now, lets say the value of the dollar drops (by printing more money). A gallon of gas still costs 3 chickens. Since you’re using chickens, it really doesn’t matter… the price stays the same.
But for those people who only have dollars, a gallon of gas now costs $6, and a chicken costs $2. When the dollar goes down, everything else goes up. If you own actual tangible goods (like gas, or chickens), it can be a good thing when the dollar drops. But if your money is in dollars, basically everything you have in the bank, in your investment portfolio, etc. is worth less. Your money just won’t go as far.
–
I hope that explained both sides of the issue a bit… injecting money can stimulate trade, and that’s a good thing. But it also makes the dollars you own worth less, which is not such a good thing.
[quote]LoRez wrote:
[quote]smh23 wrote:
I’m pretty much over my head at this point, but as I understand it, the price of essentially everything just went up, with a particular emphasis on imports (oil)?[/quote]
Well, technically, it means there’s now more money for banks to loan out. But since smaller banks borrow from bigger banks that borrow from even bigger banks that borrow from the Fed, you probably won’t see this money in terms of improved consumer loan rates.
In a very real sense, it mostly just means corporations can borrow money easier than before. Which means they can theoretically expand business and create more jobs. It also means they can get funding to buy more supplies and tooling to make whatever it is they make.
It’s sort of a roundabout way to enable businesses to do more business. At least if everything works according to plan.
But, because it simultaneously reduces the value of the dollar (if you print money out of thin air, each dollar now has progressively less value), it means a lot of stuff now becomes more expensive, relative to the dollar. In reality, the inflationary impact takes a long time to show up, it’s not instant by any means.
This is as simple of an explanation as I can come up with right now:
So lets say you raised chickens. And you needed gas. And lets say that someone was willing to trade you a gallon of gas for 3 chickens. You were used to “paying” 3 chickens for a gallon of gas.
So in terms of dollars, let’s say a gallon of gas is worth $4. And each chicken is worth $1.33. Since buying gas with chickens is pretty unreasonable (and is negotiable, since not everyone wants a chicken), that’s where the money comes in. You sell 3 chickens to someone who wants them, you then take that money and buy a gallon of gas.
Now, lets say the value of the dollar drops (by printing more money). A gallon of gas still costs 3 chickens. Since you’re using chickens, it really doesn’t matter… the price stays the same.
But for those people who only have dollars, a gallon of gas now costs $6, and a chicken costs $2. When the dollar goes down, everything else goes up. If you own actual tangible goods (like gas, or chickens), it can be a good thing when the dollar drops. But if your money is in dollars, basically everything you have in the bank, in your investment portfolio, etc. is worth less. Your money just won’t go as far.
–
I hope that explained both sides of the issue a bit… injecting money can stimulate trade, and that’s a good thing. But it also makes the dollars you own worth less, which is not such a good thing.[/quote]
Nice explanation, thanks for taking the time.
To actually answer your question… no, the price of everything didn’t just go up. The price of certain raw commodities (like oil) has gone up, since the impact of economic decisions hits pretty quickly in that market. But for other things, you probably won’t see a change for awhile (but it will go up).
The shipping company is paying more for gas, so they charge more to ship stuff. The grocery store now has to pay more to have food shipped. Then the grocery store will charge you more for that food.
Food prices and lumber/construction prices will probably be some of the first places the inflation will show up, on a personal level.
[quote]countingbeans wrote:
…assures stagnation in wages and private employer hiring.
[/quote]
Nothing new there…working on at least our second decade.
I don’t know what got into me. That was wordy.
I’m just going to figure out the investment angle.
[quote]LoRez wrote:
I mean, I really like the concept of injecting capital into the economy to increase the amount of economic exchange. The more exchange there is, the more real wealth gets created.
[/quote]
I don’t think that’s true.
“The more exchange there is, the more real wealth gets created.”
From my understanding - that’s according to free market theory - that you don’t make a trade unless you perceive yourself to benefit from it.
But 1st of all - that’s not free market when you are injecting capital.
2nd - You haven’t made a true choice when you are being forced to spend before inflation robs you. If you wouldn’t have spent without the capital injection, then maybe saving is the way to go. Whatever you intended ‘real wealth’ to mean - it doesn’t mean buying a pile of junk with gov’t $ you haven’t in some way earned
3rd - injection of capital is none other than taxing everyone in order to subsidize someone else. Purchasing power of everyone else decreases, except for the guys you inject the cash into
“The more exchange there is, the more real wealth gets created.”
My understanding has been that this quote is true in regards to technological advances and faster moving, cheaper, better organized business systems. But forcing it is a step backwards. The reason is that when you do it through advances, you have truly decreased costs - so more people can make more choices which benefit them.
If you do it by capital injection you have only fooled them. So yes, you do also make more trade - but not the good kind. The decreased purchasing power will hurt them and decrease their possible choices in the future. You can’t hold them up forever, so they will eventually fall. Whereas they would have just been saving instead
One more… this might make more sense than everything else - simply stimulating trade is not good in and of itself
What can be good is when you find ways to remove existing barriers to trade
I was once worried about inflation, but I now realize after 3 yrs that it just won’t happen.
The only thing that is getting inflated is the stock market. So, I don’t really care if ben buys more bonds because it just makes me more money on my investments.
the S&P 500 is up close to 100% since the crash over the past 4 yrs or so. Core Inflation is like 8-10% over that same time period.
So, I really don’t care…It’s a good thing imo
Outside of some specified form of nominal GDP targeting, this was the best (and most politically feasible) policy the Fed could implement.
[quote]LoRez wrote:
The more exchange there is, the more real wealth gets created.[/quote]
Step 1: - wealth creation
Let’s say someone’s got a big rock in their backyard. It pretty much has no purpose; you can sit on it, you can look at it, but otherwise it’s just a rock.
But let’s say they crush the rock and heat it, and it turns out that rock has iron ore in it.
What was once a (useless) rock, is now a bit of (useful) iron, and some crushed stone. A metalworker can’t do much with a rock, but they can do something with a chunk of iron. A construction crew can’t do much with a rock, but they can do something with a bunch of gravel.
The rock didn’t have much value to begin with, but by transforming it (via crushing and heating it), it now became a chunk of iron and some gravel, which are more valuable resources. Value was added via that transformation.
Step 2: - the motivation
If you don’t have the money to hire the tools or employees to crush and melt that rock, that value isn’t added. The wealth isn’t created.
If a construction company or metallurgical company can’t afford to buy the iron/gravel from you, there’s really no point in doing the work in the first place.
Step 3: - how the banking industry fits in
So, let’s now say there’s a company that wants to put in a new railway so they can service new markets, or undercut their competition, or whatever. There’s some risk that it might not succeed, but they also don’t have the cash to do it. They went to the bank to get a loan to add this new rail line.
The bank, 2 days ago, said no… they simply don’t have the money to loan out to something with that degree of risk. But today, the bank actually has enough capital that they can engage in slightly riskier lending.
The railway gets money.
They place an order for rail from the metallurgy shop. And an order for gravel for the rail foundation.
The metal shop hires workers to make the rail. A construction crew is hired too.
Now that there’s a need for more iron and gravel, there’s money to hire the workers and equipment to break down that rock.
The newly hired workers need to buy gas for their cars, so there’s more business in the petroleum industry.
Etc. etc.
At least that’s the basic theory it.
I like the theory, and parts of it actually do work that way, especially in pull-based supply chains… where the production doesn’t really happen until there’s a demand for it. But real life always works a bit different than theory.
–
Also, while I’m using a more manufacturing-centric example, the whole idea of value being added via resource transformation also applies to everything from food (cow → a bunch of steaks), to people/time (bunch of people sitting around watching TV → team of call center agents).
Wealth is really just created by the transformation from a less-desirable resource to a more-desirable resource. (drug-addict college party girl → stripper)
[quote]D Public wrote:
I was once worried about inflation, but I now realize after 3 yrs that it just won’t happen.
The only thing that is getting inflated is the stock market. So, I don’t really care if ben buys more bonds because it just makes me more money on my investments.
the S&P 500 is up close to 100% since the crash over the past 4 yrs or so. Core Inflation is like 8-10% over that same time period.
So, I really don’t care…It’s a good thing imo
[/quote]
Bubble.
Bubbles burst.
Sure, asset inflation is just swell, if you get out in time.
[quote]LoRez wrote:
[quote]LoRez wrote:
The more exchange there is, the more real wealth gets created.[/quote]
Step 1: - wealth creation
Let’s say someone’s got a big rock in their backyard. It pretty much has no purpose; you can sit on it, you can look at it, but otherwise it’s just a rock.
But let’s say they crush the rock and heat it, and it turns out that rock has iron ore in it.
What was once a (useless) rock, is now a bit of (useful) iron, and some crushed stone. A metalworker can’t do much with a rock, but they can do something with a chunk of iron. A construction crew can’t do much with a rock, but they can do something with a bunch of gravel.
The rock didn’t have much value to begin with, but by transforming it (via crushing and heating it), it now became a chunk of iron and some gravel, which are more valuable resources. Value was added via that transformation.
Step 2: - the motivation
If you don’t have the money to hire the tools or employees to crush and melt that rock, that value isn’t added. The wealth isn’t created.
If a construction company or metallurgical company can’t afford to buy the iron/gravel from you, there’s really no point in doing the work in the first place.
Step 3: - how the banking industry fits in
So, let’s now say there’s a company that wants to put in a new railway so they can service new markets, or undercut their competition, or whatever. There’s some risk that it might not succeed, but they also don’t have the cash to do it. They went to the bank to get a loan to add this new rail line.
The bank, 2 days ago, said no… they simply don’t have the money to loan out to something with that degree of risk. But today, the bank actually has enough capital that they can engage in slightly riskier lending.
The railway gets money.
They place an order for rail from the metallurgy shop. And an order for gravel for the rail foundation.
The metal shop hires workers to make the rail. A construction crew is hired too.
Now that there’s a need for more iron and gravel, there’s money to hire the workers and equipment to break down that rock.
The newly hired workers need to buy gas for their cars, so there’s more business in the petroleum industry.
Etc. etc.
At least that’s the basic theory it.
I like the theory, and parts of it actually do work that way, especially in pull-based supply chains… where the production doesn’t really happen until there’s a demand for it. But real life always works a bit different than theory.
–
Also, while I’m using a more manufacturing-centric example, the whole idea of value being added via resource transformation also applies to everything from food (cow → a bunch of steaks), to people/time (bunch of people sitting around watching TV → team of call center agents).
Wealth is really just created by the transformation from a less-desirable resource to a more-desirable resource. (drug-addict college party girl → stripper)[/quote]
Weird that it deleted your step 1, 2, and 3 portions. I changed it a little hoping that it goes thru this time.
No arguments on step 1 - only a comment. That not every resource will be put to maximum use. It’s just not possible - we go with what’s most efficient. The backyard was the perfect example. Unless your backyard is huge, it’s just not feasible.
No arguments on step 2 either
Step 3 is where it’s at
[quote]The bank, 2 days ago, said no… they simply don’t have the money to loan out to something with that degree of risk. [/quote]But do you really understand what you’ve just said? (not saying that you don’t - you might)
I think it would be best if I come back here more toward the end of my post
[quote]But today, the bank actually has enough capital that they can engage in slightly riskier lending.[/quote]This goes back to what I said before. I worded it in obvious consumer terms and you’ve taken it into the business / investing realm. That’s cool, it’ll be more precise now
[quote]squating_bear wrote:
2nd - You haven’t made a true choice when you are being forced to spend before inflation robs you. If you wouldn’t have spent without the capital injection, then maybe saving is the way to go. Whatever you intended ‘real wealth’ to mean - it doesn’t mean buying a pile of junk with gov’t $ you haven’t in some way earned
[/quote]
In this case you are still ‘buying a pile of junk with gov’t $ you haven’t earned’.
But instead of “you” it’s “the banks”
Instead of “buying” it’s “lending” or “investing”
Instead of a physical “pile of junk” it’s “bad investments with more risk than reward”
And now we might be more ready
There is a measurement happening. You said that degree of risk
It’s like this -
s_b: yo LoRez - you hungry?
LR: hmmmm… little bit - got somethin to eat?
s_b: yup - some tasty fried cockroaches!!! mmmmm! YUMMY!
LR: nah, I’m good
Had I said steaks the story would be completely different
What you’re doing on the grand scheme is somewhat similar to throwing out stakes for fried cockroaches. Those two examples are to extreme, but the concept is real.
What I’m saying is back to step 1 - we can’t do everything. When you do this capital injection you are taxing all of us to subsidize that same bank so that he can make bets that he knows aren’t very good ones.
Exception to the rule is if ‘you’ actually do know better than the banker - but that’s extremely rare and on a case by case basis - not societal. I trust the banker with his own money much more than I trust the gov’t with mine.
A key word we have both used is ‘risk’. It stems from uncertainty - we naturally express in probability.
It seems that you’ve almost said that we should all just roll the dice. I think I’ll take a look at the probabilities first.
But make no mistake - if you roll every time then you’re gonna come out on top at least some of the time. I’m just saying it’s not really worth it. The greedy banker has already checked that 2 days ago
Then again - I know nothing of pull based supply chains, so maybe I’m missing something
Hm, I think I’m not understanding where you’re coming from.
From a risk/reward standpoint, another example.
Low risk, low reward:
A small-town restaurant is regularly packed to the brim every night. They decide to spend some money to buy another 3 tables to service their customers. They spent a bit up front, but they make more money now that they’re able to service more customers each night.
Higher risk, higher reward:
The same restaurant decides to open a new location in a major city, in a larger store (to service even more people at the same time), and with somewhat higher prices (because the demographics can afford it.) It has the potential to more than double their profits. However, there’s several competitors in the area, and property is much more expensive. If it works, they could make a ton of money… but it’s more risky than adding a few tables.
When the banks are strapped for cash to loan out, they might be able to do several small low-risk loans like the first example. That’s kind of been the situation we’ve had. Banks are unwilling to loan any money to individuals or businesses unless it’s very low risk. The return on investment is almost 100% guaranteed, barring any major disasters (like the restaurant catching on fire).
With a bit more capital to loan (via, say, cash injections), banks would be more willing to finance the second scenario. It will probably work out very well for both the restaurant and the bank, but there’s a chance it might not. Instead of just major disasters, they have more competitors and a new market to tend with. But if they do succeed, it will be great for everyone involved.
I really wouldn’t say that the second example is “greedy banking” by any means. It’s higher risk, and higher reward, but it’s not like they’re lending money to gamblers. (cough housing bubble cough)
Banking sort of went from a state where they’d lend money to anyone, for any reason, with no due diligence… to a point where they’re lending money to nobody, for any reason. They did a complete 180, and that swift reactionary approach seemed to cause several problems of its own.
It’s like crash dieting… it appears to work for a bit, and then you realize pretty soon how much you really messed things up. A much more gradual approach would’ve probably worked better.
I think if things swing back the other direction, where banks are a bit more risk-tolerant and businesses can start spending money to grow their businesses (instead of just maintenance), that it would be a good thing. I also think it needs to be eased in, as a fairly gradual process.
BUT (and this is probably the really big one here) I don’t actually think that “printing money”/“inflating the dollar” is the way to do it.
In a nutshell:
I think that increased business lending can genuinely spur economic growth, but I don’t think QE is the way to go about doing it.
On a personal note – and because of this announcement – I’m considering moving more of my money out of dollars and into more tangible goods.
[quote]LoRez wrote:
Hm, I think I’m not understanding where you’re coming from. [/quote]
I think the most important difference in thought MIGHT be what I said about step 1 from before. There’s many rocks in many backyards that will never do anything but get in my way when I try mowing the lawn.
They COULD be put to much better use, but I would have to pick it up, load it to my truck - waste the time and gas to drive it wherever, etc. Or have a crew come over and do whatever - but it’s just not worth it. Imperfection is the concept. Not everyone gets a loan - it just can’t, sorry. Imperfection is inevitable, but maximization is the goal.
So I’m saying some sort of measurement and decision has to be made on who get’s loans and who doesn’t. The banker is an expert at this - it’s literally his job. Your capital injection game is throwing him off balance (imo).
There’s also high risk, low reward
and low risk, high reward.
This is still an oversimplification. There are an infinite number of possibilities on how the risk and reward match up.
We want higher reward for lower risk. The bank will never lose sight of that if it’s lending with it’s own money.
How does this even happen in the first place?
I think the truth is that even if you inject a bunch of cash they still won’t lend unless they can be confident enough. “Enough” being judged by them - same as before. I don’t think lack of money is the problem… (for some reason I hate using this term) - but it’s lack of confidence
[quote]
With a bit more capital to loan (via, say, cash injections), banks would be more willing to finance the second scenario. It will probably work out very well for both the restaurant and the bank, but there’s a chance it might not. Instead of just major disasters, they have more competitors and a new market to tend with. But if they do succeed, it will be great for everyone involved.[/quote]This is what I was talking about at the end of that other post. With the dice rolling. It’s not gambling - but that’s a fair enough analogy.
The blackjack master (the banker) wants to stay when it’s his own money he’s betting. But you want to give him more money so that he will take more risks. I’m saying the obvious - that it could go well, but he could also bust. And he knows the game so much better than you and me. Sometimes the better move is to stay.
(if you know blackjack then you know that analogy is flawed, but I hope you can see past that)
Nothing else to argue except this.
[quote]BUT (and this is probably the really big one here) I don’t actually think that “printing money”/“inflating the dollar” is the way to do it.[/quote]I’m not aware of any other way besides taxes / subsidies. Are you?
And that’s really the main point of what I’m trying to say. You are basically taking money from production (taxes / inflation) in order to fund other production which is less efficient (that the banks weren’t confident in).