Whip (Up More) Inflation Now!

Brian Doherty | May 27, 2009

Federal Reserve of San Francisco analyst thinks we gotta keep the zero interest rate train rolling until it derails in some terrible tragedy. From the Wall Street Journal's "Real Time Economics" blog:

San Francisco Fed economist...Glenn Rudebusch says the Fed’s history and its current economic expectations indicate “the funds rate should be near its zero lower bound not just for the next six or nine months, but for several years.”

The economist said the Fed will need to maintain this stance in part because its current interest rate policy is not easy enough, having been constrained by an inability to go below zero.....

The policy Rudebusch is referring to is the one the Fed put in place at the end of last year, as it struggled to stimulate a rapidly faltering economy. The Fed then took a step unprecedented in the era of modern monetary policy-making and pegged its overnight target rate in a band between 0% and 0.25%....

....economic and banking troubles have been such that policy makers have been forced to adopt a radical agenda of emergency lending and direct market interventions, to create an environment where those rock-bottom borrowing rates can be more effective.

The inflationary effects of such low interest rates--the encouraging of borrowing effectively means the injection of more new money into the economy--are still thought to be a worry for another day by our monetary policy mavens. Which raises the risk that that other day will be very worrisome indeed. Mo money, mo problems, as a wise man once said.

The St. Louis Federal Reserve's scary monetary base growth chart.

For them that has forgotten the Gerald Ford interregnum, title explained, to the extent there's any rational explanation.

Comments

Warty|5.27.09 @ 3:10PM|#

current interest rate policy is not easy enough, having been constrained by an inability to go below zero.....

Dude, I've been doing shrooms too much. I could swear that says that they want negative interest rates.

|5.27.09 @ 3:13PM|#

High inflation bad.

KT|5.27.09 @ 3:13PM|#

Mo money, mo problems, as a wise man once said.

Our leaders could probably benefit from observing the "Ten Crack Commandments" as well.

|5.27.09 @ 3:18PM|#

They do want negative interest rates. But since they're not the ones lending the money, they don't see anything at all odd with it.

|5.27.09 @ 3:20PM|#

Its not just the low fed funds rate driving inflation. Its also monetizing the debt via "quantitative easing" in the Treasury market. The last bond auction was pretty much a failure, and it looks like the next one will be, too.

Oh, yeah, that inflation train is a'comin'.

Fluffy|5.27.09 @ 3:22PM|#

This article is about 5 days too late.

Beginning Thursday afternoon, the Fed completely lost the control they had maintained over the MBS market, resulting in a free-fall in mortgage bonds this afternoon.

Mortgage interest rates are 0.750% higher in rate as of about five minutes ago than they were last Thursday morning.

There is no "0 interest rate environment" in existence. Rates are higher now than they were before the Fed starting buying treasury bonds and MBS.

We're probably looking at another leg down on the recession as the effect of the last week's move all categories of bond rates works its way out into the economy.

|5.27.09 @ 3:40PM|#

Not only will Wimpy get to eat his hamburger today, we will pay him to do it.

------

Rates are higher now than they were before the Fed starting buying treasury bonds and MBS.

Could this be because rational investors are looking into the future and discounting for inflation?

|5.27.09 @ 4:10PM|#

The St. Louis Federal Reserve's scary monetary base growth chart.

That's not a chart, that's a porno.

|5.27.09 @ 4:36PM|#

There is no inflation.

The money supply is still contracting. The higher yields on T-Bills reflect further weakness.

|5.27.09 @ 5:25PM|#

There is no inflation.

*clicks heels together three times*

|5.27.09 @ 5:32PM|#

The money supply is still contracting. The higher yields on T-Bills reflect further weakness.

No, the yields on T-bills are a function of buyer demand, not monetary supply. T-bills aren't cash, they are an investment, and primarily a safe haven investment. The fact that the auctions have been failing, requiring higher rates, is an indication that demand for T-bills is down, as T-bills are no longer seen as a safe haven.

And why aren't they seen as a safe haven, you ask? The colossal debt we have taken on have created doubts about the ability to honor them (absent major inflationary devaluation), and our super-duper loose monetary policy guaranteeing such inflation.

SIV|5.27.09 @ 5:46PM|#

My God! I agree with shrike on something.Well it happened with joe once too.

No Name Guy|5.27.09 @ 5:54PM|#

Hmmmm....that chart makes me want to exchange all these pretty pieces of paper with numbers on them and 'Federal Reserve Note' for real goods I can use at some point in the future - like rice, flour, gas, gold and silver.

|5.27.09 @ 6:00PM|#

No, the yields on T-bills are a function of buyer demand, not monetary supply. T-bills aren't cash, they are an investment, and primarily a safe haven investment. The fact that the auctions have been failing, requiring higher rates, is an indication that demand for T-bills is down, as T-bills are no longer seen as a safe haven.

And why aren't they seen as a safe haven, you ask? The colossal debt we have taken on have created doubts about the ability to honor them (absent major inflationary devaluation), and our super-duper loose monetary policy guaranteeing such inflation.

This is problematical but very worthy of an answer.


But, happy hour takes precedent.

Invisible Finger|5.27.09 @ 6:24PM|#

The money supply is not contracting, it is expanding. But it is not expanding at a level that replaces the contracting of credit.

If credit declines by $8 Trillion, and money supply expands by $3 Trillion, you are in a deflation.

I do not know when credit will cease contracting. I do not know when the Fed and Treasury will stop expanding the money supply. I do not know if the Fed and Treasury will eventually create more new money than the amount of credit that will ultimately contract. If I had to place a bet, I would bet on the Fed and Treasury eventually overshooting rather than undershooting, but they haven't overshot yet.

robc|5.27.09 @ 7:05PM|#

I think we need to be very careful with loosely thrown terms like "money".

M0 is clearly expanding, as the graph shows. No, wait, it fucking exploded.

It is quite possible that despite the pumping up of M0, that the higher order Ms are not expanding and may even be contracting.

I would think that is only a temporary effect and that they will unfortunately follow M0 eventually.

robc|5.27.09 @ 7:06PM|#

they haven't overshot yet.

I think they have overshot, but with the time delay, it isnt obvious yet.

BakedPenguin|5.27.09 @ 7:12PM|#

robc, M2 has also expanded, although not nearly as much as M0. However, given that M2 has increased about 10-15% while the economy is contracting, it's hard to believe we can avoid massive inflation once the economy starts to rebound.

|5.27.09 @ 7:13PM|#

The money supply is expanding, but the velocity of money has declined. That's my story, and I'm sticking to it.

But all those dollars aren't going to lie around in bank vaults forever.

robc|5.27.09 @ 7:18PM|#

The money supply is expanding, but the velocity of money has declined. That's my story, and I'm sticking to it.


Yep, I think we have a winner. If M2 has increased 10-15% while M0 has, what, nearly doubled?, then clearly the velocity has declined.

I would think that is only a temporary effect and that they will unfortunately follow M0 eventually.

t's hard to believe we can avoid massive inflation once the economy starts to rebound.

But all those dollars aren't going to lie around in bank vaults forever.

I think at least 3 of us are in agreement.

Rice Bingham|5.27.09 @ 7:51PM|#

Check this out:

www.usdebtclock.org

|5.27.09 @ 8:07PM|#

"the funds rate should be near its zero lower bound not just for the next six or nine months, but for several years."

Shit yes! Free money for everybody (banking oligarchs first, though)!

How could The Big O say we're "out of money"?

Craig|5.27.09 @ 8:15PM|#

The money supply is not contracting, it is expanding. But it is not expanding at a level that replaces the contracting of credit.

Invisible Finger for the win....

All the Fed has managed to do is slow down the economy's descent, and make sure that as soon as things start to recover, inflation and interest rates are going to make the 70s look like an era of sound money.

How are those interest payments on the soon-to-be 20 trillion dollar national debt gonna feel when the short term rates hit double digits?

robc|5.27.09 @ 9:52PM|#

Craig,

We have locked that debt up in low-interest 100 year bonds, right? Right? Um, please tell me Im right?

:)

|5.28.09 @ 10:31AM|#

Re the graph: what other country of 305 million outsourced their money supply to the Fed last year? 'Cause that spike couldn't just be us.

Re WIN: I have this newspaper photo laser-etched in my memory of George Harrison visting the Ford White House (surrealism #1), where he received a WIN button from President Ford (surrealism #2).

I think this might be evidence that someone actually DID put LSD in the water supply in the '70s.