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Old 08-04-2011, 09:01 AM   #61 (permalink)
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So US have no money, but plenty of cash? :-)
Oh, this changes everything!
Of course the US has money. It just isn't synonomous with cash.
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Old 08-04-2011, 09:08 AM   #62 (permalink)
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Of course the US has money. It just isn't synonomous with cash.
So why all around panic with the debt? Let's the US pays. If it cannot — it has no money.
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Old 08-04-2011, 09:28 AM   #63 (permalink)
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You assert inflation leads to low interest rates. Again, the tail does not wag the dog. Low interest rates are how inflation is achieved. Central lending rates (discount rates and overnight rates) lead to creation of commercial money driving up money supply and causing inflationary forces on prices. If inflation were low, interest rates would respond by increasing because interest rates simply are the supply/demand of capital liquidity.
Lowering and raising interest rates is any central banks primary method for controlling inflation. If high inflation forces Bernanke to raise interest rates, in a sense it did.

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Inflation, as reflected in prices, is only "under control" because it be exported through issuance of bonds and T-bills. In terms of the amount of commercial money that exists, you would have to know the total unfunded liabilities in terms of issued debt obligations and somehow extrapolate how much of the budget will be continue to be financed in this manner.
It is and I agree.

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Inflation nor deflation stifle growth. Malinvestment is what destroyles growth and inflation tends to exacerbate malinvestment while deflation can stifle all investment. Deflationary scenario also will result (necessarily) from healthy interest rates, driving up capital demand. Once capital demands are satisfied, interest rates will respond by tapering off and deflationary forces will be weakened. It is a negative-feedback mechanism in this manner.
Deflation rewards malinvestment, which is great if you already have dollars, not so great if you don't. You'll see this on a small scale with the Bitcoin. That's the whole point of the Fed using interest rates to manipulate inflation.


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The problem is that inflation is far too high but it is masked because it is able to be exported. Yet, this will come to an end. Debt cannot be used to drive a society forward because it creates undisciplined investment.
This seems to be the root of where we disagree. The high demand for US treasuries certainly won't last forever and warrants caution, but in my opinion, the market shows no signs of losing its taste for our debt any time soon.
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Old 08-04-2011, 09:48 AM   #64 (permalink)
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Lowering and raising interest rates is any central banks primary method for controlling inflation. If high inflation forces Bernanke to raise interest rates, in a sense it did.
I do not agree. The tail does not wag the dog. Inflation is driven by central interest rates. What Bernanke has been charged with doing is ensuring "price stability". But prices are subject to more forces than just inflation. Market forces undboutly will cause price shifts due to problems or boons in productivity (natural disasters or breakthroughs). Trying to paper over these hiccups by playing with central interest rates is akin to trying to make a cat walk straight on a leash.

Prices stabilize eventually, but attacking the problem centrally introduces too many uncontrolled forces on variables and affects things in an oftentime unforseen way.



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Deflation rewards malinvestment, which is great if you already have dollars, not so great if you don't. You'll see this on a small scale with the Bitcoin. That's the whole point of the Fed using interest rates to manipulate inflation.
Deflation doesn't reward malinvestment whatsoever. In fact, it makes people even more cautious with investment because if their venture doesn't prove fruitful, they are out even more than in an inflationary or stagnant envinronment because the currency has appreciated and the instrument is demoninated in nominal terms.

Would you be more or less cautious loaning money to others if the US Dollar index is soaring?

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This seems to be the root of where we disagree. The high demand for US treasuries certainly won't last forever and warrants caution, but in my opinion, the market shows no signs of losing its taste for our debt any time soon.
Really? Because major credit institutions are downgrading both quality of US Soverign debt and the Dollar itself which is an ominous sign for any instrument denominated in dollars.

The reason why debt instruments haven't had the rug pulled out from underneath of them is because China and others who are so heavily invested in US Treasury obligations, have a nefarious interest to keep the dollar afloat to avoid massive losses. These bonds cannnot be sold, either, without risking preciptating both huge downward pressure on the value of the bonds themselves and a liquidity crisis (or liliquidity crisis, as it were).

It's a situation where perception of the dollar keeps bonds in their hands, keeps them from being able to do anything with them (even as they mature) and keeps them purchasing more to maintain a climate where their bonds hold value.
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Old 08-04-2011, 09:51 AM   #65 (permalink)
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Yes, but Japan also has a very high savings rate. Their mentality about borrowing money is different. Do you see a culture of savings in the United States? Look how many things you can finance.
More specifically 90% of Japan's treasuries are owned by Japanese.
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Old 08-04-2011, 09:57 AM   #66 (permalink)
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Lowering and raising interest rates is any central banks primary method for controlling inflation. If high inflation forces Bernanke to raise interest rates, in a sense it did.
there two other methods. Reserve requirement and open market operations. Actually, biggest part of the debt is made by the last method.
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Old 08-04-2011, 10:06 AM   #67 (permalink)
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Really? Because major credit institutions are downgrading both quality of US Soverign debt and the Dollar itself which is an ominous sign for any instrument denominated in dollars.
There are only 3 that matter and none of them have downgraded US debt. China is a junkie for US debt and that isn't changing soon so there will be no downgrade.

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The reason why debt instruments haven't had the rug pulled out from underneath of them is because China and others who are so heavily invested in US Treasury obligations, have a nefarious interest to keep the dollar afloat to avoid massive losses. These bonds cannnot be sold, either, without risking preciptating both huge downward pressure on the value of the bonds themselves and a liquidity crisis (or liliquidity crisis, as it were).
Exactly....nothing has changed.

Their interest isn't nefarious, they are interested in manipulating their currency in the manner that most benefits them....same as us.
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Old 08-04-2011, 10:10 AM   #68 (permalink)
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there two other methods. Reserve requirement and open market operations. Actually, biggest part of the debt is made by the last method.
That's absolutely true, but interest rates are the largest influence on capital flows and drive demand for bonds.

That is what makes the carry trade possible.
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Old 08-04-2011, 10:35 AM   #69 (permalink)
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Deflation doesn't reward malinvestment whatsoever. In fact, it makes people even more cautious with investment because if their venture doesn't prove fruitful, they are out even more than in an inflationary or stagnant envinronment because the currency has appreciated and the instrument is demoninated in nominal terms.

Would you be more or less cautious loaning money to others if the US Dollar index is soaring?
Good question. Lets imagine an environment of ridiculously severe deflation.

I'm going to make you a loan for $5 in 2011 dollars @ 20%APR for 1 year.

In July 2012, $5 is worth 6 2011 dollars. ~20% deflation.

You then pay me back the $6 that you owe me, which is worth ~ 7.2 2011 dollars.

I made about ~40% in a year.

I'll make that loan all day, but would you borrow? (usurious interest rates aside)
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Old 08-04-2011, 12:27 PM   #70 (permalink)
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Reserve requirements don't change day to day though, so while it is certainly an influence, it's a set variable for the purposes of analyzing the change of monetary growth and resulting inflation as a funtion of market and political activity.

Cifex:

If I default on you, your losses aren't only the principal, but the amount the principal appreciated. In a deflationary environment, consider the fact you could set on a static instrument and it will appreciate with nearly zero risk. I think it goes without saying that in a deflationary environment, bonds will be worth more upon maturity than in a stagnant or inflationary environemnt. I think we all accept this as a fact of nature about instruments denominated in the nominal currency.

What we have to consider, however is how different vehicles compare to each other the same environment and determine how those vehicles compare to each other another environment, not only how the vehicle compares to itself across different environments.
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