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Economy Questions (Inspired By Peter Schiff)

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Mar 27, 2010
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Economy Questions (Inspired By Peter Schiff)

I'm about 3/4 done Peter Schiff's book How An Economy Grows And Why It Crashes and have a few questions.

Inflation

[QUOTE]inflation can happen when governments print an excess of money to deal with a crisis[/QUOTE]
How would this help a crisis? Wouldn't more money being printed decrease the value of the dollar?

Mortgages

What incentive does the government have for buying house loans from the bank? The book explains the bank is able to lower interest rates on the loan because the risk is decreased (because the government will pay back the loan if the borrower doesn't), but what does the government get out of it?

Finding this book very interesting so there may be more questions to come.
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Jr. Member
Sep 28, 2009
130 posts
Regina
Take a look at Zeitgeist: Moving forward (2011) on youtube. It's a long view but it's worth it.

Just came out too, it explains why the economy is anything but. (the definition of..)
Deal Addict
Apr 21, 2008
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Stn wrote: I'm about 3/4 done Peter Schiff's book How An Economy Grows And Why It Crashes and have a few questions.

Inflation


How would this help a crisis? Wouldn't more money being printed decrease the value of the dollar?

Mortgages

What incentive does the government have for buying house loans from the bank? The book explains the bank is able to lower interest rates on the loan because the risk is decreased (because the government will pay back the loan if the borrower doesn't), but what does the government get out of it?

Finding this book very interesting so there may be more questions to come.



1. The simple answer being, by printing more money, you're able to disburse more money into your country, hoping to increase spending, there by picking up the economy.

2. The gov't will have ppl not defaulting, and again, you get ppl to spend more money by reducing interest rates. It's all about stimulating the economy.
Newbie
Aug 31, 2010
63 posts
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On inflation:

Temporary infusion of money (via printing) would help economy. The simplest way to think about it is if pre crisis, everyone shares $1 million of a pie (pie = economy)...by printing money, now everyone shares $2 million of pie...thus, because there is more to go around...people tend to spend..

Of course, per your point, over extended period time of time, dollar value will go down...but it's only used as a temporary measure to boost the economy.

On mortgage...government gets economic stability. For example, a lot of house values in us right now is worth less than the carried mortgage....thus, being rational, home owners would stop paying their mortgage payments. In this case, if too many people default, the banks have to write off the values on their balance sheets...which can create market uncertainty...thus you have institutions like Fannie and Freddie...which would step in and would guarantee mortages from the banks...above was an example only
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Mar 27, 2010
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DanP wrote: 1. The simple answer being, by printing more money, you're able to disburse more money into your country, hoping to increase spending, there by picking up the economy.

2. The gov't will have ppl not defaulting, and again, you get ppl to spend more money by reducing interest rates. It's all about stimulating the economy.
Ok, that clears things up a little.
tyler.mcg wrote: Take a look at Zeitgeist: Moving forward (2011) on youtube. It's a long view but it's worth it.

Just came out too, it explains why the economy is anything but. (the definition of..)
Will do. I plan on finishing this book today which may have a similar message of Austrian economics < Keynesian economics. That being said I'm sure the book is written with a bias and I won't make too much of a concrete judgement before reading about the other side.

nerdawar wrote: On inflation:

Temporary infusion of money (via printing) would help economy. The simplest way to think about it is if pre crisis, everyone shares $1 million of a pie (pie = economy)...by printing money, now everyone shares $2 million of pie...thus, because there is more to go around...people tend to spend..

Of course, per your point, over extended period time of time, dollar value will go down...but it's only used as a temporary measure to boost the economy.

On mortgage...government gets economic stability. For example, a lot of house values in us right now is worth less than the carried mortgage....thus, being rational, home owners would stop paying their mortgage payments. In this case, if too many people default, the banks have to write off the values on their balance sheets...which can create market uncertainty...thus you have institutions like Fannie and Freddie...which would step in and would guarantee mortages from the banks...above was an example only

Understand the inflation question now, still iffy with the mortgaging one. Sorry, I am very new to all this.
Newbie
Aug 31, 2010
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Mortage is debt. If people default on it, then the lender has to write off the debt. If too many people write it off, then the lender would be insolvent...one way to manage this would be to have the government to guarantee the debt...in case the borrower defaults, govt institutions will step in.
Deal Addict
Nov 26, 2005
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there are time lag between CPI and money supply.
people take time to adjust spending habit if there is a sudden supply of large amount of money in notional term. (US doubled amount of debt it accumulated in 200 years in 2 years)
everyone, including corporations, feel pocket is full of cash and will start spending.

one more potential gold bug. once you know the truth, you become a gold bug.
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Dec 10, 2008
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Here is MrBeachman's analogy of Peter Schiff's quote.

Printing money does not help the economy. It is a complete illusion and saying that governments have it under control is a blatant lie. As a matter of fact I see printing money just like a reverse stock split. Someone please give me one example where reverse stock split helped a company. I remember when 10 for 1 split was supposed to help Nortel and the analogy was that institutional investors would take it more seriously. Ya, that worker out allright. Some people never learn and poured all their savings YET AGAIN (that was waaaayyyy after Nortel crashed). Man, you should have been on stockhouse forums at that time, people giving all kinds of rosy outlooks that sounded completelly legit I admit. Now, US economy is in way better shape than Nortel, but Benny is burning money faster than napalm. No amount of argument by some cheerleaders here can contradict that fact. The inflation is real and it ain't quantitative easin'.

BTW, I guess I am one of the few here that thinks real estate is excellent buy (in major centres) if you want to hedge against inflation.
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Mar 27, 2010
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York Region
nerdawar wrote: Mortage is debt. If people default on it, then the lender has to write off the debt. If too many people write it off, then the lender would be insolvent...one way to manage this would be to have the government to guarantee the debt...in case the borrower defaults, govt institutions will step in.
Right, which is what allows the bank to lower the interest rates. Ok, I looked up default, which I think is what was causing the confusion.

Default = failure to pay?
For example, a lot of house values in us right now is worth less than the carried mortgage
Why is this? Because of interest rates on the loans/mortgages?
the banks have to write off the values on their balance sheets...which can create market uncertainty
How does this create market uncertainty? Does it create market uncertainty for potential borrowers, because they can see there are borrowers failing to pay back the mortgage/loan? Or for the banks doing the loaning?
...thus you have institutions like Fannie and Freddie...which would step in and would guarantee mortages from the banks
These institutions are being explained in the book, which is really the root of my question. So these institutions buy the loans from the bank in order to "stimulate the economy". This is caused because the bank can lower interest rates with the security of their principle being guaranteed by Fannie and Freddie? Do Fannie and Freddie pay the bank at the same rate the borrower would, without F&F? F&F doesn't charge a higher interest rate to make a profit, right?

I appreciate all the help
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Mar 27, 2010
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York Region
mrbeachman wrote: Here is MrBeachman's analogy of Peter Schiff's quote.

Printing money does not help the economy. It is a complete illusion and saying that governments have it under control is a blatant lie. As a matter of fact I see printing money just like a reverse stock split. Someone please give me one example where reverse stock split helped a company. I remember when 10 for 1 split was supposed to help Nortel and the analogy was that institutional investors would take it more seriously. Ya, that worker out allright. Some people never learn and poured all their savings YET AGAIN (that was waaaayyyy after Nortel crashed). Man, you should have been on stockhouse forums at that time, people giving all kinds of rosy outlooks that sounded completelly legit I admit. Now, US economy is in way better shape than Nortel, but Benny is burning money faster than napalm. No amount of argument by some cheerleaders here can contradict that fact. The inflation is real and it ain't quantitative easin'.

BTW, I guess I am one of the few here that thinks real estate is excellent buy (in major centres) if you want to hedge against inflation.
Note that it wasn't a direct quote of Peter Schiff himself, but rather from the book which he explains in cartoon-esque form how the economy got the way it is. What you're saying (minus the real estate part) seems to be what he advocates.
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Jul 8, 2009
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Post-WWI Germany made the best use of inflation for its own needs. They owed billions to the encouraged inflation so they could repay that debt in severely devalued currency. Literally, they devalued the mark by billions to one. It was purely genius.
Newbie
Aug 31, 2010
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Yes on default.

If you buy a house worth 100k and pay mortgage on it...then market tanks and the house is worth only 20k...would you still pay your mortgage?...most people would just stop paying...

Uncertainty for the banks doing the loaning...because then people would try to estimate worst case scenarios...which like bp, most estimates are wrong....

Fannie and freddy are there as a safety in case defaults happen...they do not stimulate the economy directly...indirectly they do...as inflation = more money = more people buy stuff...like a house
Deal Fanatic
Jul 1, 2007
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Wing Nut wrote: Post-WWI Germany made the best use of inflation for its own needs. They owed billions to the encouraged inflation so they could repay that debt in severely devalued currency. Literally, they devalued the mark by billions to one. It was purely genius.

Need to pay off debt in your own currency? Hyperinflate the currency. Need more Lebensraum? Invade Poland.
Money Smarts Blog wrote: I agree with the previous posters, especially Thalo. {And} Thalo's advice is spot on.

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