I keep reading about how inflation is around the corner. The general consensus is that deflation is the order of the day and that without that massive infusion of money we’d be in big trouble. It’s a bit frustrating to call for inflation because it’s what I understand is coming from my knowledge of economics and from other more knowledgeable than I when there’s little evidence of it thus far.
It is not here…yet. The massive injections of liquidity by the Federal Reserve is mostly still being hoarded by the largest banks. Inflation is too many dollars chasing the same amount of goods. As of now the banks are still holding these dollars they have not been released into the system yet. Are the banks scared? Or are they getting direction from the Fed to go easy on the lending? Who knows?
Also for all the spending that Washington is doing and for all the liquidity that has been injected as I just mentioned it is important to note that private businesses and individuals are deleveraging which is putting deflationary pressures on prices. The thing to watch for is the banks and their lending. If they open the flood gates and money comes flooding in then it could be a rough ride.
The market is trying to deleverage itself now. Businesses and individuals need to pay down debt and in an economy absent a Central bank fixing interest rates they would be doing everything they could to lose the debt. Even if that means selling off assets for little or no profit, or even at a loss. The Federal Reserve is still trying to rescue the market with more credit, but the market is trying to purge the market of excess credit and return to soundness. As long as the Federal Reserve keeps pumping credit into the market I don’t see how we can avoid high inflation in the future. It may take a while, but the economy is in limbo right for the reasons I mentioned above.
“Inflation” is already here, an increase in the money supply. We do not see “price inflation” or a “general rise in prices” because 1) the fiat credit bubble has not yet fully collapsed, ie, it continues to collapse and 2) the way the CPI measures “inflation” is dubious to say the least. Additional factors that have delayed the day of reckoning are the structural trade deficits that allow foreign currency manipulation, ie, we can export dollars to China while they export goods to us, and the rise of information technology (deflationary forces).
Notice that the rise in housing prices never made it into the CPI because the methodology was changed several years ago to some sort of equivalent rent basis. I suggest Mike Shedlock’s website for details on this. But of course, there are plenty of resources to be found here!
The main thing to remember is that money printing does not accomplish the stated objectives of those who possess the power to print it. All it does is benefit some people over others, and causes distortions (malinvestmens) within the economy that feels like a “boom”. That’s it. Yet, the money printing continues on the basis that those in power are “fighting deflation”. But they don’t mention that the “deflation” is the result of fiat credit bubble collapsing, the one they created previously.
chloe732,
You are right. I stand corrected. Inflation is here, just not visible in prices yet.
To address the 2nd part of your question; Is it (lack of price inflation) a strike against Austrian theory? Absolutely not. See my previous reply and jdp’s about why we are not seeing price inflation. Austrian theory has predicted and explained what we are seeing the economy. The “bust” is the result of malinvestments during the “boom”. Austrian theory is simply “sound economics”. There is nothing to strike against.
If inflation is already here, and prices have not risen, what’s so bad about inflation? There were deflationary pressures and with the injection of new money prices haven’t risen. To the average joe this means the newly printed money hasn’t resulted in higher prices, so they’re okay with it.
Prices haven’t risen?
Maybe I should remind you what the prices were a hundred years ago.
1] inflating [i.e increasing] the money supply, does not necessarily cause “inflation” [defined here as a general loss of purchasing power of the $U.S]
2] There is always a considerable time delay [2 to 3 years or longer ]between the actions of the central bank[ the Federal Reserve] and what happens in the general marketplace [i.e. the effects of the Feds previous actions].
If, as you say prices in general have not risen, then all that means is that the anticipated[presumably by yourself and others] loss of purchasing power due to the Feds actions has not yet occurred.
3] Because the price of all “commodities” [including fiat currencies] is ultimately determined by the twin factors of supply, and the demand for that supply, there is , and can be, no written in stone guarantee that inflation [loss of purchasing power of the $] will actually result from the prior “inflationary” actions of the Fed, no matter how outrageously huge they might appear to be.It might, it might not- there is no way to know in advance.
As always, the money supply is, at any point in time, still only 50% of the final , true ,value-of money[i.e. purchasing power] price equation. Future demand for that supply can never be predicted/anticipated.
Regards, onebornfree
Mtn Dew - "If inflation is already here, and prices have not risen, what’s so bad about inflation? "
Read my reply regarding inflation (expansion of the money supply by a central bank). Monetary inflation 1) benefits some (the early recipients) over others (the late recipients), and 2) creates the boom bust cycle, ie, causes capital to be misdirected into unsustainable activities (the boom). The bust occurs when these activities are revealed.
The stated goals of the monetary inflationists are to achieve “full employment” and “stable prices.”
Sound economics contends that the above goals cannot be achieved by monetary inflation. What is achieved is described in #1 and #2 above.
Greenspan created the most recent boom / bust (2002 - 2008). Yes, Greenspan is responsible for the bust even though he was not Fed chairman at the time (convenient, from his point of view though). It was Greenspan’s expansion that caused the boom (housing bubble). At that point, NOTHING could be done to prevent or even cushion the collapse.
Now, Bernanke prints money in response to the collapse (remember, Greenspan printed money in response to a collapse) yet “…we don’t see price inflation, so what’s so bad about monetary inflation?” All that has happened since 2008 (Bernanke) is that some have benefited at the expense of others, and a new boom / bust cycle is being created.
Malinvestments have been occurring since 2008, but it may not seem like it since the economy is in the tank. But previous malinvestments have not been allowed to be liquidated (the banking system, the auto industry, Fannie Mae, just to name some well known and obvious examples). They are being propped up at this moment. Signs of recovery are phantoms; the stock market rose because of Bernanke’s printing (his “quantitative easing” printed $1.7 TRILLION!), and GDP is up due to deficit spending.
When the bust (read “crisis”) comes, Bernanke will respond by printing more and Obama will respond by borrowing and spending more. It should be obvious that their stated objectives cannot be achieved with these “policy tools”.
When the U.S. debt default occurs in a few years (ie, Greece) the Fed will simply print the money to honor the bond holder’s investment. When the social security and medicare system collapses in 10 to 20 years, the government will “borrow” to pay for it and the Fed will “buy” the bonds. The Fed will, in effect, print the money needed to send to social security recipients and pay for their medical care (about $60 trillion at this time in unfunded liabilities).
What’s so bad about inflation? Nothing, I guess, unless you believe the things that “policy makers” tell you. Then, there could be a problem.
This is an interesting post I read in a different forum:
"… It would be very hard to spark hyperinflation in the US. It is not simply a matter of increasing money supply. People get this wrong. When I repeat that markets or the economy are nonlinear chaotic systems, it means they resist simple linear changes (more money, more inflation) until some discontinuity occurs, and then they run surprisingly fast in some direction. In this case it is the accelerating velocity of money that causes hyperinflation, and that comes when people lose faith in the currency. The discontinuity is a collective bit flipping to - gotta get out, this Shekel or Zloty or Drachma or whatever is going to trash.
This has not happened in Japan because the Yen has been the darling of the carry trade, which has maintained confidence in it.
What Edwards is worried about is a realization that ALL currencies are going to break. Japan’s lost two decades happened when the US was strong, and then China was rising. Now with all major economies weak, the risk is that all currencies break, including the Yen.
That is what happened in 1931, when country after country defaulted by breaking from gold. Yet hyperinflation did not follow. Why? In a deflationary debt spiral, velocity slows. Money is hoarded, people shift to gold or whatever and sit tight.
Is it different this time? In certain respects, yes, as there is such a global effort to re-inflate. The UK seems to be the most at risk of an inflationary spiral right now. But given the Euro is acting like gold in Europe, it may cause a move into Dollars or Euros rather than hyperinflaton in the UK.
My take is the debt-deflationary spiral wins, at least for the next three years. After de-leveraging bottoms, then we are at risk of a spurt of hyperinflation."
http://yelnick.typepad.com/yelnick/2010/05/technical-note-of-caution/comments/page/2/#comments
“In a deflationary debt spiral, velocity slows. Money is hoarded, people shift to gold or whatever and sit tight.”
Exactly. The vast majority of the money created is sitting with the mega banks and other financial institutions from the bailouts. The 787 billion dollar stimulus has only been half way spent and I think this was on purpose. I personally think the Federal Reserve did not want to give the economy a big shot in the arm because the last thing they want to happen is to send the market false signals due to the stimulus’s temporary effects thereby leading to banks lending, businesses borrowing, and consumers spending. This would have opened the flood gates of freshly created money sending prices sky high, but once the stimulus dried up and the fundementals were still weak we would have been back to square one except with stagflation instead of deflation as we currently see.
The US authorities have an entirely different explanation for the failure of stimulus measures to gain full traction. They are opting instead for yet further doses of Keynesian spending, despite warnings from the IMF that the gross public debt of the US will reach 97pc of GDP next year and 110pc by 2015.
Larry Summers, President Barack Obama’s top economic adviser, has asked Congress to “grit its teeth” and approve a fresh fiscal boost of $200bn to keep growth on track. “We are nearly 8m jobs short of normal employment. For millions of Americans the economic emergency grinds on,” he said.
David Rosenberg from Gluskin Sheff said the White House appears to have reversed course just weeks after Mr Obama vowed to rein in a budget deficit of $1.5 trillion (9.4pc of GDP) this year and set up a commission to target cuts. “You truly cannot make this stuff up. The US governnment is freaked out about the prospect of a double-dip,” he said.
The White House request is a tacit admission that the economy is already losing thrust and may stall later this year as stimulus from the original $800bn package starts to fade.
Recent data have been mixed. Durable goods orders jumped 2.9pc in April but house prices have been falling for several months and mortgage applications have dropped to a 13-year low. The ECRI leading index of US economic activity has been sliding continuously since its peak in October, suffering the steepest one-week drop ever recorded in mid-May.
Mr Summers acknowledged in a speech this week that the eurozone crisis had shone a spotlight on the dangers of spiralling public debt. He said deficit spending delays the day of reckoning and leaves the US at the mercy of foreign creditors. Ultimately, “failure begets failure” in fiscal policy as the logic of compound interest does its worst.
However, Mr Summers said it would be “pennywise and pound foolish” to skimp just as the kindling wood of recovery starts to catch fire. He said fiscal policy comes into its own at at time when the economy “faces a liquidity trap” and the Fed is constrained by zero interest rates.
Mr Congdon said the Obama policy risks repeating the strategic errors of Japan, which pushed debt to dangerously high levels with one fiscal boost after another during its Lost Decade, instead of resorting to full-blown “Friedmanite” monetary stimulus.
“Fiscal policy does not work. The US has just tried the biggest fiscal experiment in history and it has failed. What matters is the quantity of money and in extremis that can be increased easily by quantititave easing. If the Fed doesn’t act, a double-dip recession is a virtual certainty,” he said.
Mr Congdon said the dominant voices in US policy-making - Nobel laureates Paul Krugman and Joe Stiglitz, as well as Mr Summers and Fed chair Ben Bernanke - are all Keynesians of different stripes who “despise traditional monetary theory and have a religious aversion to any mention of the quantity of money”. The great opus by Milton Friedman and Anna Schwartz - The Monetary History of the United States - has been left to gather dust.
Mr Bernanke no longer pays attention to the M3 data. The bank stopped publishing the data five years ago, deeming it too erratic to be of much use.
This may have been a serious error since double-digit growth of M3 during the US housing bubble gave clear warnings that the boom was out of control. The sudden slowdown in M3 in early to mid-2008 - just as the Fed talked of raising rates - gave a second warning that the economy was about to go into a nosedive.
Mr Bernanke built his academic reputation on the study of the credit mechanism. This model offers a radically different theory for how the financial system works. While so-called “creditism” has become the new orthodoxy in US central banking, it has not yet been tested over time and may yet prove to be a misadventure.
Paul Ashworth at Capital Economics said the decline in M3 is worrying and points to a growing risk of deflation. “Core inflation is already the lowest since 1966, so we don’t have much margin for error here. Deflation becomes a threat if it goes on long enough to become entrenched,” he said.
However, Mr Ashworth warned against a mechanical interpretation of money supply figures. “You could argue that M3 has been going down because people have been taking their money out of accounts to buy stocks, property and other assets,” he said.