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Author: WendyBG Big gold star, 5000 posts Top Favorite Fools Top Recommended Fools Feste Award Winner! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 465282  
Subject: Free money and inflation - commodities Date: 2/21/2012 1:28 PM
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Notehound just wrote a good post about free money (that is, money created out of thin air by central banks) being like feeding stray cats. The banks would rather borrow at low interest from the central banks than "hunt" for loans in the free market.

When I look at the charts of the money supply, it's really scary. The money supply is growing much faster than GDP.

I charted GDP and M1 from 1/1/2000 to the present. It's clear that the Federal Reserve gradually increased M1 during the early 2000s to help recovery from the 2001 recession. Once the recovery appeared to be solid, the Fed kept M1 stable until the financial crisis in 2008.

During the 2004-2008 period of stable M1, GDP grew, which gave prosperity with low inflation.

http://dl.dropbox.com/u/45054803/GDP%20%26%20M1.xlsx

During the 2008-2009 recession, GDP dipped. Then GDP recovered.

The Fed exponentially increased M1 from 2008 to the present.

GDP growth from 4/1/09 to 10/1/2011 was 10%, while M1 growth was 37%.

The Fed funds (short-term) rate is zero, while the Fed is controlling the long-term rate by buying 90% of 30 year Treasury bonds.

What prevents rampant consumer price inflation?

Consumer price inflation is relatively low because disposable personal income has stalled. Bank lending into the real economy is low and the velocity of money in the real economy is low and dropping.

http://research.stlouisfed.org/fred2/series/A229RC0

Where is all this free money going?

The free money is going into the financial markets, propping up stock, bond and commodity prices. There is little crossover between the financial markets and the consumer markets -- except for commodities.

With the Nightly News blaring about rising gas prices, speculators are again buying oil futures. We may see a replay of 2007, where speculative investments in oil inflated a bubble which dramatically increased gas prices and worsened the 2007 recession.

Unless TPTB take quick action to smack down speculation in oil, this may repeat in 2012.

Wendy
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Author: putnid Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 385957 of 465282
Subject: Re: Free money and inflation - commodities Date: 2/21/2012 2:16 PM
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The free money is going into the financial markets, propping up stock, bond and commodity prices. There is little crossover between the financial markets and the consumer markets -- except for commodities.

With the Nightly News blaring about rising gas prices, speculators are again buying oil futures. We may see a replay of 2007, where speculative investments in oil inflated a bubble which dramatically increased gas prices and worsened the 2007 recession.
- Wendy

My view is similar. When the Fed initiated QEI/QEII, commodities soared. Hedge funds borrowed cheap money to cavort in the futures markets. Today, the ECB and Bank of Japan (China, soon?) are pouring money into the financial markets. We already see the effect in oil/gasoline futures (even as several refineries have been shut down due to low utilization). Other commodities are trending higher as well. If commodities soar as they did during QEII, it'll put the kibosh on the emerging markets which spent most of 2011 raising interest rates/reserve requirements to curb inflation.

I started nibbling again on emerging market plays a coupla months ago, but have since stopped to watch how all this "liquidity" plays itself out.

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Author: notehound Big gold star, 5000 posts Top Recommended Fools Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 385958 of 465282
Subject: Re: Free money and inflation - commodities Date: 2/21/2012 2:40 PM
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When I look at the charts of the money supply, it's really scary...
Where is all this free money going?
...The free money is going into the financial markets, propping up stock, bond and commodity prices. There is little crossover between the financial markets and the consumer markets -- except for commodities.


Wendy,
If the below linked chart is accurate, the money expansion truly is alarming - not just because of the amounts involved, but also by how little of all this free money has been used to alleviate real human suffering.

This is not off-topic. The run-up in commodity prices (such as oil) immediately inflicts human suffering on an extraordinary scale. This fact is not lost on all the "little people" who do not profit from the financial markets. Remember the Arab Spring?

http://www.zerohedge.com/sites/default/files/images/user5/im...

Central bank balance sheet expansion since the end of 2007:

Swiss National Bank +230%
US Federal Reserve +222%
Bank of Japan +125%
Bank of England +87%
Peoples Bank of China +93%
European Central Bank +51%


http://www.zerohedge.com/news/here-why-dow-just-passed-13000...

With such wealth having been "created," it seems incongruous that there are still poor and starving people living on Planet Weimar.

At some point, a critical mass of those people are going to say: "If we don't share in the benefits of printing money, why should we share the suffering it causes?"

There are, in fact, some drawbacks to having infinite balance sheets.

:-o

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Author: OrmontUS Big gold star, 5000 posts Feste Award Nominee! Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 385966 of 465282
Subject: Re: Free money and inflation - commodities Date: 2/21/2012 5:21 PM
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Both the US and the Swiss central banks are fighting against similar tides. In the US, the Fed is buying most of the long term sovereign debt in order to keep interest rates low. The Swiss central bank is buying enough Euros to choke a horse to keep the exchange rate below 1.2CHF to the Euro. I guess both can keep this up indefinately as long as no one calls their bluff, but at some point the distortortions in the fabric of the global money supply can cause a small catylist to create immediate high inflation. At that point it may be hard to vacumme up all that excess money without a serious recession taking place.

Jeff

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Author: MadCapitalist Big funky green star, 20000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 385974 of 465282
Subject: Re: Free money and inflation - commodities Date: 2/21/2012 9:34 PM
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Where is all this free money going?

The free money is going into the financial markets, propping up stock, bond and commodity prices. There is little crossover between the financial markets and the consumer markets -- except for commodities.

With the Nightly News blaring about rising gas prices, speculators are again buying oil futures. We may see a replay of 2007, where speculative investments in oil inflated a bubble which dramatically increased gas prices and worsened the 2007 recession.


A while back, I read an article that made a lot of sense. Money has been fleeing the "real economy" into "tangible safe havens." This time, unfortunately, we are doing the opposite of what got us out of that mess. Instead of cutting tax rates, reducing regulation, and maintaining a tight monetary policy, we are raising rates, increasing regulation, and maintaining a very loose monetary policy.

"The prophet of the renaissance of the 1980s was the Reagan budget team’s economic forecaster, John Rutledge. Rutledge noticed that in the dozen years prior to 1981, money had been fleeing from the real economy, what with its taxes, regulations, and currency devaluations, and into tangible safe havens – especially commodities: oil, gold, and land.

Rutledge calculated that over the 1970s, some $11 trillion had migrated out of real economic enterprises into these hedges – a whopping number. And yet if the burdens on the economy were to lessen, a prodigious amount of money stood to flow back into the real sector, with epic growth, employment, and profits in tow.

This is of course what happened in the 1980s, as taxes got cut, regulation stymied, and money stabilized. GDP growth was north of 4% per year for a seven-year run, job creation was measured in the eight digits, and the stock market was off on a 15-fold advance. All because huge money had been parked elsewhere waiting for the real sector to become attractive again.

Sound familiar? Today, we see gold at $1500 an ounce, oil crossing $100, massive retained profits at corporations, and excess reserves at banks. And we’ve just endured a real estate bubble. If economically inert investments – vehicles that are not themselves businesses or their financing instruments – are capturing an extra-large portion of our financial capital, our economy is underperforming. As Forbes columnist John Tamny says, $1500 gold is the recession."


http://www.forbes.com/sites/briandomitrovic/2011/07/04/suppl...

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Author: jerryab Big gold star, 5000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 385977 of 465282
Subject: Re: Free money and inflation - commodities Date: 2/21/2012 10:28 PM
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This is of course what happened in the 1980s

Not.

Real wages stagnated from the 1970s to present. What increased dramatically were PROFITS.

GDP went up because of the tech shift to desktop computers. That continued in the 1990s with the Internet. However, real wages never rose any significant amount--but profits rose exponentially.

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Author: MadCapitalist Big funky green star, 20000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 385978 of 465282
Subject: Re: Free money and inflation - commodities Date: 2/21/2012 10:51 PM
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This is of course what happened in the 1980s

Not.

Real wages stagnated from the 1970s to present. What increased dramatically were PROFITS.


I really should know better than to bother arguing with you (your reputation precedes you), but what the heck.

The quote was:

"...if the burdens on the economy were to lessen, a prodigious amount of money stood to flow back into the real sector, with epic growth, employment, and profits in tow.

This is of course what happened in the 1980s, as taxes got cut, regulation stymied, and money stabilized."


So what are you saying "Not" to? He didn't say anything about wages, and he mentioned the increase in profits. By the way, did profit margins increase since then? Do you know? I'm curious.

Besides, a lot of information is lost when you look at high level data. First of all, looking at wages necessarily ignores total compensation. Not to mention the demographic shifts that occurred over this time.

One of these days I hope that you stop taking such a simplistic view of things based solely on the motivation to back up your preconceived notions, but I know that it will never happen.

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Author: jerryab Big gold star, 5000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 385979 of 465282
Subject: Re: Free money and inflation - commodities Date: 2/21/2012 10:59 PM
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First of all, looking at wages necessarily ignores total compensation. Not to mention the demographic shifts that occurred over this time.

Real wages *means* total compensation. Plus, you omitted the fact benefits have been reduced over time--so (using YOUR argument) CASH wages should have gone up significantly to offset that drop in benefits.

Real wages have been relatively flat for about 40 years. That will be changing in the not-so-distant future.

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Author: MadCapitalist Big funky green star, 20000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 385980 of 465282
Subject: Re: Free money and inflation - commodities Date: 2/21/2012 11:00 PM
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First of all, looking at wages necessarily ignores total compensation. Not to mention the demographic shifts that occurred over this time.

Real wages *means* total compensation.


No, it ignores benefits. Knowing your history, I will stop right now before I get too irritated.

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Author: jgc123 Big gold star, 5000 posts Top Recommended Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 385998 of 465282
Subject: Re: Free money and inflation - commodities Date: 2/22/2012 9:03 AM
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"Where is all this free money going?

"The free money is going into the financial markets, propping up stock, bond and commodity prices. There is little crossover between the financial markets and the consumer markets -- except for commodities."

That sort of supports my anecdotal *formula* for guessing when the financial markets are out of whack.

My formula is that whenever I am making substantially more on my stocks than I can make by working, it's another bubble. Every time my stocks have grown this rapidly in the past it turned into a bubble. Late 90's. 2006-7. Now.

A lot of money is being created, but each bubble seems to succeed in putting more of it into financial markets and less into the pockets of workers than the preceding bubble.

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Author: goofnoff Big funky green star, 20000 posts Top Recommended Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 386007 of 465282
Subject: Re: Free money and inflation - commodities Date: 2/22/2012 10:38 AM
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My formula is that whenever I am making substantially more on my stocks than I can make by working, it's another bubble

I was looking at my ROI for the past six months and thinking "runaway runaway".

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Author: wittgenstein Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 386012 of 465282
Subject: Re: Free money and inflation - commodities Date: 2/22/2012 11:02 AM
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My formula is that whenever I am making substantially more on my stocks than I can make by working, it's another bubble. Every time my stocks have grown this rapidly in the past it turned into a bubble. Late 90's. 2006-7. Now.


It should comfort us to know that the "mass" of all financial instruments is declining rapidly in real terms


http://www.economist.com/node/21547760

The real growth is elsewhere....and indeterminate. That should make our recurring bubbles less annoying. We're all insects clinging to logs careening down fast flowing rivers.


jz

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Author: brucedoe Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 386014 of 465282
Subject: Re: Free money and inflation - commodities Date: 2/22/2012 11:07 AM
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witt

We're all insects clinging to logs careening down fast flowing rivers.

You are something else. I love it, I love it.

brucedoe

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Author: jerryab Big gold star, 5000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 386032 of 465282
Subject: Re: Free money and inflation - commodities Date: 2/22/2012 2:08 PM
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No, it ignores benefits.

When an employer eliminates benefits, there has been no cut in wages (because the "cash payroll" is the same).... And employees will NOT leave a company to GET "benefits" because they have "no cash value"....

By definition, "real wages" HAS to include the total compensation package--because it is impossible to compare incomes otherwise. People work for a TOTAL compensation package--not just a cash wage.

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Author: MadCapitalist Big funky green star, 20000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 386034 of 465282
Subject: Re: Free money and inflation - commodities Date: 2/22/2012 2:31 PM
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No, it ignores benefits.

When an employer eliminates benefits, there has been no cut in wages (because the "cash payroll" is the same).... And employees will NOT leave a company to GET "benefits" because they have "no cash value"....

By definition, "real wages" HAS to include the total compensation package--because it is impossible to compare incomes otherwise. People work for a TOTAL compensation package--not just a cash wage.


No, by definition real wages EXCLUDES benefits. TOTAL compensation includes benefits.

This is why I generally ignore you.

Total Compensation Reflects Growth in Productivity

"According to Feldstein, the doubling of productivity since 1970 represented a 1.9 percent annual rate of increase. Real compensation per hour rose at 1.7 percent per year -- when nominal compensation is deflated using the same non-farm business sector output price index. In the more recent period between 2000 and 2007, productivity rose at a much more rapid 2.9 percent a year and compensation per hour rose nearly as fast, at 2.5 percent a year.

Total employee compensation was 66 percent of national income in 1970 and 64 percent in 2006. This measure of the labor compensation share has been remarkably stable since the 1970s. It rose from an average of 62 percent in the 1960s to 66 percent in the 1970s and 1980s, and then declined to 65 percent in the 1990s where it has remained from 2000 until the end of 2007.

Feldstein concludes that two principal measurement mistakes have led some analysts to conclude that the rise in labor income has not kept up with the growth in productivity. The first is a focus on wages rather than total compensation: because of the rise in fringe benefits and other non-cash payments, wages have not risen as rapidly as total compensation. Feldstein feels it is important to compare the productivity rise with the increase in total compensation rather than the increase in the narrower measure of just wages and salaries.

The second measurement problem that Feldstein addresses is the way in which nominal output and nominal compensation are converted to real values before making the comparison. Although any consistent deflation of the two series of nominal values will show similar movements of productivity and compensation, Feldstein concludes that it is misleading to use two different deflators, one for measuring productivity and the other for measuring real compensation."

http://www.nber.org/digest/oct08/w13953.html

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Author: jerryab Big gold star, 5000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 386041 of 465282
Subject: Re: Free money and inflation - commodities Date: 2/22/2012 3:58 PM
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Feldstein concludes that two principal measurement mistakes have led some analysts to conclude that the rise in labor income has not kept up with the growth in productivity. The first is a focus on wages rather than total compensation: because of the rise in fringe benefits and other non-cash payments, wages have not risen as rapidly as total compensation. Feldstein feels it is important to compare the productivity rise with the increase in total compensation rather than the increase in the narrower measure of just wages and salaries.

Fringe benefits for most workers are--and have been--"going away" for decades, not increasing. Proof? PBGC expenses. The only people seeing increases in total compensation are management--and they are essentially "guaranteed" bonuses regardless of actual performance.

Plus, the *cost* of benefits (especially healthcare AND retirement costs) have been shifted to the workers--as well as the shift in risk (through 401/IRA plans). Those are several Feldstein errors just off the top of the charts. Yet those *same* cost-and-risk shifts have NOT happened to management.

If wages rise at the same pace as productivity, then labor's share of national income remains essentially unchanged.

Productivity outstripped wages AND total compsensation. Why? Because if that was NOT true, then profits could NOT grow so dramatically vs compensation. IF the same percentage of resources was used to create the products (as Feldstein alleges), then profits compared to revenues would ALSO be a near-constant (at about 35%--as costs are alleged to be about 65%). As that is NOT true, his premise fails. We see this in the falling standard of living--which could NOT happen if Feldstein's claims about employee compensation were true.

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Author: MadCapitalist Big funky green star, 20000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 386046 of 465282
Subject: Re: Free money and inflation - commodities Date: 2/22/2012 4:43 PM
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Feldstein concludes that two principal measurement mistakes have led some analysts to conclude that the rise in labor income has not kept up with the growth in productivity. The first is a focus on wages rather than total compensation: because of the rise in fringe benefits and other non-cash payments, wages have not risen as rapidly as total compensation. Feldstein feels it is important to compare the productivity rise with the increase in total compensation rather than the increase in the narrower measure of just wages and salaries.

Fringe benefits for most workers are--and have been--"going away" for decades, not increasing. Proof? PBGC expenses.


You win. I can't compete with your non sequiturs.

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Author: Hawkwin Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 386047 of 465282
Subject: Re: Free money and inflation - commodities Date: 2/22/2012 5:01 PM
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Notehound just wrote a good post about free money (that is, money created out of thin air by central banks) being like feeding stray cats. The banks would rather borrow at low interest from the central banks than "hunt" for loans in the free market.

Well duh!

No, seriously, why would ANYONE (bank or otherwise) go out into the marketplace and try to borrow at any rate (let's say 1% or greater) when you can instead pull nearly unlimited sources of funds from the Fed at near 0%.

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Author: WendyBG Big gold star, 5000 posts Top Favorite Fools Top Recommended Fools Feste Award Winner! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 386059 of 465282
Subject: Re: Free money and inflation - commodities Date: 2/22/2012 7:54 PM
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<No, seriously, why would ANYONE (bank or otherwise) go out into the marketplace and try to borrow at any rate (let's say 1% or greater) when you can instead pull nearly unlimited sources of funds from the Fed at near 0%. >

Only the largest banks can borrow from the Fed. Smaller banks, corporations and individuals can't.

Wendy

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Author: Hawkwin Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 386084 of 465282
Subject: Re: Free money and inflation - commodities Date: 2/23/2012 9:01 AM
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Are not those the banks you were specifically mentioning?

The banks would rather borrow at low interest from the central banks

I don't see any reference to individuals in the above quote.

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