Posts Tagged ‘fiat money’

Where the money went

Monday, February 15th, 2010

The government has been shuffling the money around to obfuscate who stole it.  It lends money, and then announces that there is no problem, the money has been paid back.

But after much fiddling, the money has mostly come to rest, in that the government is now the proud owner of about one trillion dollars of mortgage backed securities guaranteed by Fannie, Freddie, and the FHA, plus some Fannie, Freddy, and FHA debt.

The first graph in the above link is the money wizzing around in complicated circles to obfuscate who is at fault, the second graph is the bailout of private entities, other than General Motors, and the third graph is primarily the bailout of Fannie, Freddy, and the FHA.

That these Mortgage Backed Securities are “Fully guaranteed by Federal Agencies” implies that the vast majority of the crisis, the vast majority of the bailout, was dud mortgages rubber stamped Fanny, Freddie, and the FHA, that privately issued mortgage backed securities have been liquidated – that the dud mortgages underlying privately issued mortgage backed securities have been settled by foreclosure and bancruptcy, but the dud mortgages underlying Fannie, Freddy, and FHA issued mortgage backed securities are on the tax payers tab to the tune of about a trillion dollars.

Overtime, as the mortgages are resolved, the trillion dollars of mortgage backed securities will diminish with time.  In proportion as they were worthless, the agency debt will correspondingly increase.

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American debt

Sunday, September 6th, 2009

Total federal debt twelve trillion

That is not too alarming in itself. It is a bit less than GDP, and for most countries, trouble ensue when debt is around twice GDP. The liberty papers are not too worried.

Total American indebtedness (public and “private”) is sixty trillion, which is much larger than federal debt, and has been rising very rapidly. The primary cause of this rise has been implicit and explicit governmental and quasi governmental guarantees – FHA guarantees, debt of too-big-to-fail corporations, guarantees by too-big-to-fail corporations, state debt, for example California, and so on and so forth.

Some substantial part of this sixty trillion is secured by real assets such as houses and the income stream of hard working people, and some substantial part is not.

Thus the excess “private” debt is not private.  The normal level of public and “private” debt is about twice GDP, say twenty six trillion, so we are about thirty trillion or so in the hole and getting deeper fast – well past the danger level of twice GDP.

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Prospects of hyperinflation

Monday, August 24th, 2009

Arnold Kling thinks that “hyperinflation would be political suicide” and that therefore that the US government will sooner or later do the extraordinary and drastic things necessary to avoid it.

Even if it was political suicide, this is like arguing that someone will lose weight because his morbid obesity is about to kill him – but it is not political suicide.  Incumbents that engage in hyperinflation usually gain political benefit in the short run, and the short run is all they care about.  The Weimar government was not punished at the polls. (more…)

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Inflation looms

Friday, June 19th, 2009

Bryan Caplan, favorably citing Sumner, tells us “stop worrying about inflation”

Supposedly we should stop worrying about inflation, because the bond markets predict only moderate levels of inflation. Supposedly we can determine future inflation by looking at the difference between Treasury Securities, and Treasury Inflation Protected Securities. Supposedly, this tells us what the people investing in securities think that inflation will be, and they are pretty good at predicting inflation.

However, this tells us only what people who are confident that inflation will be moderate think inflation will be, because if you are worried about immoderate levels of inflation, you do not diversify into long term Treasury Inflation Protected Securities, you diversify into gold, silver, guns, ammunition, rice and beans, which is roughly what the Chinese are doing, except that they are also diversifying into copper and iron, and private Chinese are not allowed to diversify into guns and ammo.

The bond market does not tell us what the smart money people think inflation will be. It tells us what those among the smart money people who do not expect very high levels of inflation think inflation will be.

What are the Chinese worried about?

They are not worried about the possibility four percent inflation in 2011. They are worried about the possibility of four hundred percent inflation in 2020. And so they are not buying Treasury Inflation Protected Securities. And so the difference between Treasury Securities and Treasury Inflation Protected Securities fails to reflect their concerns. And so, if we look at the bond market, what it tells us is that the Chinese think inflation may well hit four percent in 2011, but does not tell us what they think inflation will be in 2020. But if you listen to what they are saying, what they are saying is that they think there is a substantial risk of very high levels of inflation in eight years or so.

Governments tend to go down the tubes when total public debt is around two hundred percent of GDP or so. Thus a deficit of ten percent of GDP or so is sustainable for ten or twenty years or so. Trouble is that in addition to an on budget deficit of ten percent or so, there is also a much larger off budget deficit, in the form of an ever growing pile of government guarantees, which there is no will to restrain. Put the two deficits together, crisis looms.

Trees do not grow to the sky. That which cannot continue, must stop.

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Yes, the Fed can just keep on printing money.

Saturday, March 15th, 2008

The business times quotes an anonymous “senior London Banker”

Someone will go under in this crisis, that’s for sure. The question is whether they stay under or get rescued. Let’s see whether this latest round of stabilisation helps, but if it doesn’t, it’s difficult to see what Plan B is. The Fed can’t just keep on printing money.

Yes, the Fed can just keep on printing money.

The banks have real assets and nominal liabilities. If the Fed debases money enough, the banks will be fine – it is just that everyone else will be broke.

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