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Non-Tech : Money Supply & The Federal Reserve -- Ignore unavailable to you. Want to Upgrade?

To: Ahda who wrote (352)	8/17/2002 3:02:29 PM
From: glenn_a	Respond to of 1379

Hi Darleen et al. You stated: ((When you look at the past bubble the profit for business did not increase but the wages of the CEO's in certain companies increased due to a surplus of dollars.)) It is important to appreciate IMO the distinction between Money and Credit. I am coming to feel that an economy can suffer Massive Credit Inflation that makes it's way into a financial system in the form of loans/debt, that only tangentially appears in the monetary aggregates as Money or in the CPI as Consumer Goods Inflation. ((Interestingly, the monetary mechanics of the current U.S.-exported Financial Bubble is so similar IMO to the Japanese bubble of the 1980's. A book that explains the mechanics of this bubble in great detail is Christopher Wood's The Bubble Economy: Japan's Extraordinary Speculative Boom of the '80s and the Dramatic Bust of the '90s .)) The most causal aspect of inflation is NOT Consumer Goods Inflation nor Monetary indicators such as M1, M2, or M3, but rather Credit Inflation. I'm trying to get my mind around exactly how this works, and it's not particularly easy. The problem appears to begin, however, with a misvaluation of the underlying value of the productive assets in an economy by all economic actors - Bankers, Enterprises/Firms, Consumers/Workers, and the Government. Thus Credit is extended to Economic Actors throughout an Economy, based on a value of underlying Assets and future economic growth that is quite illusory. How does this happen? Well, here's a hypothesis. There is a limit to the rate of growth in an economy, and the ability for that growth to facilitate growth in both corporate earnings and wage growth in the form of a higher standard of living for workers. It appears that the U.S. financial system - starting with bond and equity markets, but extending to derivative mechanics - began to see the "price" applied to the "value" of productive assets begin to disassociate from the actual long-run productive potential of these assets to generate profit growth. Thus, for a decade or more, P/E ratios in technology companies were in the 50x to 100x earnings range. Inflation was viewed only as Consumer Goods inflation. So everyone - workers, managers, owners, and bankers - made economic decisions based on a "valuation" or "price" attributed to economic assets that was in total disconnect with reality. The Bankers provided the credit; Enterprises invested in productive capacity; Government's raised taxes, conducting fiscal spending; and directed economic policy, and Workers/Consumers invested their discretionary income on Consumer Goods, Stocks, Houses, etc. in a manner that was in accordance with the economic signals of the financial system, but entirely NOT in accordance with Reality - i.e the underlying productive value of the entire American Economy. So Dareleen, when you speak of "surplus dollars", I would counter that what we are more importantly referring to is "surplus credit" ... a bubble that has decidely NOT yet fully burst. "Surplus dollars" is a proximate result of a monetary-induced speculative bubble, but it is not the cause. The cause is excessive Credit creation based upon a flawed analysis of the productive potential of an economy - a flawed analysis that is then carried to an extreme by all economic actors - Consumers/Workers, Enterprises/Firms, the Banking sector/mechanism, and the Government. How exactly is this speculative bubble and misassessment of an economy's underlying potential? Perhaps someone else might speculate on how this might occur. Or, perhaps I'll try to tackle this dilemma in another post. Any thoughts, comments, criticisms, or whatever are very much welcomed. I'm just kind of evolving this line of analysis as we go along here. Regards, Glenn