Comment by danenania | Hacker News Reader

Comment by danenania | Hacker News Reader

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Good post. It seems common for participants in an industry undergoing a bubble to concoct elaborate industry-specific theories to explain a sudden influx of new money when the real cause is, well, exactly that: a sudden influx of new money. Unfortunately, we've been trained to correlate the numbers in our bank accounts with actual value, but the link has been all but severed for a long time.

It seems unbelievable that we as a population could keep being fooled by the same trick over and over, but when you look at the sums involved for those who benefit, it starts to make sense. This racket dwarfs even the military-industrial complex. It's rule-the-world money. In my opinion, anyone who tries to portray the situation as obscure or highly complex either has a stake or has succumbed to propaganda--printing money always causes artificial booms, and artificial booms always lead to busts. It's been true since fiat money was invented and it'll be true until we evolve beyond it.

I don't think anyone is really being fooled anymore. They just get the game, and understand that cheap-money bubbles are a normal part of that game.

Well, a bubble is the result of people being fooled on an industry or economy-wide scale, so I think the fact that we still have them shows that plenty are fooled. I agree that many savvy players will participate with full knowledge of what's happening, but this only works for them because of all the suckers waiting in line.

It's not really a result of anyone being fooled. It's rational economic behavior to get in on a bubble which is why bubbles get bigger. The people that get screwed are the ones that dont get out at the right time.

Unless you are a very sophisticated trader (and likely even then), knowingly betting that a bubble will continue to expand is just gambling. You might get lucky and exit at the right time, but it's seriously -EV. That said, I don't really think the majority of small time investors think in those terms or are at all aware of how the monetary boom-bust cycle operates, which is why they get fooled into thinking they are better off when their nominal wealth increases as their real wealth deterioriates.

In hindsight, maybe. You only know it's a bubble when it bursts and the markets come back to earth. Outside of that it's rational to invest in something that's growing.

I still disagree. During bubbles, it is often apparent through straightforward financial analysis that companies are overpriced. Investing in a company whose price isn't supported by underlying assets and earnings because it's 'hot' is a speculative gamble on the extremely difficult to predict group psychological whims of the marketplace, not a rationally conceived value investment.

This is completely wrong and absurd. We've had a gradual inflation rate since the beginning of the U.S. Dollar. We were headed toward a deflation without the QEs, which would've been a disaster in a highly illiquid economy. The QEs simply brought the inflation back to a good, gradual rate, and put more liquidity into the economy so businesses can start hiring again.

"We were headed toward a deflation without the QEs, which would've been a disaster in a highly illiquid economy."

Right, this according to the brilliant minds who created the crisis in the first place.

Clearly the financial situation is bad. Your 'good, gradual inflation rate' is WHY we're on the precipice of disaster. It's not like we now have a choice between an economic meltdown and a land full of unicorns and rainbows if only we keep stamping more paint on more pieces of paper. Our only option is damage control, but you'd rather keep piling on the damage.

Google some of the predictions made by Bernanke and his colleagues in the years and months leading up to the crisis. They've been dead wrong every step of the way. Yet now we are supposed to believe that inflation is no concern when food and commodity prices are at all time highs and causing revolts around the world? Talk about absurd.

"Good, gradual inflation" is how The Man keeps the proletariat busy working. They can't afford to stop.

Inflation helps the proletariat, you know. Most of them are net debtors, so inflation makes it easier to pay off their debts.

> Inflation helps the proletariat, you know. Most of them are net debtors, so inflation makes it easier to pay off their debts.

Not so fast. Lenders factor in expected inflation, so it's only unexpected inflation that benefits debtors.

And, making payments isn't the only way to handle debt - bankruptcy works too. You don't get any more "pay later" pizzas, but you get to keep the ones that you already ate.

However, inflation hurts folks whose income doesn't match inflation. After they stop paying their debts, they still need to buy food.

My cat's favorite food went up 25% last month. Since she was already on the cheap stuff....

It's true that a higher inflation regime will not help debtors. But the net effect of an event like QE/QE2 is to help debtors.

But the net effect of an event like QE/QE2 is to help debtors.

Let's be serious here. Net effect of QE is 0.

QE2 did push US mortgage rates up.

It's unclear why/how though, as the vast majority of new US mortgages end up with a GSE that is heavily dependent on govt support, so the increase was a political decision.

Only if their wages also get inflated, which does not always follow with price inflation of goods. And apparently would not happen on the free market, or else the government would not have to force it with minimum wage legislation.

The QEs simply brought the inflation back to a good, gradual rate, and put more liquidity into the economy so businesses can start hiring again.

How is that working out so far?

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

The fundamental flaw in this idea is the assumption that increased production/consumption will in turn increase employment. At the end of the last two recessions, production and consumption have increased, but employment has not. The old theories no longer work.

The current inflation rate suggests that the supply and demand for cash is in balance. This might not be true, but you won't disprove it with unsourced conspiracy theories.

There are a quite a number of ways to measure inflation, the fed's version of it is quite narrow. If you look at wholesale commodities there has been a dramatic increase over the past year.

Here is an interesting article that appeared in the WSJ opinion section a few weeks ago. I found it to be quite insightful, and it presents a workable explanation about why we might currently be causing inflation and not wanting to admit it.

The Federal Reserve Is Causing Turmoil Abroad: http://www.marketwatch.com/story/george-melloan-the-federal-...

The fed's version is the PCE/PI, which is the most general measure of inflation that is theoretically possible. You might have that confused with the CPI, which is a different index, the one you usually see in the news.

Finance is pretty easy to understand, relatively speaking, but the signal-to-noise ratio is far too high. The average finance news site tends to be a wretched hive of investment advice nuts and unreliable emotional opinionators.

Bernanke has regularly referred to "Core Inflation" when discussing inflationary pressures. You can see his use of it as recently as Feb 3, 2011 in his speech to the National Press Club: http://www.federalreserve.gov/newsevents/speech/bernanke2011...

The Fed's version of core inflation is the core PCE price index as you stated. The "core PCE price index [...] excludes the more volatile and seasonal food and energy prices" [1].

While you may reasonably take issue with my wording of "quite narrow" as I perhaps wasn't choosing my words carefully enough, core inflation/core PCE certainly isn't "the most general measure of inflation that is theoretically possible". I assume you weren't meaning to refer to "core PCE" - but never the less it is clear from federal reserve speeches that it is this measure that has been playing significantly into federal reserve monetary policy.

Core inflation makes sense in trying to smooth out seasonal or short term moves. However, the effects on global food and oil commodities that are traded in US dollars seem to far exceed any seasonal or short term influences. In that case discounting food and fuel influence on actual inflation rates seems unwise.

Bernanke seems to be acknowledging this. The WSJ reported on the 13th of March in an article titled "To Avert Criticism, Fed Avoids Saying 'Core'": Now, Mr. Bernanke is taking another tack in his public communications. In two days of testimony on Capitol Hill earlier this month, the Fed chairman never uttered the words "core inflation" while explaining the central bank's aims and policies. [2].

As a side note, as I've noted I'm in no way trying to put myself forward as an expert on these subjects. I get a significant amount of my financial news and analysis from the WSJ and Marketplace (public radio) (and Morgan coverage, which admittedly is not particularly hawkish here). I'm not above admitting that I could be making some serious mistakes, so if you'd like to suggest better sources of information I am all ears.

[1] https://secure.wikimedia.org/wikipedia/en/wiki/Personal_cons...

[2] http://online.wsj.com/article/SB1000142405274870489360457619...

Core inflation is not the main measure of inflation used by the Fed, so your previous statement is false. But you don't have to take my word for it--read the article you yourself linked.

Nevertheless, overall inflation remains quite low: Over the 12 months ending in December, prices for all the goods and services purchased by households increased by only 1.2 percent, down from 2.4 percent over the prior 12 months. To assess underlying trends in inflation, economists also follow several alternative measures of inflation; one such measure is so-called core inflation, which excludes the more volatile food and energy components and therefore can be a better predictor of where overall inflation is headed.

The takeaway is that core inflation is an "alternative" measure used when volatile components are obscuring long-term trends. The intent is to get a good feel for what the real inflation number will look like in the future. This is a big difference from "using" core inflation as the primary measure, and I don't know what you gain from confusing my statements about the PCE/PI with core PCE. I never claimed that core PCE was the most general measure.

Anyway, this is far from the original point, which is that you have some silly conspiracy theory about printing "rule-the-world money", and you won't tell us what it is. But at least I got you to stop citing MarketWatch.

I think you may have confused me with another poster regarding "rule the world money".

I did link to an opinion piece from the Journal that suggests that the Fed is exporting unrest to MENA via inflationary monetary policy. Whether this is intentional or accidental is hard to determine, but it would make a certain amount of sense if it was on purpose. None the less, I didn't write the piece nor is it my theory.

Note that the marketwatch article is a direct reprint from the Wall Street Journal (which I noted). The WSJ version is behind their paywall.

You seem to suggest that I hold a lot of fringe conspiracy views, yet the theories you take issue with come from the Journal editorial pages. Does that mean you hold the WSJ to be a fringe conspiracy paper?

I think you may have confused me with another poster regarding "rule the world money".

You're right, I'm sorry.

But it's curious that you cite the WSJ editorial pages specifically. One of the things the WSJ is known for is how incongruously stupid the editorial section is, compared to the rest of the paper.

It might help to take Chris Martneson's Crash Course (www.chrismartenson.com) where he makes it clear that inflation is necessary under the present Federal Reserve system. Although Chris was a biological scientist before being an internet content provider, he has a pretty good way of describing the economics behind the Fed. It doesn't take a conspiracy theory to address the fairly human activities of the superbanks. Activities that vastly increase their power and in no noticeable way improve our lives. They don't have to conspire. In fact, they are often vicious competitors. Anybody tried to get a home mortgage lately? Hard to get, now. And why? The banks get free (as in no interest) loans from Treasury which the Fed will pay interest on. So they loan it back to the Fed to get paid interest. Why take the much higher risk of loaning us money to buy or refinance a home?

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