inflationary federal reserve - to what extent and why stop?

Economics Economics Questions
,
1

this link http://mises.org/daily/3390 states “The US Federal Reserve, for instance, increased the stock of the monetary base — which includes banks’ demand deposits held with the Fed, plus coins and notes in circulation — from $870.9 billion in August 2008 to $1735.3 billion in January 2009.”

i have seen similar charts elsewhere on the internet.

the artcle goes on to say “The monetary base expands when the central bank takes over the troubled assets of commercial banks in order to extend new credit to those banks.”

and

"What the Fed does is produce inflation…What the rise in base money has done so far is prevent prices of banks’ security holdings to decline to free-market levels. In other words, the money injection helps to keep asset prices at artificially elevated levels, thereby preventing prices in financial markets, credit markets in particular, from adjusting…The government controlled fiat-money regime is highly inflationary"

‘"Expanding the money stock through circulation credit sets into motion an illusionary boom, leading to malinvestment. However, the latter does not come to the surface as long as the credit and money supply keeps growing.’"

if what i read is true the federal reserve has greatly increased its bank reserves to levels not seen in any recent history - well thats strange i guess and that fact alone (some uberbank meddling with interbank lending) is probobly why a federal reserve shouldnt exist at all.

but the article above mentions that malinvestment will not occur so long as credit and money supply keep growing? is this so?

is the only real issue with steady credit and money supply increases the possibility that it might slow down?

would a 2 percent annual credit expansion growth set on auto pilot not cause boom bust cycles or malinvenvent spoken of at this site?

prior the the rapid base money increase that the article claims took place it seems that the monetary base increased rather modestly over the last 4 decades. (chart at link)

clarification appreciated

2

not quite; the article you quoted says that whilst malinvestment will be occuring, it wont be ‘revealed’ till later.

3

Malinvestment still occurs, because interest rates are forced down by the injection of new money. Stuff that shouldn’t be profitable under a free market rate of interest becomes “profitable”. The malinvestment doesn’t really get ugly, however, until the boom is brought to an end (the printing presses slow down or turn off), and the rate of interest returns to it’s proper free-market equilibrium. Then, alot of the boom business that succeeded with the artificially low rate becomes unprofitable, and falls apart, leaving capital (real economic value) tied up in stuff that no one wants (think of all the houses that no one wants to buy now).

The thing is, it’s the money keeping ahead of rising prices that allows for the boom. The new money is valued at the old price, before it rises, acting as if it has real value of its own (when in fact, this value is just sucked out of the other money in the economy, like a pie that just gets cut into smaller pieces). So, you can’t keep growth up with constant inflation, because people will anticipate the inflation and adjust prices earlier, robbing the new money of the value it was previously robbing from the existing money stock. So, you’d have to keep ratcheting up the rate, 2% this year, 3.5% next year, and so on, to avoid the bust.

The Rev

4

ok what you say isnt clear to me however.

it would seem that ‘people’ would anticipate 2 percent inflation and racheting would occur in a similar fashion and the sucked out value would be taken into account - regularly.

??

also in the article…“Banks’ “excess reserves” — banks’ base-money holdings minus required reserves — rose from $1.9 billion to $798.2 billion.”

i have been told that bank reserves with the federal reserve are often increased through federal reserve fiat purchases of bank assets (securities, etc) and that this is an inflationary process.

additionally, i have been told that the federal funds rate arises from the inflationary additions of money into fed bank reserves.

additional asset purchases/reserve additions lower the FFR and sales of bank assets increase the FFR.

wouldnt the federal reserves balance sheet reflect this - continually growing in size?

this is unclear to me

thanks

5

If the central bank announced ahead of time that it was inflating the currency, then people would see it coming and adjust prices accordingly. If you had a constant inflation of say, 2%, people would know ahead of time that prices would be going up, and they would demand higher wages and charge higher prices in anticipation of paying more themselves. So it’s not just making the money supply bigger. You have to keep ahead of rising prices to maintain the boom. And to maintain a boom, you have to introduce new money that people can still spend at the old value, before equilibrium is re-established and prices go up.

Does that make more sense?

The Rev