The federal reserve is going to pull another ONE TRILLION DOLLARS OUT OF THEIR ASS!

[LiberalNut]

It should be self-evident after one of the greatest asset bubbles of all time that we have built too many homes.

::sigh::

You can't talk macro-economics and then shift directly to one product. There can't be OVERALL overproduction in the economy. But, even in micro-economics, one could argue that there are not in fact too many homes. The problem is that not enough people can afford to buy homes.

The rest of your post is similar garbling of micro and macro-economic concepts.

 

[LiberalNut]

Your mistake is assuming I think the Fed can control things 100% of the time

No dude, your mistake is that you flip-flop from saying that the fed controls nothing to the fed controls everything. What the fed can AFFECT is the supply of money. That's essentially all it can do.

The rest of your post is a garbled mess.

 

[Paulie]

Your mistake is assuming I think the Fed can control things 100% of the time

No dude, your mistake is that you flip-flop from saying that the fed controls nothing to the fed controls everything. What the fed can AFFECT is the supply of money. That's essentially all it can do.

The rest of your post is a garbled mess.

Nowhere did I ever say they either controlled 'everything', or 'nothing'.

That's one hell of a strawman.

I never said they controlled anything other than the supply of money.

By controlling it, they influence how credit flows. Sometimes they get the results they desired, sometimes they don't.

Early last decade, they got what they wanted. Credit moved and the economy grew. This time around, they're not quite as successful.

 

[LiberalNut]

I never said they controlled anything other than the supply of money.

But you did. You said it controlled the demand for money. The fed does not control the demand for money.

Early last decade, they got what they wanted. Credit moved and the economy grew. This time around, they're not quite as successful.

That's right and I already told you the reason why, though you don't seem to want to accept it. The reason that monetary policy isn't working is because the supply of money isn't the problem. Indeed, industry and banks are FLUSH with money. The problem is AGGREGATE DEMAND. The masses don't have enough purchasing power to consume the output capacity of industry. Really, they didn't in the last decade either but the debt bubble kept them going. It's over. The consumer is at max debt. Injectingmoney into the system, in my estimation, will do no good.

You have to redistribute wealth!

 

[Paulie]

I never said they controlled anything other than the supply of money.

But you did. You said it controlled the demand for money. The fed does not control the demand for money.

Without going back to look, I'll assume you're right about that particular word being used and simply say that I never intended to mean that they CONTROLLED demand, only that they influence it. That was the argument I assumed we were having.

Early last decade, they got what they wanted. Credit moved and the economy grew. This time around, they're not quite as successful.

That's right and I already told you the reason why, though you don't seem to want to accept it. The reason that monetary policy isn't working is because the supply of money isn't the problem. Indeed, industry and banks are FLUSH with money. The problem is AGGREGATE DEMAND. The masses don't have enough purchasing power to consume the output capacity of industry. Really, they didn't in the last decade either but the debt bubble kept them going. It's over. The consumer is at max debt. Injectingmoney into the system, in my estimation, will do no good.

You have to redistribute wealth!

Like I said, it doesn't always work.

You're sitting here saying that aggregate demand is the problem, which I AGREE WITH, but then refusing to accept that the Fed is increasing the supply of money to try and spur that demand. I don't know what the hell else you would possibly think they're creating this much money for other than to get rates as low as possible and try to induce demand.

It works sometimes, but like you say, we're too leveraged right now to demand any more credit. That's certainly something I agree with.

 

[LiberalNut]

if you artificially establish a lower price, demand and quantity will increase.

NO NO NO!!! Quantity will increase but demand will not! You will cause movement along a given demand curve! I posted the graph. Look at it. Try to understand.

 

[LiberalNut]

I never intended to mean that they CONTROLLED demand, only that they influence it.

::sigh::

You need to grasp the difference between increasing demand (shifting the demand curve) and movement along a given demand curve. Until you grasp this concept, you will forever be unable to comprehend more complicated macro-economic concepts.

the Fed is increasing the supply of money to try and spur that demand.

No No NO!! The fed shifts the supply curve. Demand is unaffected! All you do is create movement along a given demand curve. That said, demand for money IS NOT demand for goods.

 

[Paulie]

if you artificially establish a lower price, demand and quantity will increase.

NO NO NO!!! Quantity will increase but demand will not! You will cause movement along a given demand curve! I posted the graph. Look at it. Try to understand.

Do me a favor..

Represent a huge Black Friday sale on the graph.

 

[Toro]

It should be self-evident after one of the greatest asset bubbles of all time that we have built too many homes.

::sigh::

You can't talk macro-economics and then shift directly to one product. There can't be OVERALL overproduction in the economy. But, even in micro-economics, one could argue that there are not in fact too many homes. The problem is that not enough people can afford to buy homes.

The rest of your post is similar garbling of micro and macro-economic concepts.

No, one cannot argue that there wasn't too much supply of homes. All one has to do is the math to understand that. It's bizarre to say otherwise.

Some estimates are that 40% of the economic and job growth between 2003 and 2007 was due to housing and mortgage finance. This is what you don't appear to understand. When you keep interest rates too low, you encourage speculation and capital gets sucked away from productive activities. Imbalances occur and bubbles form when the price of credit is kept below its market clearing rate. Overproduction in one part of the economy leads to capital misallocation and bubbles, which inevitably lead to collapse. General equilibrium theory says this cannot happen, but general equilibrium theory is bullshit.

 

[LiberalNut]

No, one cannot argue that there wasn't too much supply of homes.

Yes one can and one just did. Because you are trained in business you equate "more houses than can sell at a profit" with "too many houses". This is a basic flaw in your economic thinking. In reality, too many houses would mean more houses than people actually can live in.

When you keep interest rates too low, you encourage speculation and capital gets sucked away from productive activities.

This is simply not so. You are creating a cause/effect relationship that simply does not exist. By "productive activities" I assume you mean capital investment. Capital investment is not a function of anything but expected future profit. I don't care what interest rates are, if there is no demand for more product, nobody is gonna invest in productive capacity for more product. Rather than being caused by interest rates, the speculation is caused by the existence of the capital with no incentive for capital investment. No matter what interest rates are, this bubble of capital will rove around the financial sectors, causing ruin as it goes.

 

[LiberalNut]

Represent a huge Black Friday sale on the graph.

can't really be done on a supply/demand graph. But, if you were to ty as best you could, you'd shift the supply curve just like the graph I posted.

 

[Toro]

if you artificially establish a lower price, demand and quantity will increase.

NO NO NO!!! Quantity will increase but demand will not! You will cause movement along a given demand curve! I posted the graph. Look at it. Try to understand.

Do me a favor..

Represent a huge Black Friday sale on the graph.

A movement down the demand curve IS an increase in demand.

A demand curve is an aggregation of the trade-offs of the marginal utility for goods, represented by infinite marginal utility curves. The marginal utility of goods is a function of consumer preferences, which is a function of the structure of economic output and income, given that preferences are a function of income, and output affects income. The demand curve will shift when there are structural shifts in the economy, as will changes in the supply curve. Structural shifts in demand are usually a function of changes in income. Structural shifts in supply are usually a function of changes in costs, which usually is a function of technological advancements. When prices fall for one good, there is a change in the trade-off in the marginal utility of goods, and the cheaper product will have a higher marginal utility so will see increased demand. Thus, going down the demand curve represents an increase in demand.

 

[LiberalNut]

A movement down the demand curve IS an increase in demand.

No, it isn't. It's an increase in quantity demanded.

Structural shifts in demand are usually a function of changes in income.

BINGO! And, a shifting supply curve does not mean a rise in aggregate income. Especially when we are talking about shifting the supply curve for money.

the cheaper product will have a higher marginal utility so will see increased demand.

No. You will see movement along a given demand curve, which is not increased demand (a shift in the demand curve).

 

[Paulie]

if you artificially establish a lower price, demand and quantity will increase.

NO NO NO!!! Quantity will increase but demand will not! You will cause movement along a given demand curve! I posted the graph. Look at it. Try to understand.

Do me a favor..

Represent a huge Black Friday sale on the graph.

A movement down the demand curve IS an increase in demand.

A demand curve is an aggregation of the trade-offs of the marginal utility for goods, represented by infinite marginal utility curves. The marginal utility of goods is a function of consumer preferences, which is a function of the structure of economic output and income, given that preferences are a function of income, and output affects income. The demand curve will shift when there are structural shifts in the economy, as will changes in the supply curve. Structural shifts in demand are usually a function of changes in income. Structural shifts in supply are usually a function of changes in costs, which usually is a function of technological advancements. When prices fall for one good, there is a change in the trade-off in the marginal utility of goods, and the cheaper product will have a higher marginal utility so will see increased demand. Thus, going down the demand curve represents an increase in demand.

A store has 100 widgets to sell at a price they set of $1 a piece.

The demand is not there, and the widgets are sitting on the shelves collecting dust. In order for the store to sell the widgets and clear that excess supply, they must bring the price down until there's demand for them, in which case an equilibrium is met.

I don't see how that same analogy doesn't apply to the Fed and credit.

Banks have $1000 to loan at 5%, but no one's coming in for a loan. The Fed steps in and gives the banks another $1000 so they can bring the rate down to 2.5% to get people to come borrow. If enough people come in and borrow the whole amount supplied, that was the equilibrium price for credit.

Explain to me how this is wrong. I'm completely willing to admit a mistake if I'm making one.

 

[Toro]

No, one cannot argue that there wasn't too much supply of homes.

Yes one can and one just did. Because you are trained in business you equate "more houses than can sell at a profit" with "too many houses". This is a basic flaw in your economic thinking. In reality, too many houses would mean more houses than people actually can live in.

No wonder liberals don't understand why rent control is so bad. Just lower the cost of housing and people can afford to live there! You don't need profit! Houses will magically appear!

Your economic logic is simply wrong and this explains why you don't understand how asset bubbles occur and what has happened over the past decade, and why you relying on ideology to explain what has happened. The rate of profit is the return on the asset. The return on the asset must equal the cost of the asset in equilibrium. That profit equals the return on the asset. If you artificially lower the cost of capital below the rate of accumulation of capital, i.e. the return on capital, the only way you can get to equilibrium is to bid the price up, which increases supply. But eventually, the asset bubble collapses and the debt used to support the asset bubble exceeds the market price, which creates deflation.

When you keep interest rates too low, you encourage speculation and capital gets sucked away from productive activities.

This is simply not so. You are creating a cause/effect relationship that simply does not exist. By "productive activities" I assume you mean capital investment. Capital investment is not a function of anything but expected future profit. I don't care what interest rates are, if there is no demand for more product, nobody is gonna invest in productive capacity for more product. Rather than being caused by interest rates, the speculation is caused by the existence of the capital with no incentive for capital investment. No matter what interest rates are, this bubble of capital will rove around the financial sectors, causing ruin as it goes.

It is simply so. You know how I know? I see it everyday in my work. I see investors using leverage to speculate. And I mean big money, billions of dollars. When capital is freely available, i.e. when interest rates are low, investors borrow more to buy risky assets. When credit is tight, i.e. when interest rates are high, there is less speculation. You can't understand what happened over the past decade without understanding this.

Demand in the US is actually not particularly volatile. Only during this recession did has it turned negative since WWII.

Investment, on the other hand, is highly volatile. If there was no such thing as overcapacity, then investment wouldn't be volatile. Of course, it is. It turns negative during every recession. That is because investors are reacting to overcapacity.

 

[LiberalNut]

they must bring the price down until there's demand for them

At that lower price, the DEMAND WAS ALWAYS THERE!!!

Banks have $1000 to loan at 5%, but no one's coming in for a loan.

Then, by the store analogy you just made, the bank will lower the rate till someone buys the debt, right? Why do you need the fed?

The Fed steps in and gives the banks another $1000 so they can bring the rate down to 2.5% to get people to come borrow.

Theoretically, yes. Now, what if nobody comes in still? What if all the little consumers out there just have too much debt already and don't want anymore, no matter how cheap the debt is? What then?

If enough people come in and borrow the whole amount supplied, that was the equilibrium price for credit.

The equilibrium can move with shifts in the supply and demand curves. The REAL or FREE MARKET equilibrium rate in your example was 5%. The adjusted equilibrium in your example was 2.5%. Now, you're ASSUMING that the lowering of the rate will make the funds move. What I'm telling you is that this is not the case.

 

[Toro]

A movement down the demand curve IS an increase in demand.

No, it isn't. It's an increase in quantity demanded.

Structural shifts in demand are usually a function of changes in income.

BINGO! And, a shifting supply curve does not mean a rise in aggregate income. Especially when we are talking about shifting the supply curve for money.

the cheaper product will have a higher marginal utility so will see increased demand.

No. You will see movement along a given demand curve, which is not increased demand (a shift in the demand curve).

An increase in aggregate demand. Gotcha.

 

[Paulie]

they must bring the price down until there's demand for them

At that lower price, the DEMAND WAS ALWAYS THERE!!!

If a consumer is not WILLING to buy a product, how is there demand?

They weren't willing to buy it at the higher price, so where was the demand?

Banks have $1000 to loan at 5%, but no one's coming in for a loan.

Then, by the store analogy you just made, the bank will lower the rate till someone buys the debt, right? Why do you need the fed?

The store doesn't have to lower its widget price. It could choose to just sit on it. The same way a bank can choose to just sit on its money rather than lower the interest.

The Fed steps in to supply the bank with double the money it had, so that it can now offer loans at half the price, hoping that borrowers will now come in to apply for loans.

It would be the same if there was a central widget authority that increased the supply of widget stores so they could bring the price down and attract more buyers.

The Fed steps in and gives the banks another $1000 so they can bring the rate down to 2.5% to get people to come borrow.

Theoretically, yes. Now, what if nobody comes in still? What if all the little consumers out there just have too much debt already and don't want anymore, no matter how cheap the debt is? What then?

Then you have a liquidity trap, and monetary easing doesn't get the desired results.

Like I said, it doesn't always work. In our case today, it's just flooding the banks with even more reserves. At some point, debtors will deleverage to a point where they will then demand credit again. The frightening part of that is that there's somewhere north of 1.5 Trillion dollars in that available pool of money right now.

And that's where we anti-Fed people get worried, because we don't trust that the Fed will adequately drain those reserves before the next bubble gets too far out of hand.

 

[LiberalNut]

Just lower the cost of housing and people can afford to live there!

Of course I said no such thing. What i said was raise their income, not lower the price of the house below cost. ::sigh::

I see it everyday in my work.

I'm sorry but your work experience is not evidence of macro-economic reality.

If there was no such thing as overcapacity, then investment wouldn't be volatile.

This does not follow. Again, you are equating "over capactity" with "I can produce more product than I can sell at a profit". What I'm telling you is that too much plant and equipment isn't the problem. the problem is that the masses can't afford to consume to the output capacity of industry.

A sane economy would have capacity and consumption in equilibrium at MAXIMUM CAPACITY which is dictated by population and productivity.

Really, you are putting your finger right on why recessions happen. If inventories aren't clearing, industry assume "overcapacity". What do they do? They cut production. And away we go down the rat hole.

 

[LiberalNut]

An increase in aggregate demand. Gotcha.

Whew! Yeah, we were talking macro-economics after all.