It can’t if the assets it bought are worth less than they were worth when they were purchased.
Do you have any evidence of any central bank withdrawing the exact amount of money they injected into the market, after the recession? That certainly did not happen after 2001, nor did it happen after 1945.
Most of the Fed’s balance sheet is still in Treasury bonds and if the economy recovers then many of the currently bad assets it has won’t be so bad anymore. Beside, they could simply raise interest rates on reserves which would prevent banks from loaning out the money.
After 2001 they removed money, just not enough. I don’t know about 1945 but I was refering to the Great Moderation period.
The definition of inflation again, is an increase in the supply of money. TIPS, which is based on price increases in a government manipulated joke of an index, is irrelevant in measuring an increase in the supply of money. My proposed alternative to estimating future price increases (the inflationist definition) other than a TIPS spread would be looking at real interest rates as determined by a free market. You could compare things such as a longer terms bonds with short-term notes or bills, and dissect what comprises gross market rates (originary interest, price premiums, and the entrepreneurial factor). Originary interest is after all just the rate of discount of future goods against present goods; it’s quite telling of what people expect in the future. The reason it is so hard to tell right now of course is that the central bank manipulates interest rates perpetually. You could also look at futures and forwards.
As the other posters pointed out to you, how much is the Fed going to sell all the garbage assets they bought for? They bought them at prices that were ridiculously high, as evidenced by the fact that no private individuals would buy them. You think they’re going to be able to successfully sell these at prices higher than what they paid for them? I think along with that point a main concern is that the Fed, Bernanke in particular, simply don’t have the balls to raise rates. Let’s face it, the bubble bursts and they couldn’t wait to panic and more than double the monetary base. If they start raising rates, their cute little graphs and GDP forecasts (another joke) will begin to look bad. Bernanke, the clown he is, along with the rest of them at the Fed, believe that in the case of Japan and their lost decade (more like generation) they pulled back expansionary policies too quickly. Well, what are they going to think then once they raise rates and GDP plummets? The expansion will most likely continue until the monetary system breaks down completely.
The US has been monetizing debt for a long time now. If that wasn’t the case, the money supply would not increase in total over the decades because “they would remove it when the recession ends”. The Fed just hasn’t been buying newly issued Treasuries directly; they just buy off-the-run securities to keep prices high. This of course will only be viable as long as foreigners continue to increase their Treasury holdings; fat chance.
The government will eventually have to pay its liabilities unless it cuts them out entirely. Considering the US is a socialist country, I highly doubt they’re going to privatize retirement and/or health care or anything else for that matter. I wouldn’t underestimate how long it will take for a new economic superpower to emerge and former one to go to shit; take a look at England. Over the span of five decades they went from being an economic powerhouse with the world’s strongest currency to getting bailed out by the IMF.
I’m not questioning the market’s predictions, per say. The predictions are distorted because of government intervention. The market may as well be declared dead in the United States; there is no such thing as a free exchange of goods and services anymore. You may be a great driver and I trust you to not get in an accident, but after you drink a 12 pack of beer and a bottle of whiskey, I won’t trust that you’ll be a great driver anymore.
In liberty,
Chris
One important factor that you forgot (or perhaps simply left out) is that other countries are going to realize that we won’t pay them back, and that the dollar will be worthless, thus will dump their dollar reserves, which will exacerbate the problem.
If I were to move anywhere, it’d be Switzerland, but that’s just me. Lots of economic freedom (relatively speaking), gun rights, cantonal rule (as opposed to national/european rule), no EU membership, seriously considering leaving the UN. I might be looking through rose-colored glasses due to the fact that I speak German and my mother speaks French, but still…
I couldn’t agree more.
And the defenition I used, again, was an excess supply of money over the demand for it. This isn’t the same thing as an increase in prices. The point is, the money supply by itself doesn’t matter.
I agree with you here. Looking at longer term bonds is a good way to measure expected inflation. However, long term bonds, like 30 year treasuries, track the TIPs pretty closely, so I don’t see how there would be much of a difference.
The Fed starting paying interest on reserves in order to prevent rates from falling. This was explicit. So obviously they do have the balls to raise rates. Besides, they can’t literally keep rates low forever. The market rates will eventually begin to incorporate inflation and the rate will rise.
Bernanke believes that the Bank of Japan never engaged in expansionary policy, no that they pulled it back too fast.
The Fed had an implicit inflation target. They stuck to this target pretty well over the past 25 years. If they hadn’t pulled the money back out there would have been double digit inflation after every recent recession. Instead, they’ve kept to the target of around 3%.
I was suggesting that they would cut it entirely. Besides, a debt crisis is still years away, as I said.
How distorted do you think they are? The highest estimate of understatement of inflation I’ve seen is around 2%, meaning that the avergae rate of inflation over the past 25 years has been 5%. I admit this isn’t good but it isn’t hyperinflation.
Per annum. %5+5+5+5+5
That’s +5% every year for 25 years.
Your point?
It is not good, it should be lower. But 5% is the max estimate and probably is lower. Hyperinflation would be like 5% a day.
My point is that it devalues a currency [ an thus if that currency is legal tender, the standard of living ] of individuals over a 25 year period unless you are going to contest that the supply of goods has increase over 5% per annum for the last 25 years…this is not a ‘who cares’ moment.
Yup, this is why gold is at an all time low… [*-)]
Speaking of gold, what’s the opinion of the group on using gold prices to estimate inflation?
It’s not that easy unfortunately. I think there’s at least these factors influencing gold prices:
The one you’re interested in is #1 but the others (basically change in demand/supply for gold itself, assuming I’m not forgetting any) complicate using it as a simple method to estimate the change in a currency’s value… Also I’m not certain how big an effect each of those factors have on the supply/demand of gold. But I’d bet that some are much more important than others.
#2 is probably, I’d think, the biggest factor though (changes more than the others?)–which is why I do think it’s at least worth watching. Gold prices probably aren’t going to be dropping too much if people are expecting deflation in the future…
Don’t Swiss have some very stringent immigration laws? Besides, they’re surrounded by the enemies (i.e. European socialists). Do they love their freedom enough to fight for it?
Yeah, their laws are pretty harsh. You need to be in the country for 12 years to become a citizen. The Swiss are very willing to fight and kill for their freedom, according to my understanding. They have mobilized during the World Wars and the Franco-Prussian Wars, in case they needed it. Their military is entirely militia: every man is required to do some military training, and the men have their weapons at their homes, just in case.
From what I’ve read, the Swiss were quite ready to make Germany pay dearly for any invasion they might have been thinking of. So yes, I would say they probably do value their freedom.