But what if the money comes back to the United States and is used to pay off debt?
Runaway inflation requires a high marginal propensity to consume. If everyone is intent on paying off debt and the banks are attempting to reduce their leverage, additional money in the system is quickly absorbed.
That dollar goes to China to pay for a Treasury bond. The Chinese buy an American product with the dollar. The American pays down debt. The bank just sits on that additional dollar in order to boost its reserve ratios.
There is no hyperinflation in that scenario.
Look at America's money supply throughout the 1920s and 1930s.
After the 1929 crash, the Federal Reserve increased the money supply. Unfortunately, consumers kept taking money out of the banks and banks used the additional capital to bolster their reserve ratios, not make new loans.
Prices kept falling despite the Fed's efforts because there was no incentive to borrow any of this new money from banks. Real interest rates were in the double digits throughout the early 1930s. It wasn't until the Dollar was devalued against gold in 1933 that the economy started to make some headway towards recovery.
Fractional reserve banking involves a fraction. The smaller the fraction, the more money is created. The bigger the fraction, the less money is created.
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THE Weimar Thread (merged)
Re: United States of America 2009 and Weimar Germany 1923
by Tyler_JC » Sun 21 Dec 2008, 15:21:41
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Re: United States of America 2009 and Weimar Germany 1923
by Snowrunner » Sun 21 Dec 2008, 17:23:06
$this->bbcode_second_pass_quote('Tyler_JC', 'B')ut what if the money comes back to the United States and is used to pay off debt?
It comes down to when the debt is due and how quickly money would flow back into the US. Let's say (just to put fictitious numbers on there), next month 1 Trillion in debt would be due, and another Trillion in two months.
Now, if they print up a Trillion and it comes right back, great, but if the other guy holds onto his Trillion, or spends it on things that aren't really made in the US (e.g. oil) then the money won't be available to the US right away.
THIS of course is only for the Government debt, private debt would have a similar uphill battle, if the Fed wants to keep liquidity going they would have to print not only for the Government but also for all the private debt (at least partially).
$this->bbcode_second_pass_quote('', 'R')unaway inflation requires a high marginal propensity to consume. If everyone is intent on paying off debt and the banks are attempting to reduce their leverage, additional money in the system is quickly absorbed.
It's shoved around, not really absorbed, the problem is: Once the banks are "satisfied" to have covered their bases they will try to lend out again, meaning money will flush in the system. It's like a sponge getting squeezed.
$this->bbcode_second_pass_quote('', 'T')hat dollar goes to China to pay for a Treasury bond. The Chinese buy an American product with the dollar. The American pays down debt. The bank just sits on that additional dollar in order to boost its reserve ratios. There is no hyperinflation in that scenario.
Not directly, but what makes you think the banks will continue to sit on that money? And what about the J6P who wants to pay back debt, the money has to first get INTO the system before he can pay back debt.
$this->bbcode_second_pass_quote('', 'L')ook at America's money supply throughout the 1920s and 1930s. After the 1929 crash, the Federal Reserve increased the money supply. Unfortunately, consumers kept taking money out of the banks and banks used the additional capital to bolster their reserve ratios, not make new loans.
Prices kept falling despite the Fed's efforts because there was no incentive to borrow any of this new money from banks. Real interest rates were in the double digits throughout the early 1930s. It wasn't until the Dollar was devalued against gold in 1933 that the economy started to make some headway towards recovery.
Fractional reserve banking involves a fraction. The smaller the fraction, the more money is created. The bigger the fraction, the less money is created.
Yes, but back then the USD wasn't a wildely traded currency with lots of debt held by foreign banks. The assumption simply is that these banks will hold onto the USD, but if you would be wary of the US economy and the ability of the consumer to spend again, would you hold onto the USD once you have serviced your debt or would you try to exchange it into something you consider more healthy / viable?
That's were the crux lies, the deep seated believe that Dollars are ALWAYS good, but this may turn out to be a fallacy, as long as the "sponge" absorbes the output of the printing presses, you are right, there won't be inflation, but if anybody (or thing) squeezes the sponge all those USD will come rushing out.
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