Wouldn’t an increase in demand following an increase in the money supply lead to a situation where too many dollars are chasing too few goods and as such cause an increase in prices? I mean…isn’t that what happened with the housing market after Greenspan left interest rates so low for so long?
the friendly government is doing all it can to make sure everyone can hold lots of money. lots and lots.
I’ll see if I can find anything tonight (assuming I remember to look).
Either:
- It was a guest on TV news
or - I just can’t find it
Based on what I DID find, I think the European stimulus does indeed seem to be smaller. So either:
- The story was too new at the time (early news reports do tend to have mistakes)
- The source was bad (the main reason I want to find it, to evaluate accuracy of the source)
- I’m missing information - perhaps they were factoring in social welfare programs already in place?
- I’m remembering it wrong?
http://www.reuters.com/article/turkey/idUSLH44404720090317
This is the best article I found so far but it’s saying the Euro stimulus is smaller, even relatively (vs. GDP).
Of course this all just makes things worse–if Europe is really seeing inflation the US probably isn’t far behind. But there’s a ton of factors involved, plus Europe put it together faster I think.
And also there’s Paul Krugman, who says the European stimulus is smaller–but we know he’s always wrong, so now I’m really confused. [:D]
One link to EU “stimulus”:
http://www.bloomberg.com/apps/news?pid=20601087&sid=aI.TvvSBYXBM
I agree that part of the “inflation” we are seeing right now is caused by speculative movements, particulary in the commodities sector. Look at oil for example: price is climbing up, sure, but consumption in the Euro area has steadily gone down over the first four months of the year. Also for the first time in more than thirty years overall electrical consumption went down in 2008 and 2009 won’t probably be much better if industrial production datas are anything to go by. The Chinese can only buy so much more oil: they haven’t got infinite storage capacity and their refining capacity, despite sizeable investments, cannot go up overnight, Building a refinery takes years and taking it to full operating capacity takes a few more years. Also higher prices are sure to drive down consumption even more: electrical companies here have already announced price cuts (small things, around 1-2%, but after decades of constantly ascending prices that’s refreshing news) because their balance sheets aren’t going as well as in 2007 when booming oil and natural gas prices helped them out more than a bit . It cannot go on forever and it won’t be long before the market will try adjusting itself again.
There’s also a banking problem to consider: banks have become much more cautious lending out money but they are also failing to attract new savers because interest rates they can offer are so low people prefer keeping their money home or putting them in a State Mail account. Sure, interests are low but there are no expenses and the State will guarantee a minimal interest rate no matter what. There’s lot of pressure to force banks into lending but very few are taking notice of the problems us savers face. Talk about destruction of capital.
Falling consumption with rising price is not contradictory. Inventories level are the factor that tells us about supply/demand.
Common sense tells us that over the long term, there is no way the the Fed’s latest round of pumped money will NOT lead to inflation. Inflation is already there. WHEN its effects are seen is just a matter of when the velocity of the money picks up. Which could take time.
On two things, I know you’re not one of them, but many people get confused about the whole deflation in prices going on right now.
In all reality, price deflation doesn’t necessitate a bad thing, as long as it’s mild; furthermore, it can occur and has even during booms - between 2005-2006 and even 2006-2007, though at a slightly slower pace.
As for the future, though. I doubt you’re going to see “hyper-inflation” as it would also necessitate a shift in opinion about the US and the currency, which is that neither the economy nor the financial market is worth anything. You will probably see inflation, however, but it depends on what the velocity of money does in the future in regards to how much price inflation you do see.
True, a lot of money has been pumped into the economy, but short term velocity changes, and long term velocity - though usually stable - could change too.
If savings rates increase - or rather consumption decreases - from trend, I think the inflation could be less than catastrophic, but it will most certainly be a problem a year or four into the future.
This is a REALLY good view into the mathematic dynamics of the money supply and inflation.
Exactly.
The question is, however, whether the velocity of money will pick up at a fast pace, or will pick up by very little.
One would hope it doesn’t pick up very much at all, but this seems unrealistic given that the US is basically seen as the…consumption horse than pulls the global production wagon to a large degree even now. We’re basically being pressured to ruin our own medium of exchange by the people who are supposed to be our “protectors.” It would be funny if it weren’t so disgusting and sad.
Markets are still functioning to some extent despite the massive government/central bank intrusion. Bond yields are rising despite FED manipulating them, acting as the anchor to inflation. We’ll see how this ends.
I’ve explained this on other forums. It is possible to enter a sort of “liquidity trap” because of government bailouts. The defining characteristic of many of the bailed out institutions in Japan in the 1990s and the USA now is that these institutions are insolvent. They have excessive liabilities and their assets are near worthless. The only reason anyone would lend to these institutions would be because the government guarantees them. The economy at large, however, is going in a downwards spiral and will continue to do so for the foreseeable future, because of the bailouts and “stimuli” not allowing the economy to restructure and instead wasting money on inefficient projects. If those insolvent banks lend out any more money, they will most likely lose it. Likewise, if any other businesses lend out money, they will also lose it. This also makes it pointless for individuals to lend money to banks, since the banks won’t have anything to do with it and won’t offer a high interest rate. In fact, those banks might lose the money for the individuals.
This creates a situation where the demand for money skyrockets because the reserves of banks increase and because the cash reserves of individuals increase. So even though supply of money increases, demand more than outweighs supply increases. Cash reserves increase and nothing the government does to inflate can possibly work.
Thanks for this. This may have been what I was thinking of, but I don’t think it’s the exact article. My failing memory may have swapped bank bailouts vs “stimulus”. But whether it would cause early price inflation, I’m not sure. It sounds like they may have taken on at least some debt..
Is it not somewhat here? For those who have read Bob Murphy’s last article:
One last point about deflation/inflation: If you have been reading CNBC headlines and listening to Ben Bernanke, you would get the impression that we are still experiencing “deflationary pressures” in 2009. But guess what? If you look at the non-seasonally-adjusted consumer price Index figures maintained by the BLS, you will see that from December 2008 to April 2009, prices have risen at an annualized rate of 4.3 percent. Yes, you heard right: if you throw out the “seasonal adjustments” and just look at the raw CPI figures, over the last four months the rate of price inflation is well above Bernanke’s professed “comfort level.”
It seems like a matter of time before it becomes more vicious.