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Inflation

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Sorry to side track the Global warming debate going on, but I was looking for help on understanding what inflation is. From what I can tell it’s really the most important thing in the US economy and I don’t really know what it actually means. So what is inflation, does the monetary system change what inflation is? Does a gold standard system differ from a fiat one with inflation? Why is inflation always positive when technology is deflationary? How do we calculate the CPI and why is energy and food always removed? Why is huge inflation bad? Guess I’m looking for a theoretical understanding as much as a technical one.

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Posted by (Questions: 26, Responses: 32)
Posted on 02/27/2017 10:23 AM
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Well, the global warming discussion just got sidetracked by fart comments which is unfortunate because I usually enjoy and endorse a good fart joke.

Anyhow, inflation is a rise in the general price level. The general price level refers to an aggregate price of goods. The CPI is an aggregate index of the price level of consumer goods. It is usually quoted in year over year changes.

Inflation can rise and fall for lots of reasons, but we should expect it to generally rise in a credit based monetary system because the quantity of credit is always rising relative to the quantity of goods. So, this generally means there is more demand for fewer outstanding goods. For instance, the price of food generally rise because we don’t produce enough food to keep up with the rise in credit that is bidding on that food. In the case of technology the demand is different because the quality of the goods change much more quickly. So, for instance, a hamburger is always a hamburger so its price isn’t impacted much by its change in quality. However, something like a TV is actually improving and becoming a better quality product over time. So, a SDTV might be made that costs $500 in 2010 and then in 2011 the same company improves the technology to make a HDTV. The price of the SDTV collapses and so the demand for the HDTV is pulled down thanks to the improvements in quality. As a result, the firms have less pricing power and the vast competition drives the overall prices down. Hence, technology tends to be deflationary because the improvements in quality are so significant.

But don’t mistake rising inflation for a decline in living standards. Prices can and will rise, but that does not mean we are worse off. For instance, a washing machine costs a lot more than a washing board so the cost of cleaning clothes has increased enormously over time, but what we lose in price increases we often gain in productivity because now I can spend less time cleaning my clothes which allows me to spend more time telling fart jokes. :-)

make sense?

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Cullen Roche Posted by (Questions: 10, Responses: 1864)
Answered on 02/28/2017 1:39 AM
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Best headline on cow farts ever
https://www.foxnews.com/science/2013/11/26/big-methane-burp-cows-refineries-spew-gas.html

So inflation will always trend up in the US since we have a credit based monetary system where every dollar that’s created is a loan, so every dollar has an interest rate attached to it. So deflation would mean money is being destroyed, because loans are being repaid or defaulted on. So inflation should track growth in general?

So in a gold standard world or really any commodity, there wouldn’t be inflation since there’s no associated loan with dollar creation? What about countries that are pegged to other currencies?

Why do housing costs count in CPI but not stock or bond values?

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Posted by (Questions: 26, Responses: 32)
Answered on 02/28/2017 12:28 PM
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Yeah, I think we can expect a certain level of inflation. It’s a multitude of factors (sticky prices, credit creation, lack of resource supply, etc) but I think it’s safe to generally assume that some inflation is going to occur over time. Remember, this isn’t necessarily bad. The fact that things cost more does not mean we are worse off….

A gold standard will generally be deflationary because you’re suppressing the quantity of money that can be created which suppresses growth and has a recessionary bias. This is why the late 1800s were so volatile and had so many depressions.

Housing is counted in the CPI as the costs of rents. The BLS calculates it under Owners Equivalent Rent. Homes are technically investment and so they don’t count as a consumer good. Therefore, the value of their price increases don’t reflect “inflation” as much as they reflect the market value of past investment. A lot of people like to talk about “asset price inflation”, but asset values are not costs to consumers. They reflect the increases in the market value of assets.

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Cullen Roche Posted by (Questions: 10, Responses: 1864)
Answered on 02/28/2017 2:03 PM
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Ok Trump gave me a good example that maybe gets to my cognitive dissidence here. So if the 1 trillion in infrastructure spending went through that would boost growth from all the spending, but also increases inflation. Excluding policy based constraints, like the debt ceiling, the only US government spending constraint is to much inflation. So what’s used to judge what’s too much inflation/spending? Why cannot the government just spend until we get to full employment or everyone’s happy (insert Lego Movie’s Everything is Awesome)? And I’m not saying this in any hyperbolic way, according to the math then doesn’t communism work better? If Rand’s Galt’s Gulch is zero government spending and Marx pure communism is 100% government ownership isn’t how much control we want the government to have also a spending constraint?

Also I think I need help on where the money comes from, so government wants to pay 100 million to a construction company to rebuild bridges. Treasury auctions bonds and the proceeds go to construction company, where does the money come from to pay for that new bond? Who’s balance sheet increases?

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Posted by (Questions: 26, Responses: 32)
Answered on 03/01/2017 10:22 AM
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Mainstream textbooks say that on a rate hike the $ will soar and gold will plummet.

What we actually see is the opposite after a rate hike the $ falls and gold soars. The main reason for this is the price setter of course.

Rate hikes are price increases

Rate cuts are price cuts

Since the last rate hike in 2015 inflation has soared because the price setter increased prices. The last hike in December has of course hepled this.

Mike Norman has been saying this for months now. If you look at gold and USD/JPY since the hike they have acted opposite to the mainstream textbooks.

The gold standard, fixed exchange rate mob always push the $ up and gold down before a hike but they are doing the wrong thing and push noth markets in the wrong direction.

What is also interesting about this is that the FED thinks by raising interest rates it will fight inflation. The truth is all they will be doing is adding petrol to the flames.

A rate hike is like a helicopter drop because there are always more savers than borrowers and is a huge fiscal stimulas which can be seen in the daily treasury statement. Rate hikes add to bank deposits.

If the FED keeps on raising this year the $ will continue to plummet and gold will continue to soar. What you will see happening is they’ll push the $ up and gold down on the threat of the hike then once the FED pulls the trigger the opposite happens.

Gold at three-month highs. Yen at a two-month high. Dollar index at a three-month low.

Wait. That’s not supposed to happen, right?

https://realmoney.thestreet.com/articles/01/18/2017/here-comes-inflation

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Posted by (Questions: 6, Responses: 100)
Answered on 03/01/2017 12:01 PM
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Told Ya

Gold soaring.

USD/JPY falling like a stone.

The opposite of what’s suppposed to happen.

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Posted by (Questions: 6, Responses: 100)
Answered on 04/12/2017 9:04 PM
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“a rate hike adds to bank deposits “

good point, but are the recipients of the deposits, savers and bank shareholders spending . It depends.

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Posted by (Questions: 22, Responses: 347)
Answered on 04/13/2017 6:41 AM
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There is an sum of interest payments circulating between borrowers and savers. When interest rates rise that sum inflates. And so it is reasonable to say interest rate rises increase the amount of deposits being issued in the system.

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Posted by (Questions: 22, Responses: 347)
Answered on 04/14/2017 6:16 AM
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Here we go again.

The gold standard, fixed exchange rate zombies are buying the $ and selling gold on the threat of a rate hike.

It is akin to religious fundamentalism they’ve learned nothing from the last 3 rate hikes. If the FED pulls the trigger the $ will fall through the floor and gold will hit the sky.

If the FED goes for it buy gold, sell USD/JPY, and buy EUR/USD.

Rate hikes are price increases and rate cuts are price cuts.

Mark my words. You’ll see.

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Posted by (Questions: 6, Responses: 100)
Answered on 05/10/2017 6:02 PM
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Here we go again on the verge of another rate hike.

The gold standard fixed exchange rate brigade will sell gold and buy the $.

Let them do it and then buy gold and sell the $.

The announcement of balance sheet reduction might come into play as well this time and you can bet your last dollar they’ll go the wrong way on this as well. Just like they did with QE.

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Posted by (Questions: 6, Responses: 100)
Answered on 06/13/2017 7:06 AM
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Everything happening just as predicted above.

Just look at any graph since Jan.

Take your pick.

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Posted by (Questions: 6, Responses: 100)
Answered on 08/28/2017 9:28 PM
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So what does the data show since the FED started hiking in Dec 2015 ? 🙂

A $281 an ounce increase in price in Gold. It did go all the way to £1360 an ounce but the herd thinks there’s going to be another rate hike and started selling it again. Fools.

The actual $ index has dropped from 98 to 91 since the rate hikes began. Which is why the £ and the Euro have been rising over the same time period.

However, the best place to capture what it does to the $ is the safe haven the USD/JPY. A 761 pip move downwards.

US Inflation up from around 0.5% to over 2% with year over year increases the highest in 5 years.

None of this is supposed to happen right ? Well if you completely ignore the interest income channels it isn’t and you don’t beleive that the FED is the price setter and that price increases gets passed on. You don’t beleive rate hikes increase deposits.

It’s a coming and very few people can see it 🙂 By the time they all run back to what they’ve been running away from since Dec 2015 believing interest rate hikes fight inflation. It will be too late. They’ll be annihilated. Anybody long treasuries needs a meeting with themselves and balance sheet reduction will be the icing on the cake.

If I get the FED chair I want. I’ll probably be able to retire.

Trump will get all the fiscal levers he wants because they’ll think the new FED chair will be able to keep inflation in check. Boy are they in for a shock bigly !

Cullen, I watched that interview you did on real vision and I thought it was excellent ! Some superb points comparing the US and the EU and QE. However, it did have one major flaw.

When asked near the end why you think the $ has fell. You said because emerging markets were scrambling for $’s. It’s not about the quantity it’s always about the price. The answer should have been because the FED have been hiking interest rates.

https://www.youtube.com/watch?v=n_3sSA2joqU&t=377s

If you don’t believe me and the FED keeps hiking. You’ll see, the numbers will continue to speak for themselves. Just like they have since the FED started hiking in Dec 2015.

I’m tempted to offer a warren Buffet style bet on the side to anyone who disagrees with me. I’m so confident I have the analysis right.

If Pilu comes along with his boxful of maths and fancy charts to bamboozle me. I’ll see if he fancies a bet 🙂

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Posted by (Questions: 6, Responses: 100)
Answered on 10/24/2017 12:26 AM
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What is the mechanism for this idea you call – “price setter.”

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Posted by (Questions: 22, Responses: 347)
Answered on 10/26/2017 10:06 AM
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All else equal.

They are price adjustments, pure and simple. Higher rates equate to higher prices and higher prices mean higher inflation. Inflation is not good for currency. Higher inflation is good for inflation-sensitive stuff like gold and commodities as well as some stocks.

The data since the FED started hiking proves this. Just pick a graph, any graph. The price increases get passed on right across the economy.

Currencies are a bit like bonds, the only difference being they have zero maturity. Everyone seems to understand that when rates go up bond prices go down. It’s an inverse relationship. The discount to par reflects the implied yield and that discount increases as rates go up.

Same with currencies. The spot price of a currency can be considered par. In a rising-rate environment the forward prices of a currency are lower. The market is literally pricing in a lower exchange rate. The degree of discount to par reflects the implied yield. Buy a forward and hold it over time until it converges to spot and you will earn the implied yield.

Gold and commodities exhibit the opposite behavior. They don’t earn. They cost you to hold. There are interest payments and storage costs so the natural “curve” of gold and commodity markets has a positive slope. (Deferred contracts are priced higher than spot.)

In a rising-rate environment, forward contracts for gold are priced higher. That reflects the “cost” of holding, which equals the interest rate plus storage, etc. Prices rise in a rising-rate environment and they fall in a falling rate environment.

Of course this does not reflect short-term portfolio shifts based on traders’ beliefs. Many believe that lower rates are bullish for gold or bearish for a currency and vice-versa. As a result, they act on those beliefs and buy and sell accordingly. However, that’s not the true fundamental effect. That’s why so many people lost money buying gold when they believed rate cuts would be inflationary. Similarly, they wrongly sold the dollar. These mistakes are being repeated now, only in reverse.

The Fed thinks it is fighting inflation when actually it is feeding it via these rate hikes. Any commodity curve will show this in reaction to a rising-rate environment. The curve will instantly reflect higher future costs.

In addition, their policy and statements seem to reflect a lack of understanding of the government being a net payer of interest. They talk about being on guard against further fiscal stimulus when it is the Fed itself that is doing the stimulating. It is paying. That is income added, not removed. While some may find it harder to borrow because of the higher cost of credit, that is offset by the additional income earned by creditors and savers. There is net income received by the economy and that is by no means a brake on economic activity.

If you want to see what happens when they cut interest rates then look at Russia again pick a graph, any graph. inflation rate and the Ruble.

If it is true what they all say is true and that is increasing interest rates fight inflation and make a currency stronger.

Where is the evidence ? The clear evidence is the reverse is true.

Infact, the only time the $ has gained any strength or gold any weakness since Dec 2015 is before rate hikes as the herd on mass do the wrong thing. Herded to be annihilated.

So in the end the real question that should be asked of the corporate media is why have none of your predictions come true. Show me why increasing interest rates stop inflation and strengthen’s a currency. When it’s pretty clear looking at the data they don’t.

You’ll see Dinero after they hike next time buy gold. You’ll see, and of course if you look at the Daily treasury statement and compare year over year data on various things. There should be a big red flashing light on it at the moment screaming inflation in 15 second bursts. They’ll keep raising to fight it and only make it worse. Exactly,like they have been since Dec 2015. Only thing that has slowed the process down a bit is bank lending fell off a cliff in October last year but look at bank lending now over the last few months 🙂

Look at this graph and where it bottomed out

https://realmoney.thestreet.com/articles/01/18/2017/here-comes-inflation

He’s been bang on the money all the way through 2016 and called every currency move exactly up to today.

https://realmoney.thestreet.com/authors/mike-norman?page=8

I woke up this morning and thought they had actually got it right.

Can an interest rate rise halt UK inflation? Experts debate the data

https://www.theguardian.com/business/2017/oct/24/can-interest-rate-rise-halt-uk-inflation-experts-debate-data-brexit-watch

Read the article and realised that they will never get it. Stuck in a fog of group think delusion. These guys have had very important jobs with more letters after their name than a Welsh train station.

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Posted by (Questions: 6, Responses: 100)
Answered on 10/26/2017 6:39 PM
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Not to mention what trump has planned and already passed fiscal wise 🙂

That big red siren should be going off every 5 seconds and when balance sheet reduction gets into full swing more interest payments into the economy. Boy oh boy.

Yet, who sees what’s coming ? Anybody ? Some of us do and we are positioned accordingly.

It’s just a matter of time.

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Posted by (Questions: 6, Responses: 100)
Answered on 10/26/2017 9:02 PM
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Higher interest rates results in more government bonds issued to pay the interest. But Bonds are not used to buy things that appear in the CPI and so I don’t see how they would effect CPI. The slope of gold would be steeper but that does not mean the spot and future price would both be higher. Bonds go down in price because the their coupon rate is fixed and so the market value goes down to bring the yield in step with the higher market rate. But deposits have a variable rate of interest so that consequence does not apply to deposits.
However I do see a connection between a small increase in a low rate and a higher CPI. That is, Firms that already have loans to service, passing on the higher cost of servicing loans, passing on that business expense by asking higher prices, that is plausible.

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Posted by (Questions: 22, Responses: 347)
Answered on 10/27/2017 4:46 AM
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For sure Dinero, it does get passed on throughtout the economy. The costs of the price increases get passed on.

Gold has gone from $1,020 to over $1,350 since they started hiking in earnest. So, the short-term portfolio shifts based on traders’ beliefs are false. Look at gold they are doing the same thing and expecting a different outcome as they prepare for the next hike.

If what they say is true gold should have fallen from $1,020. We’ve had 4 rate hikes.

You are not going to like this because it uses things you don’t agree with. However, this is the real money printing and it is money printing absent of an increase in economic production. If you print more money, raise prices and don’t really produce any extra output then you get inflation.

As you can see from the graph I gave you above it is true. Inflation bottomed out Dec 2015 when the FED started hiking that was no coincidence. I’m not talking about hyperinflation here far from it but when you raise interest rates the inflation rate will move upwards. The problem of course is they think by raising interest rates they will make it go down.

https://realmoney.thestreet.com/articles/02/22/2017/rate-hikes-boost-bank-deposits

I agree that it also depends on what they spend it on. Some might just turn it around and invest it in the stock market and some might just roll it over. Ultimately, some does get spent into the economy. Banks spend money.

Check out interest paid and bank deposits via the daily and weekly reports that are released and graph them since the rate hikes began.

Within the UK MMT group I made 4 predictions the day after the last US rate hike. The predictions were as follows..

EUR/USD would break through the 1.15 mark from 1.11

GBP/USD would break through the 1.32 mark from 1.27

USD/JPY would fall further to 1.06 from 1.12

Gold would break through the $1300 mark from $1210

I nailed 3 out of 4 and I’m pretty sure the BOJ has been intervening with the YEN because it has been stuck in the same range for months now. It did fall to just above 1.07.

As with gold just look at the markets today the short-term portfolio shifts based on traders’ beliefs are all piling into the $ getting prepared for the next hike. Thing that the $ is going to strengthen. Their ignorance is making it stronger and they will be annihilated just like before.

It’s rinse and repeat expecting a different outcome. Bloomberg and Reutuers and social media have them all hypnotised.

If what they say is true the $ index should have flew upwards from 103. We’ve had 4 rate hikes and it dropped to 91. They have pushed it back up to 94 getting ready for the next hike.

https://www.youtube.com/watch?v=bg06R8cnnYE

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Posted by (Questions: 6, Responses: 100)
Answered on 10/27/2017 7:10 AM
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You have to put those predictions into context. I made those predictions when everybody was throwing the kitchen sink in the opposite direction.

Sure I’ve made mistakes as I’ve only been doing it for 2 years. The biggest mistake I’ve made was after the first hike I should of just held my positions and rode on the back of the long term trends and jump off when the FED turns around and says they won’t be hiking anymore.

I didn’t and just traded the hikes which in hindsight was a mistake. I was sailing a yacht when I should have been sailing an oil tanker.

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Posted by (Questions: 6, Responses: 100)
Answered on 10/27/2017 7:21 AM
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We could go back and forth and discuss it for months. Let’s just sit back and enjoy the ride and we’ll revisit the real data in 6 months time. Then we can talk about it again.

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Posted by (Questions: 6, Responses: 100)
Answered on 10/27/2017 7:28 AM
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During the time in which the Fed conducted QE. On aggregate personal interest income did not grow. It went from $1.4T annually in 2008 to just under $1.4T in 2015. The Federal debt went from $11T in 2008 to $19T in 2015. So the debt rose by $8T and there was no increase in personal interest income. People were holding $8T more interest bearing securities yet on aggregate they earned not a penny more.

The Fed was stripping it out. The Fed’s earnings on assets went from about $20 billion annually in 2007 to over $100 billion annually by 2015. That’s interest income that would have gone into the economy, but instead it went to the Fed.

Madness when you think about it. I’m not sure but I am starting to believe that after the crash when they knew the automatic stabilisers were going to kick in and pushed the deficit all the way to 10% of GDP.

QE was actually used to control inflation. Yet, they still to this day call QE a fiscal stimulas.

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Posted by (Questions: 6, Responses: 100)
Answered on 10/27/2017 8:16 AM
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Yes when someone is holding savings and buys a new issue bond, the deposits go in interest to the new bond buyer, who may spend it, so that does mobilise the deposits.
And also if a fixed monthly payment to service a bank loan shifts to less capital payment and more interest payment then maybe the deposit and share holders will have more to spend in the short term.
Also consider the effect on households, that could be different.I think the dynamics on these things are different in a high interest environment. When the reduction in credit growth could be dominant.
If traders make the $ go up before the hike what makes it go down after.
What in particular do I look at to observe Gold traders preparing for the next hike.

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Posted by (Questions: 22, Responses: 347)
Answered on 10/27/2017 8:44 AM
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Almost all of the Fed’s interest income is swept right back to the Treasury. Someone can correct me, but I think they keep 6-8%.

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Posted by (Questions: 0, Responses: 5)
Answered on 10/27/2017 11:55 AM
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There was quite a lot of people out there surprised by the USD Gross Domestic Product Price Index number today 🙂

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Posted by (Questions: 6, Responses: 100)
Answered on 10/27/2017 5:41 PM
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> gene kalin
In the low interest environment the Fed paid over par for the the Treasury bonds and so the Fed retains some of the interest to make up the expense of the purchase. The difference is capitalised in the price with the seller of the bond

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Posted by (Questions: 22, Responses: 347)
Answered on 10/27/2017 5:55 PM
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OK, but nothing like $100B of earned interest stays with the Fed.

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Posted by (Questions: 0, Responses: 5)
Answered on 10/27/2017 8:56 PM
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Are the mainstream starting to catch on ?

Somebody has finally decided to look at the data and the graphs.

An article in Bloomberg Says maybe.

https://www.bloomberg.com/gadfly/articles/2017-12-11/gold-s-time-is-nigh

I like this part the best…

Chart gold against U.S. 10-year Treasury yields and it looks distinctly like the metal tends to sell the rumor of rate rises, and buy the fact. Every time yields have peaked north of 2.5 percent over the past five years, gold has promptly rallied.

Yet, they still have no idea why it happens. There is just no way ever these people who spent a fortune to get educated at different ivy league universities are ever going to admit they are wrong and that what education they did recieve is out of date by decades. Their groupthink is still solid as a rock.

No matter how much money they lose they’ll still keep on thinking that increasing interest rates makes a currency stronger.

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Posted by (Questions: 6, Responses: 100)
Answered on 12/12/2017 7:47 AM
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The FED keeps raising the interest rate inflation keeps rising

The BOE raises the interest rate inflation keeps rising

Bank Of Mexico keeps raising the interest rate. 7 times in one year, inflation rate doubles.

Russia cuts interest rates and inflation falls off a cliff.

Thinking raising interest rates fight inflation. All because Mankiw taught a generation about it, and what mainstream economists like him think is that if interest rates are lowered savers put less money in banks so they have less “loanable” funds to lend out, so there is less aggregate demand. If rates are raised savers put more money in banks so there are more loanable funds to lend out.

The guy should be dragged to the Hague for crimes against humanity !

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Posted by (Questions: 6, Responses: 100)
Answered on 12/12/2017 1:18 PM
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I dont think that is the idea Derek

Its more that higher rates disincentive borrowing and the associated spending

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Posted by (Questions: 22, Responses: 347)
Answered on 12/12/2017 1:38 PM
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Either way Dinero he is wrong and it is a crime economic students are taught via his text book.

We’ve been saying just before the first rate hike.

That inflation would increase, the dollar would fall, gold and commodities would rise and Treasuries would be lower.

Let’s have a look.

December 2015, Dollar Index, 98.
Today, Dollar Index, 94.

December 2015, Dollar/yen, 121.00
Today, dollar/yen, 113.00

December 2015, Gold, $1050
Today, Gold, $1240

December 2015, Oil, $38
Today, Oil, $57

December 2015, 10-Yr Treas futures, 127.00
Today, 10-year Treas futures, 124.00

December 2015, CPI, 0.7% y-o-y.
Today, CPI, 2.1% y-o-y.

Nailed every single one of them. Mankwi and mainstream don’t even see it never mind the why it has been happening.

All trends will continue after this rate hike all else equal. The gold standard fixed exchange rate brigade are giving you a chance to get in gold low and sell the $ quite high.

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Posted by (Questions: 6, Responses: 100)
Answered on 12/13/2017 1:34 PM
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If you were a cynic.

You could easily make the case and say that central banks with their current policies show that the ONLY manifestation of inflation that they are interested in will actively try to stamp out is a rise in your wages.

They tell everyone they are increasing interest rates to fight inflation but the reality of the situation is they are increasing inflation albeit slowly as the data suggests but destroy your income at the same time. Because your income can’t keep up with the growth in inflation they are causing.

So are they stupid and they dont know what they are doing ?

Or

Do they know what they are doing all along ?

I’ll let you decide for yourselves.

It’s as if Mankwi was tasked by the corporate sector to write an economic textbook that says black is white and white is black but ultimately no matter what colour it is everything will serve the corporate sector. He got paid a lot of money for doing so.

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Posted by (Questions: 6, Responses: 100)
Answered on 12/13/2017 7:03 PM
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Don’t forget about the £ and the Euro.

Euro has gone from 1.08 to 1.19

£ has gone from 1.2 to 1.36

Since the FED started hiking and the $ weakened.

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Posted by (Questions: 6, Responses: 100)
Answered on 12/14/2017 6:14 AM
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Hi Derek,

You should try to avoid functional thinking of relationships of two time-series economic variables.
You can see chart below for spaghetti relationships of inflation with FFR and unemployment rate’

1. Phillips spaghetti (green lines and balls) : relationships of inflation to unemployment rate.
2. Neo-Fisherism spaghetti (blue lines and balls): relationships of inflation to FFR rate.


https://fred.stlouisfed.org/graph/?g=gGCI

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Posted by (Questions: 19, Responses: 161)
Answered on 12/14/2017 6:01 PM
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Thanks Pliu as always. much appreaciated.

However, I’m more than happy to stick with our theory.

Going long gold, and short USD/JPY on these rate hikes with another 3 to come in 2018 maybe. Looking at it so far I think the long term trends we’ve identified are holding up well.

Looking at the real data the only time the trends have not held up is when the FED announces another hike and they start selling gold and buying the $ again. Still believing that rate hikes fight inflation and make the currency stronger.

All else equal.

They are price adjustments, pure and simple. Higher rates equate to higher prices and higher prices mean higher inflation. Inflation is not good for currency. Higher inflation is good for inflation-sensitive stuff like gold and commodities as well as some stocks.

Currencies are a bit like bonds, the only difference being they have zero maturity. Everyone seems to understand that when rates go up bond prices go down. It’s an inverse relationship. The discount to par reflects the implied yield and that discount increases as rates go up.

Same with currencies. The spot price of a currency can be considered par. In a rising-rate environment the forward prices of a currency are lower. The market is literally pricing in a lower exchange rate. The degree of discount to par reflects the implied yield. Buy a forward and hold it over time until it converges to spot and you will earn the implied yield.

Gold and commodities exhibit the opposite behavior. They don’t earn. They cost you to hold. There are interest payments and storage costs so the natural “curve” of gold and commodity markets has a positive slope. (Deferred contracts are priced higher than spot.)

In a rising-rate environment, forward contracts for gold are priced higher. That reflects the “cost” of holding, which equals the interest rate plus storage, etc. Prices rise in a rising-rate environment and they fall in a falling rate environment.

Of course this does not reflect short-term portfolio shifts based on traders’ beliefs. Many believe that lower rates are bullish for gold or bearish for a currency and vice-versa. As a result, they act on those beliefs and buy and sell accordingly. However, that’s not the true fundamental effect. That’s why so many people lost money buying gold when they believed rate cuts would be inflationary. Similarly, they wrongly sold the dollar. These mistakes are being repeated now, only in reverse.

The Fed thinks it is fighting inflation when actually it is feeding it via these rate hikes. Any commodity curve will show this in reaction to a rising-rate environment. The curve will instantly reflect higher future costs.

In addition, their policy and statements seem to reflect a lack of understanding of the government being a net payer of interest. They talk about being on guard against further fiscal stimulus when it is the Fed itself that is doing the stimulating. It is paying. That is income added, not removed. While some may find it harder to borrow because of the higher cost of credit, that is offset by the additional income earned by creditors and savers. There is net income received by the economy and that is by no means a brake on economic activity.

Let’s see how it all plays out and we can see what commodities, the $, and year over year CPI is at the end of this rate hike cycle the FED are in at the moment.

Kind Regards.

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Answered on 12/14/2017 9:51 PM
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I’m also hoping commercial bank lending also really picks up once the debt ceiling gets sorted out.

Interest rate hikes increase deposits.

Government spending is going at a right click and is set to beat the Obama fiscal stimulas after the crash this fiscal year.

Then on top of that we have balance sheet reduction increasing to $20 billion per month in January ( that’s if it does) which again will add more stimulas via the interest income channels into the economy.

Trumps tax cuts.

One of the reasons we think commercial bank lending has slowed down is because of the leverage ratio introduced in Basel 3. When commercial banks get reserves dumped on them in huge numbers in a short pace of time by the government like $60 billion over a 3 week period for example. This curtails commercial banks from lending because they have to raise more capital to cover their leverage ratios. Especially over the last 6 months as the US congress got closer and closer to their debt limit.

So not really the amount of reserves created but the speed they are created in large numbers and dumped on the commercial banks..

The set point is the Leverage Ratio of 0.1 which is Capital/Assets…

So any govt action that modifies either Capital or Assets used in this equation will foment a systemic response to get back to the Set Point of 0.1. Then you have to study all this activity in time domain.. ie how fast can the individual parameters be adjusted .

Here this reform lowered the assets used to compute the Leverage ratio so accordingly the banks become immediately over capitalised so that newly excess capital is now directly available to shareholders so the stock price goes up to reflect the new regulatory arrangements.

Works the other way too iow if the govt acts to raise the asset levels then the system has to lower the price of all the other assets in order to maintain the 0.1 set point as capital is fixed in the relevant time domain response time of the capital account.

Bank regulatory parameters matter both pro and con…

The Basel Committee on Banking Supervision on Dec. 7 issued new rules on how banks estimate the risk of mortgages, loans and other assets. The compromise, reached after fierce lobbying by the industry, will cause “no significant increase” of overall capital requirements, the regulator said. For some big banks, capital demands will actually decline.

Who knows ? But I would like to see lending starting to run at a clip again.

All in all alot of things are in our favour to keep these long term trends going.

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Russia cut their interest rate again today.

All I ask is….

1) Compare the Russian interest rate and inflation rate

2) Look at the 2 year RUB v USD graph.

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Answered on 12/15/2017 2:53 PM
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Gold up $50 an ounce since the last US rate hike.

$ falling and falling against most currency pairs.

Not supposed to happen right ? We are told the reverse is supposed to happen.

And it aint even started yet just wait until you see what is by Feb. All else equal these trends will continue.

I rest my case. The real data always proves our theory.

It is now up to others to prove that increasing interest rates strengthen a currency and fight inflation. When it is quite clear the opposite is true.

Good luck with that.

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Gold flying high

$ dropping like a stone

I wonder why 🙂

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This will be my very last post on the subject.

It’s been a month since the last US rate hike. So what we got ?

Gold is now $100 per ounce higher ✓

The $ continues to fall. The $ index is now at 90

256 pips lower ✓

Because the $ is falling what’s it doing to the currency pairs ?

GBP/USD – 312 pips higher ✓

EUR/USD – 359 pips higher ✓

AUD/USD – 344 pips higher ✓

NZD/USD – 317 pips higher ✓

USD/JPY – 260 pips lower ✓

All as predicted in the many posts above and all else equal I hope those who have read the posts realise the complete utter crap central bankers talk. Most things do the exact opposite to what they say they will do.

Yet, you can bet your last penny when Central banks come to hike interest rates again it will be all over the media that it will make the currency stronger and fight inflation. Don’t believe a word of it.

5 rate hikes of data shows the complete opposite.

Regards

Derek.

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Is it possible there is another factor at play? Maybe all you have is a non-causal correlation. What is your recommendation-in one organized, concise comment please instead of five nearly incoherent ones? Nobody can follow you.

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Noob here. Subject related but off topic.

I am slowly getting my head around inflation. This site has been helpful!

I would appreciate some critical feedback on the CPI data from John Williams at Shadow Stats. I tend to be skeptical of Gov’t data when to comes to highly political areas like CPI and unemployment. His perspective makes sense to me but I don’t feel knowledgeable enough to critically evaluate it.

http://www.shadowstats.com/article/no-438-public-comment-on-inflation-measurement

It is a bit of a read but I thought some here maybe familiar with him.

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Cullen Roche Posted by (Questions: 10, Responses: 1864)
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Thanks, this is what I was looking for.

I did, only recently, read his hyperinflation article and understood he clearly got that wrong but chalked it up to his understanding, or more accurately, misunderstanding of money printing.

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Answered on 01/19/2018 3:44 PM