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Bad news for savers
October 31, 2020
9:56 am
Norman1
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Bill said
"One will definitely have hyperinflation if one grows money supply 200% per annum" vs "Inflation and hyperinflation have to do with prices and not money supply" - which is it?

It's really the second.

There would be no inflation or hyperinflation if people took all that extra 200% money and just paid down their debts.

Why did money supply grow 200% per year in those countries? That money supply growth and goods-and-services inflation could be signs of something else. Just because one sees both symptoms at the same time doesn't mean that one caused the other.

If growing money supply really does boost inflation, then the solution to our inadequate level of inflation is easy: Print more money! Somehow the central banks in the US, Canada, and EU missed that.

Canada is not close to limits. I showed earlier that Canada has the capacity to easily take on another $2 trillion of debt.

The capacity is even higher. Those bonds Canada issued 30 years ago at around 8% can be rolled over for around 1.25% now. So, Canada can actually roll them over and borrow an additional $5 for each $1 rolled over and still be paying less interest than before!

October 31, 2020
10:50 am
Kidd
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I think it's a lack of oversight. Who is running the printing presses late at night?

If my one dollar has the true value of one dollar. The moment i print a second dollar, my original one dollar now has the value of 50 cents.

Taking that theory further. When i want to buy something from some other country, they look at my currency and do an exchange rate based on how many one dollars i printed. A lower valued dollar makes imported items in my home county more expensive, you have inflation.

Interest rate policy also increases or decreases a currency value.

October 31, 2020
11:35 am
Norman1
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Kidd said

If my one dollar has the true value of one dollar. The moment i print a second dollar, my original one dollar now has the value of 50 cents.

That's actually not the case.

A dollar is not a legal claim against some assets like a share of a corporation or a unit of a mutual fund is.

It is more like the autograph of a celebrity. Each time the celebrity signs and creates a new autograph, it doesn't reduce the value of the previous autographs proportionally.

October 31, 2020
12:41 pm
Bill
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If people took the 200% money and paid off their debts they'd now have no interest to pay, plus they could rack up new debts, so the increased demand resulting from their new extra spending power would indeed exert inflationary pressures.

Rolling bonds over into greater debt at lower interest levels can be a trap. Once this much greater new debt matures interest rates could be much higher, then you're in big do-do, especially if you've continued to add to your debt in the interim. Ask those with big mortgages - one of their main worries is come renewal time the interest rates might be much higher.

The central banks are printing money but not unlimited precisely because they fear too much printing leads to devaluation of currency. I do agree that the printing has led to less than dramatic impacts on inflation, so far, doesn't mean there's been no effect. Without the printing we could well be in deflation.

I agree Canada's not yet at capacity, it's why we keep borrowing. But re the celebrity autograph analogy, the more of one's autographs that are out there indeed the less each one is valued by autograph collectors. If everybody had a particular celebrity's autograph the value would be very little. The more dollars out there the less they're worth to its "collectors".

It would be nice if printing money had no side effects, but the fact governments make at least a pretense of limiting the printing suggests they know full well that printing at some point causes noticeable, "hyper" devaluation of currency. Otherwise they'd just print up every day whatever we need for any new gov't program or other spending.

November 1, 2020
5:26 am
savemoresaveoften
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Printing money "used" to have all the side effects being mentioned here.
Except this time all developed countries are in the same boat. And the less developed countries will NOT take over the world just because they may not be printing.
So my thoughts are "this time it IS different". Rates will just stay low for a looong time, forget about 5% 5/10 year savings rate that the older generations use to think of it as a given.
A country is not that different from a corp. When one can borrow low and pay next to little interest, there is all the incentive to keep doing it. A country has the advantage of setting the interest too.

November 1, 2020
10:05 am
Kidd
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Bills in circulation have to be accounted for, it's not a free-for-all. Otherwise, I would have retired before i even started working. "Honey, we need more toner. Forget the Calgon."

A few countries have turned on their currency printing presses and found, they only created a lot of toilet paper. Zimbabwe and Venezuela for examples.

November 1, 2020
11:49 am
Norman1
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Bill said
If people took the 200% money and paid off their debts they'd now have no interest to pay, plus they could rack up new debts, so the increased demand resulting from their new extra spending power would indeed exert inflationary pressures.

There won't be any pressure as long as the demand doesn't overwhelm supply.

That's the case with service and goods including autographs. There will be no downward pressure as long as the celebrity does produce more autographs than the demand for them.

One celebrity did something like that years ago for a concert. It would have been nice, but I didn't see a 50% drop in ticket prices when she added a second show for that city.

100% increase in the supply of tickets! The price of tickets should have cratered according to such flawed reasoning. In reality, the second show almost sold out. Same price for tickets in the second show as for the tickets for the first.

November 1, 2020
12:19 pm
Bill
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There is always downward price pressure when supply increases, only exception is if demand has increased more in the same interval of time.

And though moving from free autographs to for-pay concerts is a fundamental change of assumptions, even in the concert example in fact there is pressure, almost immediately, though perhaps imperceptible to most observers, i.e. you say the 2nd show (unlike the 1st) didn't sell out, so presumably a 3rd show would have sold zero tickets, at least without a devaluation of the entry fee. That's a sudden and drastic change, from a sold-out 1st show to a not-viable 3rd show. That's how it works with inflation, you can have lots of time with moderate increases in prices and then, all of a sudden, like with the 3rd concert you've hit a tipping point in money printing (and/or borrowing, e.g. see Greece a few years ago), i.e. no-one is interested any longer in your printed currency or in lending you more money to be paid back in your ubiquitous printed currency, and now things change a lot. Suddenly.

November 1, 2020
3:06 pm
Bruford
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We seem to all agree, the money supply is increasing. Hyperinflation starts as a perception, a loss of confidence. When people start to perceive that the ever increasing currency supply is chasing the same amount (or fewer) of goods/services, and that the value of that currency is thereby being devalued, they will begin to dump the currency in favour of something they perceive as more stable. When enough people come to that realization, hyperinflation will accelerate. At some point, it will become unstoppable.

November 1, 2020
10:44 pm
Jon
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I am just really happy that the participants of this forum have gained so much knowledge about monetary policy!

At the moment, the economy of developed countries have strong deflationary pressure due to aging population (reduce demand) and technological advancement (increase supply), the money printing is what keep us from getting into deflation.

However, it may still be a dangerous game to switch on the printing press 24*7. This is because as long as some kind of supply or demand shock happen (the most likely 2 situations are a war between China and US in the South China Sea that disrupt trade route, or a war by China to invade (reclaim) Taiwan which cause massive shortage in computer chips globally - TSMC is the largest and most advance manufacturer of computer chips by a significant margin), the velocity of money may increase rapidly as sudden increase in price of ICT products may induce panic purchase of all goods, even goods that have no relation with computer chips.

(Theoretical info: Price level multiply by real GDP is equal to money supply multiply by velocity of money. When government print lots of money, velocity of money only need to increase slightly to have massive inflation, as suggest by this equation)

However, in the very long run, I still have little trust in fiat currency, as most developed countries have rising healthcare and pension expenses (far beyond the level of inflation) due to aging population, while tax revenue may not increase fast enough as economic growth remain anemic. This means most counties' public finance are a ticking time bomb, and this implies the currencies that are issue by the said government(s) are going to turn into monopoly money when the public finance "bomb" gone off.

In regard to gold and silver standard that gold bugs like Bruford cares about, it may actually be a good idea to return to it, as economic and population growth around the world have slow down. In the past, when the economy and population is growing rapidly, it is a requirement to use fiat currency as there isn't enough gold and silver for everyone to use for trading, as there are more people, and they are all producing and consuming more. If gold and silver was used, the end result was significant deflation and depression, as money was harder to come by, which increased interest rate (price for money), and reduced investment and (most likely) consumption.

That being said, consider technically, most land in Canada belongs to the crown of the province, if we do have hyperinflation, we can use those land as a backing for the issuance of currency. This has been done before in Germany

November 2, 2020
5:51 am
Bruford
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Jon said
That being said, consider technically, most land in Canada belongs to the crown of the province, if we do have hyperinflation, we can use those land as a backing for the issuance of currency. This has been done before in Germany   

US currency was backed by gold until 1971. The problem with land based currency (especially in Canada) is that there is a lot of land nobody wants. (Think mosquito infested Muskoka swamp) Land is not fungible. Some land is worth more than others. Land is also not easily divisible.

November 2, 2020
6:43 am
Bill
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I agree with what is being said re developed countries, i.e. aging population, deflationary pressures, etc. However not the case in much of the world, i.e. countries, continents, with large, young and growing (albeit at slower rates than previous generations) populations being lifted out of poverty every day, spending capacity increasing, so the future looks brighter than today for those places. Should not be overlooked by younger investors, but be judicious. And future debt problems of 1st world will definitely impact some places, e.g. lots of undeveloped countries not doing well during virus time due to 1st worlders not travelling and bringing their much-needed money with them.

December 16, 2020
3:28 pm
ExtraSauce
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all I know about inflation and the man behind the curtain is that 50 years ago you could buy a really nice new car for $3000. Now some line up to pay $100,000 for a dressed up pickup truck and many evidently just slap it onto the mortgage - LOL

Homes have doubled and tripled in price in many locations in BC over just the last 15 years, which seemed to be jump started after all the quantitative easing during the 2008/2009 meltdown. A casual shop in the grocery store now feels like a physical shakedown by wiseguys.

You can tell you're getting older when you start to see your dad in the mirror and are whining over everything - lol

One thing appears to be certain, over time, paper money buys less and less stuff!

December 16, 2020
4:49 pm
Bill
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ExtraSauce, to complete the comparison you need to indicate how much people were making when they bought those $3000 cars. A more accurate comparison would be how many hours did the average person have to work to buy that car vs today (plus also factor in vehicle longer life and better reliability today)?

In 1970, 54% of driving age adults in Canada had a car, in 2017 it was 87% (says the internet).

December 16, 2020
5:47 pm
Norman1
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People aren't earning what they were earning 50 years ago.

In Ontario, for example, the minimum wage is now $14/hour. That works out to be around $27,000 a year.

Had a nice car remained $3,000, that high school student working at McDonalds would be able to buy a new one every semester!

December 16, 2020
7:30 pm
AltaRed
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A starting engineer's wage in 1970 was about $7500 per year and minimum wage was about $1.60/hr. I know from personal history. It is non-productive to take things out of context.

December 16, 2020
9:57 pm
mmlt
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Bad news for savers all right. Our finance minister wants to unlock all that money Canadians have squirreled away.
https://www.bnnbloomberg.ca/experts-answer-freeland-s-call-for-ideas-on-how-to-unleash-canadian-cash-hoards-1.1533891

December 17, 2020
12:29 am
Loonie
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mmlt said
Bad news for savers all right. Our finance minister wants to unlock all that money Canadians have squirreled away.
https://www.bnnbloomberg.ca/experts-answer-freeland-s-call-for-ideas-on-how-to-unleash-canadian-cash-hoards-1.1533891  

I heard more carrots than sticks, but the audio wasn't great and I didn't catch all of it.

Interesting that she noted the the economists have been wrong at every step in this crisis so far. Not surprising, but that's a longer story.

She said she is going to tax foreign-owned unoccupied properties, which sounds like a step forward to me.

She asks for ideas, i guess in lieu of relying on economists. I have a couple. I might send them along. Who knows?

December 17, 2020
5:44 am
Bill
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They talk nothing but saving the planet, and then they want to unlock hundreds of billions of savings to be used for consumption. Hypocrisy personified.

December 17, 2020
8:09 am
Koogie
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Indeed. This from a person who was in such a financial mess personally that in her mid forties she needed help from her father to qualify for a mortgage on a house she wouldn't otherwise have qualified to purchase.

I will not be taking financial advice from this finance minister.

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