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May 29, 2009



You are absolutely right Joel. Increase of M may be getting completely offset by destruction of V. Therefore, the fed can be making money like crazy, but the banking system break down offsets to keep P constant....or maybe even down.

I need to clarify my point. Krugman is saying that the increase in M is just staying at the Fed. However, my worry is that it is there and the only way it disappears is through a reversal in QE....I think!

Joel Stainton

hi eric, good stuff as usual. wasn't krugman's point that the $10bio "credit" to JPM shouldn't be treated as such (in terms of inflationary pressure) until there is a real possibility the cash will be put to use?

whitney, roubini et al have all been on this train of thought recently saying that these new items on the credit side of the balance sheet are being immediately chewed up by losses on "legacy" (not "toxic" now tax payers own them!) debts and the new problem CMBS, credit card etc debts.

The Fed is printing money to buy assets but, the deflationists argue, it is merely fighting the huge withdrawal of money from the "shadow banking system" and the net result is still negative.

we have a similar problem in the UK where our QE program is limited to buying gilts. This means the BoE is printing money to buy bonds that look a lot like cash from pension funds who then use the money to buy more gilts. It does have the effect of keeping long term rates lower than they otherwise would be but does absolutely nothing to repair the balance sheets of banks.

keep up the good work, Joel


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krugman is irrelevant, he's a propagandist at best. his office in the ivy tower must be above the chem lab, lots of fumes floatin up his nostrils over the decades spent in the cloister. classic example of what happens to someone who has never ever tasted risk. but talks as if. and explains how someone with his "credentials" can miss the point so completely and fundamentally. wasn't he supposed to be able to teach this stuff?


Good stuff Strange. I think I wrote something about the potential short squeeze that could happen a few months ago....I'm going to find it. My worry was dealers or originators selling billions of fn 4's for july settle...and then the mortgages don't get made because of a rate spike......and everyone gets caught short to the Fed!



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