What kind of inflation can we expect if the monetary world gets back to "normal"?

Economics Economics Questions
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Greetings,
On my latest post on Debtor’s Prison, I have set out to answer the very simple question of “What kind of inflation can we expect if the monetary machine returns to ‘normal’?”. It’s quite a simple premise, and one that I think most can see eye to eye on, no matter what side of the inflation/deflation debate you are on.

The basic assumption is that CPI is correlated with M2. This is certainly the case, in the past 50 years, the correlation coefficient between them is 0.97. Therefore, we can be safe in using M2 as a barometer of CPI.

As for the future “projections”, we very simply assume that the M2 Money Multiplier (M2/M0) returns to “normal” in 18 months (the same amount of time it took it to deteriorate from 8.9 to 4.0). I also assume that M0 stays constant. This is a very safe assumtion since the asset side of the Fed Balance Sheet is now primarily composed of long-term assets that can’t be easily disposed.

This allows me to extrapolate potential M2 levels to August 2011 (the end of the 18mo recovery period). Given the growth of M2, and using the correlation coefficient to CPI, we can easily derive the projected growth of CPI.

The conclusions of this EXTREMELY simple exercise are staggering:
If the M2 Money Multiplier returns to its “normal” level, and the CPI correlation continues to hold, then we would reach a CPI level of 21% in February 2011!

Please check out the article if you need further convincing. Such a simple exercise as this has very little space for bias, and I cordially invite you to vigorously debate the parameters and set up. I have provided all the XLS charts with all the data, and some MATLAB M-files for the dorks amongst you.

http://www.debtorsprisonblog.org/journal/2010/3/18/what-kind-of-inflation-can-we-expect-if-the-monetary-machine.html

2

Yes, it could go that high and it is really much higher than the reported numbers now. See shadowstats.com for the real numbers.

Regardless of how the government massages (Lies) about the increasing prices, GDP growth and other numbers we are going to see a lot of price increases in the near future. Unless this excess reserves are off by a factor of 10, then there is over 1 trillion in Excess Banking Reserves sitting in the Fed Accounts just waiting to be loaned out. Currently, the Fed funds rate is now between 0 and 0.25%. The interest on excess reserves is the Fed funds rate - 0.1% or between 0 and 0.15%. So why lend to any other bank or anyone else for that matter and let your excess reserves just sit there.

At some time this trillion will become at least 10trillion of loans as banks use a 10% reserve rate. So you better believe that there will be some prices rising with 10 trillion of dollars chasing the same amount of goods.