QE2... why and what if it fails?

meanreversion said:
Oh yes, something else I forgot.

Fractional reserve banking means that most of our "money" is in fact debt. New money must be created, by definition, in order to pay off interest on existing debt. Money supply MUST always go up, otherwise defaults will occur.

This thread is turning out to be decent, but more importantly, does anyone have a view on who is going to win X Factor this year?
Click to expand...

The mother of all ponzi schemes
 
counter_violent said:
The mother of all ponzi schemes
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Maybe, but the alternative was tried before (the Gold Standard) and was also found to be seriously deficient. Credit was limited to the amount of physical gold dug up from the earth!

Fractional reserve banking is not perfect by any means, but it has many plus points.
 
meanreversion said:
Maybe, but the alternative was tried before (the Gold Standard) and was also found to be seriously deficient. Credit was limited to the amount of physical gold dug up from the earth!

Fractional reserve banking is not perfect by any means, but it has many plus points.
Click to expand...

This isn't true - even in the days of JC (about 0000), there were institutions that held Gold. These were the origins of the banking industry.

Even in those days,banks could loan out more than was initially deposited, even though there were no promissory notes.

It all hinges on there being no bank run. But basically, even with Gold standard, Banks can still create money.

Wise Man 1 - deposits 1,000 ounces of Gold in the bank
Wise Man 2 - borrows 500 ounces of Gold to buy a particularly handsome camel off wise man 3
Wise Man 3 - deposits 500 ounces of Gold in the bank

Total wealth - 1,500 ounces of gold, plus Wise Man 2 is going to pay interest
Total gold in the bank - 1,000 ounces.
 
Yup, that is true but the ratio was much higher back then, this from Wiki

The gold standard limited the flexibility of central banks monetary policy by limiting their ability to expand the money supply, and thus their ability to lower interest rates. In the US, the Federal Reserve was required by law to have 40% gold backing of its Federal Reserve demand notes, and thus, could not expand the money supply beyond what was allowed by the gold reserves held in their vaults.
 
So there was creation of money, but severely limited by the small quantities of gold dug up each year.

Now, to quote 2 Unlimited, there's no limits.
 
The Fed has done more QE because they are scared of a deflationary environment al a The Great Depression (Bernanke’s specialist subject). By performing QE they are hoping to increase inflation expectation and hence avoid deflation.

The ECB on the other hand is predominantly ruled by the Bundesbank and they are scared of hyper inflation as experienced in the 1920’s. That is why they have not printed any money.
 
http://www.marketoracle.co.uk/Article23909.html
http://www.marketoracle.co.uk/Article23427.html
http://www.marketoracle.co.uk/Article23955.html

http://en.wikipedia.org/wiki/Stagflation
http://en.wikipedia.org/wiki/Hyperinflation

Stagflation is actually a good goal in my view, its the only sane choice compared to the alternatives - the U.S. economy simply cannot return to strong sustained growth as that just creates a potentially bigger bubble.

Right now the Fed are trying to let the bubble deflate slowly instead of burst or inflate even more. If they lose control, hyperinflation along with possible depression (not a guaranteed effect of hyperinflation - Brazil 64-94) will be the result.
 
Things eventually must make sense. You can put it off for a long time (google "Communism") but eventually bullsh1t collapses. The West in its current form is just as unsustainable as the Soviet Union was.

The longer the day of reckoning is postponed the worse it will be.
 
There have been a couple of negative reactions to "QE2" since it was announced. The Chinese seem to be unhappy (hypocrites) and now the Germans are complaining too.

This could start to get verrrrrry interesting.
 
meanreversion said:
There have been a couple of negative reactions to "QE2" since it was announced. The Chinese seem to be unhappy (hypocrites) and now the Germans are complaining too.

This could start to get verrrrrry interesting.
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Huh?
 
The Chinese are quite happy to manipulate their own currency but get peeved when someone else tries the same trick..
 
The thing to remember with the yuan peg is that the Chinese have maintained it, whether the USD is strong or weak. They have been consistent. When the USD is weak, all the other countries cry foul, but when the USD is strong (i.e. during the credit crunch), they all go quiet.

There's something awfully symbiotic, or parasitic, about the US/China relationship. The drug dealer has a client who can't stop buying, but can't afford to pay.. so the dealer accepts IOUs from the user in return for further narcotics.

The profit margins in Chinese industries are tighter than people imagine, so (for example) a 10% increase in the value of the yuan will hurt many Chinese exporters. However, the inescapable truth is that people in the US (and UK) get paid far more than people in China do, for producing exactly the same output, whether it's pyhsical goods or even a service (computer programmers, e.g.). This is the issue that has to be resolved over the next decade or two.
 
meanreversion said:
The thing to remember with the yuan peg is that the Chinese have maintained it, whether the USD is strong or weak. They have been consistent. When the USD is weak, all the other countries cry foul, but when the USD is strong (i.e. during the credit crunch), they all go quiet.

There's something awfully symbiotic, or parasitic, about the US/China relationship. The drug dealer has a client who can't stop buying, but can't afford to pay.. so the dealer accepts IOUs from the user in return for further narcotics.

The profit margins in Chinese industries are tighter than people imagine, so (for example) a 10% increase in the value of the yuan will hurt many Chinese exporters. However, the inescapable truth is that people in the US (and UK) get paid far more than people in China do, for producing exactly the same output, whether it's pyhsical goods or even a service (computer programmers, e.g.). This is the issue that has to be resolved over the next decade or two.
Click to expand...

Hasn't been resolved since WW2...could take longer than a decade more.

Peter
 
meanreversion said:
The thing to remember with the yuan peg is that the Chinese have maintained it, whether the USD is strong or weak. They have been consistent. When the USD is weak, all the other countries cry foul, but when the USD is strong (i.e. during the credit crunch), they all go quiet.

There's something awfully symbiotic, or parasitic, about the US/China relationship. The drug dealer has a client who can't stop buying, but can't afford to pay.. so the dealer accepts IOUs from the user in return for further narcotics.

The profit margins in Chinese industries are tighter than people imagine, so (for example) a 10% increase in the value of the yuan will hurt many Chinese exporters. However, the inescapable truth is that people in the US (and UK) get paid far more than people in China do, for producing exactly the same output, whether it's pyhsical goods or even a service (computer programmers, e.g.). This is the issue that has to be resolved over the next decade or two.
Click to expand...


Strongly disagree with your perspective.

I'm afraid this isn't just about the Chinese holding dollars. Just about every country holds dollars because it is an international currency. So when the US does another round of QE it devalues the dollar and thus robs every country in the world by reducing the purchasing value of their dollar holdings.

The Chinese are working hard and earning their dollars. Stable pegged currencies is the ideal not the other way round. They can revalue their currency when it suits the national Chinese interest. That is when they may wish to curtail inflation perhaps when it rears it's ugly head and sooner or later it will do.

The US competitiveness is an internal issue not external. It is called market competition.

They could virtually pay off their defecits by cutting back on space and defence projects but perversely that expenditure is untouchable.

In contrast I would state that the US is the parasitic nation living off borrowed money. Lenders will want their money back and nobody likes being short changed.

The Germans aren't complaining they are fuming - very angry to say the least.

Vietnam war took the US off the gold standard.

Looks like Iraq will knock the dolalr standard of its perch. Did mentioned this before back in 2006 and got a few laughs... Let's see how funny it is now...
Jacinto if you are reading this now - I told you so 👍
 
They weren't knocked off because of Vietnam...it started way before that, the triffin dilemma for one example.
 
I would suggest that the war industry is extremely profitable, to assume anything other, is naivety at its core!,...
 
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