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View Diary: Monetary insanity continues (8 comments)

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    The marginal utility of savings is negative which is why Americans in general have stopped.  Using M3 as the measure the current increase in the money supply has been, roughly, 5.5% over the last year.  Savings Accounts, on the other hand, are at roughly 3.5%.  A 'back of the envelope' estimate gives a preliminary estimate of a 2% loss per year of monies in a savings account.

    Real assets, such as housing, are giving a net positive return in most of the country.  

    A superficial analysis seems to show Americans are actually responding intelligently to our economic environment by foresaking saving for asset investment.  

    The problem is, as you say, the "housing is also the basis of our currency - in terms of assets on the books of banks..."  This works in two ways: (1) as older homes are purchased the mortgages carried on the properties increase and (2) the ongoing use of home equity for current consumption.  Both of these increase the current account deficit.  The first, due to dis-intermediation, by the issue of debt instruments by banks to foreign buyers and purchase of goods and services by consumers to foreign producers.  

    The point of all of this is we are facing serious structure problems in the US economy.  The history of bubbles indicates a credit supply boom eventually returns to the same (more or less) level of economic activity present at the start of the bubble.  I had hoped the baseline was 1982 when the Fed under Mr. Volker had wring the previous Viet Nam era 'inflation' out of the economy.  Your comparision with the 1920s is .... worrisome.

    "...[one] must still have Chaos in oneself to be able to give birth to a dancing star." Nietzsche

    by ATinNM on Sat Apr 30, 2005 at 09:41:30 AM PDT

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