Financial topics

[Higgenbotham]

1. Year to Year real ( inflation adjusted ) growth (GDP) can be a huge portion of declines in debt percentages shown in H's graph.

I believe it's important to make comparisons in the growth rates. A higher growth rate can support a higher debt burden. When I look at the valuation of the US stock market, I can only come to one conclusion - that investors believe the subsidies and bailouts to US corporations can continue for a long time. In other words, they believe that the US government can keep going further and further into debt for a long time to continue to support corporate profits. Perhaps that belief comes from the assumption that the US can handle a debt burden on the order of what Britain handled in the past, or what Japan is currently handling. That is a very dangerous assumption. The US economy is only growing right now (at a low 2%) because of deficit spending on the order of $1.2 trillion per year. If the $1.2 trillion were taken away and the debt not allowed to grow any further, the US economy would have a negative growth rate and at the same time it would be impossible to pay down the debt. Therefore the ratio of the debt to GDP would increase. What the graph does show which I found interesting is that all through the 1930s, during a decade of worldwide depression, neither Britain nor the US ratio of debt to GDP increased much.

[Higgenbotham]

US and UK government debt in historic perspective

http://www.simontaylorsblog.com/2011/12 ... rspective/

There is no way the government will cut spending if half today. It is not the same situation at all.

http://pair.offshore.ai/38yearcycle/#debtlevel

Agree 100%. If the US government cut spending in half today, the US economy would collapse and the debt to GDP ratio would still increase.

[Reality Check]

When I look at the valuation of the US stock market, I can only come to one conclusion - that investors believe the subsidies and bailouts to US corporations can continue for a long time. In other words, they believe that the US government can keep going further and further into debt for a long time to continue to support corporate profits.

There is an alternative belief on the part of investors that might result in the same stock market investment actions.

QE1, QE2 and QE3 have resulted in massive excess reserves ( over and above the required Reserves ) in the accounts of Banks and other Financial Institutions in their Reserve Accounts at their Federal Reserve Bank. These excess reserves are on the order of 1.4 Trillion Dollars in total. That 1.4 Trillion could serve as the Required Reserves for up to Fourteen Trillion in additional loans by the Fractional Reserve Banks to businesses and others.

This lending, if it occurred, would of course drive up inflation and allow the values of stocks to rise based on inflation as well as profits generated when Fourteen Trillion hits the private economy.





Please Note the max Y ( vertical scale ) on the graph below is over 10 TIMES smaller that the one above.

[Reality Check]

...
On a different track ...

Is the 1.4 Trillion in excess reserves shown in the previous Graphs proof you can not "Push a Rope" ?

Did the FED intend the banks to open up the flood gates on low interest fractional reserve loans to private business, but instead the banks, just sat on the money ?

[Reality Check]

...
On yet a Third Track...

Are these Excess Reserves the reasons the Inflation Vince has been predicting has NOT occurred ... Yet ?

[Higgenbotham]

There is an alternative belief on the part of investors that might result in the same stock market investment actions.

QE1, QE2 and QE3 have resulted in massive excess reserves ( over and above the required Reserves ) in the accounts of Banks and other Financial Institutions at banks. These excess reserves are on the order of 1.4 Trillion Dollars in total. That 1.4 Trillion could serve as the Required Reserves for up to Fourteen Trillion in additional loans by the Fractional Reserve Banks to businesses and others.

This lending, if it occurred, would of course drive up inflation and allow the values of stocks to rise based on inflation as well as profits generated when Fourteen Trillion hits the private economy.

You're right; I read some version of this almost every day. Usually, they gloss over the debt. This was today's version:

IBD Chairman William O'Neil: Supercycle Bull May Arrive
Wed, Oct 31 2012

Read More At IBD: http://news.investors.com/investing-mar ... z2Avogt3fm

[Reality Check]

Read More At IBD: http://news.investors.com/investing-mar ... z2Avogt3fm

I did not notice any mention of Quantitative Easing or Excess Reserve Balances, but maybe I missed it.

I did notice he focused on very low interest rates, but I am not sure business loans are being widely offered at historically low interest rates yet.

[Higgenbotham]

I did not notice any mention of Quantitative Easing or Excess Reserve Balances, but maybe I missed it.

He didn't mention it. The overall conclusion I got out of it is O'Neil believes the US is still an innovative powerhouse economy that can grow its way out of the current malaise.

Usually those who offer this opinion don't talk details other than to say, if they do mention the Fed, that the Fed has done almost exactly the right thing.

Here's Buffett on October 24, for example:
"WELL, I THINK--I THINK THE STOCK MARKET GENERALLY IS THE BEST PLACE TO HAVE MONEY."
"I THINK BERNANKE HAS DONE AN ABSOLUTELY SUPERB JOB."

http://www.cnbc.com/id/49453726/CNBC_EX ... _BOX_TODAY

Though I found it interesting that Buffett didn't endorse QE3 and that's the first criticism he has made of the Fed that I am aware of.

[vincecate]

...
On yet a Third Track...

Are these Excess Reserves the reasons the Inflation Vince has been predicting has NOT occurred ... Yet ?

I think so. And just like short term bonds will not be rolled over and provide a flood of new cash, so will these.

Because nobody ever paid interest on excess reserves before people don't know how to think about the effects on inflation and such. I think the right way is to imagine a black box around the central bank and government. If you put money in the box for awhile you can get interest added to your money when you get it back. It is the same if the Treasury pays you interest or the Fed pays you interest. The Fed just came up with another way to keep money off the street so it does not contribute to inflation without people counting it as part of the national debt. It is a very cool trick really. Some day people will understand, but maybe not till after the hyperinflation starts.

[Reality Check]

... short term bonds will not be rolled over and provide a flood of new cash ...