Why there is no growth

[johnyj]

Quantity theory of money:

MV=PQ

M is base money supply
V is base money turn over speed
P is price level
Q is GDP

This formula is proved to be correct even on a simple simulation of an island with only 2 people, so I trust it due to its simplicity

After financial crisis, central banks around the world increased the base money supply M by approximately 4 fold. But due to previous V is dramatically reduced, the result is that even GDP did not improve too much, P is relatively stable

In a fractional reserve banking system, V is tightly related to the money multiplier. If banks could actively loan out any money they have at hand, then V usually is 5 to 10. If economy is so bad that no one want to borrow money, then V will drop to 1, this seems to be the case now: M increased by 4x but V decreased by 4x, the result is that both GDP and price level stays stable

However, when economy eventually improved and loaning become active again, V will rise back to a normal level of 5, that will cause a 500% rise in price level if GDP keeps growing at a couple of percent per year, that will effectively crash the fiat money system

In such a case, central bank must quickly reduce the M accordingly. However, the way to reduce M is to sell their assets to commercial banks to get base money back, those assets include government bonds and mortgage backed securities, and a large sell of those assets will crash the market immediately and destroy many people's house value, drive economy back into recession

So it seems there is no way back once the hyperinflation is happening. The only way they can prevent a runaway inflation from happening is to let commercial banks hold their money and never loan them out. This means in a foreseeable future, there won't be large scale lending happening at commercial banks, that's the real reason that we didn't see any significant improve in economy, because from bank's point of view, the credibility of their money is much more important than economy

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[1715299954]

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[Pokerfan]

However, when economy eventually improved and loaning become active again, V will rise back to a normal level of 5, that will cause a 500% rise in price level if GDP keeps growing at a couple of percent per year, that will effectively crash the fiat money system

In such a case, central bank must quickly reduce the M accordingly. However, the way to reduce M is to sell their assets to commercial banks to get base money back, those assets include government bonds and mortgage backed securities, and a large sell of those assets will crash the market immediately and destroy many people's house value, drive economy back into recession

Moreover, if central banks were to unwind the QE, they would be selling assets at a loss. Maybe that's not a problem for the central banks, but it would further transfer wealth in society from people to big banks.

[notme]

P is price level of the average good/service
Q is the quantity of goods/services sold

Their product is GDP.  At least get the variables correct .

I'll just leave this here:

No zombies (apart from Bitcoin cultists perhaps) this apocalypse will be entirely fiscal in nature.

Exactly, which is why a US dollar collapse wouldn't cause long term damage to the economy.  The economy runs on goods and services.  The supply of and demand for these goods and services would not change.  However, several alternative means of value transfer would have to pick up the slack.  While such a transition would be a bit rough around the edges, between gold, silver, bitcoin, livestock, and produce people will find ways to transact.

Going over a "fiscal cliff" would save us from the artificial bubbles that have distorted the pricing mechanisms, and improve the efficiency of capital usage within the economy.  This return to efficient markets is the only thing that will get the US economy going.  A "fiscal cliff" is far from the smoothest way of achieving it, and personally, I don't see it happening this decade.  However a return to sanity is the only cure for the economy.  Cheap capital makes for inefficient markets.

Unfortunately, if easing is reigned in too fast, the private sector will start defaulting because of their malinvestments, which would actually be deflationary for the dollar.  However, deflation is actually what a normal economy experiences when innovation displaces workers.  Labor becomes less valuable, wages stagnate, and prices normally fall.  Or at least, that's how Adam Smith described it in http://en.wikipedia.org/wiki/The_Wealth_of_Nations.

By easing, the Federal reserve is keeping housing and bonds inflated, so that banks can get cheap money to keep stock prices and commodities inflated.  This in turn keeps consumer prices up while wages fall.  This is why consumption has fallen off.  So, who benefits?  The homeowners, the banks, and the CEOs.  The worker, as always, is shafted.  This system will change, but we have a long road left to travel.

However likely you think a fiscal crisis is to wreck the USD, even if it does, things will improve for the man who makes his living by his sweat after a brief shock.  Unfortunately, some may be knocked on their asses if something like that happens, but as long as you have skills, you can find a way to store value and transact.