Inflation Fears Hover on the Horizon Like So Many Massing War Ships From a Crappy Transformers Movie...

Nick Gillespie | June 24, 2009

If your full faith and credit in Ben Bernanke and the Federal Reserve has not yet hit the Jell-o phase, consider this ringing declaration courtesy of Bloomberg.com:

Federal Reserve officials will probably seek today to reassure investors they can keep short- term interest rates at a record low without igniting inflation.

The Fed's Open Market Committee, concluding a two-day meeting, may stress that increasing slack in the economy will contain consumer prices into next year, analysts said. Policy makers also will likely discuss how to avoid a jump in longer- term Treasury yields once they fulfill their commitment to buy $300 billion in Treasuries as soon as August.

Please tell me that the "slack" referenced above is an economic term and not the linchpin concept in the Church of the SubGenius. It's getting harder to tell. More here.

Last year, Reason.tv talked with the Washington Post's Robert Samuelson, whose recent book The Great Inflation and Its Aftermath, is an indispensable guide not only to post-war America but to the self-delusions that regularly overtake economists and public policy pros. Watch below or go here for downloadable versions and more links, etc.

Comments

Kyle Jordan|6.24.09 @ 9:43AM|#

So basically they'll be covering they're ears and repeatedly screaming "THERE'S NO INFLATION!!! THERE's NO INFLATION!!!"?

Yeah, that'll work great...

Xmas|6.24.09 @ 9:43AM|#

*fnord*

T|6.24.09 @ 9:50AM|#

If we're gonna go all SubGenius, when can I expect the Stark Fist of Removal? By Bob, the Fist is long overdue.

monkey on juice|6.24.09 @ 9:59AM|#

"Federal Reserve officials will probably seek today to reassure investors they can keep short- term interest rates at a record low without igniting inflation. "



Thats going to be a pretty nifty trick when Congress and the president seem to be intent on spraying as much gasoline on the inflation fire as they possibly can.

Rich|6.24.09 @ 10:02AM|#

Wrt full faith, it's interesting how much economic "news" consists of comparing actual measurements (hee-hee) with gov/pundit "predictions". Like, Good news today: the CPI is better than expected. This stuff just compounds the idiocy.

|6.24.09 @ 10:07AM|#

less than two weeks to X-Day XII!

|6.24.09 @ 10:10AM|#

that increasing slack in the economy

That none of the pundits have advocated vaginal rejuvenation for the economy proves that they don't know what they are talking about.

|6.24.09 @ 10:10AM|#

Fear not. Federal Reserve necromancy will make us all rich.

Warty|6.24.09 @ 10:16AM|#

The guys who confuse me are the ones who agree that the Fed&Co. are clueless, but still expect deflation, like Mish Shedlock for instance. I don't get it.

robc|6.24.09 @ 10:16AM|#

Please tell me that the "slack" referenced above is an economic term and not the linchpin concept in the Church of the SubGenius.

Cant it be both?

|6.24.09 @ 10:21AM|#

The only reason we don't have inflation now is that we are in a severe recession. The loss in income and value associated with the recession has offset the huge increase in the money supply. The problem is that eventually asset values will stablize and the economy will stop contracting. When that happens, there won't be anything to offset the increase in the money suppply. And then away we go to big inflation. Once that happens, the FED will have to raise rates like it did in the early 80s, which will send the economy into a double dip recession. We have two choices at this point, stagnation with big inflation or a double dip recession. Of and by the way, Obama plans to destroy the economy with cap and trade and massive tax increases so even after the fed tames inflation, growth rates will still suck. There will be no Obama boom to follow taming inflation like there was a Reagan boom.

|6.24.09 @ 10:28AM|#

The only reason we don't have inflation now is that we are in a severe recession. The loss in income and value associated with the recession has offset the huge increase in the money supply.

Very true

The problem is that eventually asset values will stablize and the economy will stop contracting.

I'd say that's a feature, not a bug.

When that happens, there won't be anything to offset the increase in the money suppply.

Well, I certainly hope, and do actually believe you are wrong about that. The fed can contract the money supply and it's balance sheet easily by selling the many assets that it's taken on, and reverseing rate cuts. It definitelt will NEED to do that at some point, and my sources there indicate that was a consideration from day one.

really|6.24.09 @ 10:32AM|#

"The fed can contract the money supply and it's balance sheet easily by selling the many assets that it's taken on"

ROFL!
To whom? who's gonna buy that crap?

Rich|6.24.09 @ 10:33AM|#

> The fed can contract the money supply and it's balance sheet easily by selling the many assets that it's taken on, and reverseing rate cuts. It definitelt will NEED to do that at some point, and my sources there indicate that was a consideration from day one.

Dibs on the Grand Canyon!

really|6.24.09 @ 10:34AM|#

and how is that going to affect prices?
...as if the treasury is not already buying HUGE amounts of T-bills from the Fed...

|6.24.09 @ 10:35AM|#

"Well, I certainly hope, and do actually believe you are wrong about that. The fed can contract the money supply and it's balance sheet easily by selling the many assets that it's taken on, and reverseing rate cuts. It definitelt will NEED to do that at some point, and my sources there indicate that was a consideration from day one."

No they can't. Obama is running a two trillion dollar deficit. No one will buy our securities. That means the Treasury has to buy them, which just printing money. If you can't sell enough bonds to finance the deficit, the government has no way to contract the money supply because the Treasury won't be able to sell its bonds. The fed will have to raise interest rates.

August 6th... watch USDJPY!|6.24.09 @ 10:35AM|#

....rumors that "Some U.S. embassies worldwide are being advised to purchase massive amounts of local currencies; enough to last them a year. Some embassies are being sent enormous amounts of U.S. cash to purchase currencies from those governments, quietly. But not pound sterling. Inside the State Dept., there is a sense of sadness and foreboding that 'something' is about to happen ... within 180 days, but could be 120-150 days."

nesci|6.24.09 @ 10:38AM|#

"To whom? who's gonna buy that crap?"

It is a pretty impressive, massively humongous pile of crap...

|6.24.09 @ 10:40AM|#

The Fed's Open Market Committee, concluding a two-day meeting, may stress that increasing slack in the economy will contain consumer prices into next year, analysts said.

Gosh, its almost like they don't realize that inflation is a currency event, related primarily to the devaluing of the currency, not a shortage of goods or excess of buyers.

The fed can contract the money supply

Theoretically, it can, with the effect of (a) keeping the dollar expensive (thus choking off exports and crippling the recovery and (b) raising interest rates (thus choking off the credit markets and crippling the recovery).

However, in practical terms, no one has ever tried to contract a money supply that has grown as much as fast as ours has over the last year. I seriously doubt that it is even possible to contract the money supply enough to avoid pretty serious inflation.

The assets the Fed has to sell are, primarily, the T-bills it is now buying at auction, because no one else is willing to buy them. Those are going to be sold off, how, exactly, in the future?

roy|6.24.09 @ 10:44AM|#

don't forget the commercial paper and ABS toxic waste it bought from the banksters...

|6.24.09 @ 10:47AM|#

"The assets the Fed has to sell are, primarily, the T-bills it is now buying at auction, because no one else is willing to buy them. Those are going to be sold off, how, exactly, in the future?"

They won't be at least not for a while. Eventually the government is going to have to balance the budget and massively cut its costs. Once, the government is no longer running a deficit, people will be willing to buy T-Bills again. We are facing an incredible looming fiscal crisis of biblical proportions. And all Obama can do is think of ways to spend more on healthcare and cap and trade. It is insanity. We have a President who appears to be in complete denial of reality. I was always circumspect about the election because I thought the Democrats at least had some grasp of reality. No sane person could try to increase taxes, spending and regulation at the start of what could be another Great Depression. I guess I gave the Dems' sanity a bit too much credit.

|6.24.09 @ 10:52AM|#

The Fed has the ability to contract the money supply, but I do not believe they have the will, or the political independence, to do it.

Does anybody really think Bernanke is going to go to Capitol Hill and tell Barney Frank to go fuck himself?

|6.24.09 @ 10:55AM|#

"Does anybody really think Bernanke is going to go to Capitol Hill and tell Barney Frank to go fuck himself?"

I think there is going to be an economic, political and fiscal earthquake in the next 18 months. This insantity can't go on. I think a lot of "unthinkable" things are going to happen.

|6.24.09 @ 11:13AM|#

couple responses:

No they can't. ... No one will buy our securities. That means the Treasury has to buy them, which just printing money. If you can't sell enough bonds to finance the deficit, the government has no way to contract the money...

The question is not IF people will buy them, it's "at what price". I agree that the treasury will have higher borrowing costs to the extent that they continue to need to borrow trillions. If the Fed buys the securities (they've largely stopped that, btw, that's why treasuries have crashed over the last few weeks), that expands their balance sheet, but is emphatically NOT the same as printing money. Monetization occurs when the Fed matures issues that they hold, and do not require payment from the treasury. The treasury doesn't buy securities - they sell them. This will have the biggest impact on the long end of the curve, not Tbills - which should stay pretty tight to funding unless we get to a point where Obama is saying we will decline to pay off the debt.

Theoretically, it can, with the effect of (a) keeping the dollar expensive (thus choking off exports and crippling the recovery and (b) raising interest rates (thus choking off the credit markets and crippling the recovery).

Too right, RC Dean - but then, if you are looking for the US to become a net exporter overnight as a result of a massive currency devaluation, the cure is worse than the disease.

The assets the Fed has to sell are, primarily, the T-bills it is now buying at auction, because no one else is willing to buy them. Those are going to be sold off, how, exactly, in the future?

Actually the fed shifted away from bills in favor of longer maturities and mortgages to try and help people refinance.

The original argument was that WHEN THE ECONOMY RECOVERS, the fed can take in the slack by selling it's massive holdings. If there is no market for MBS, almost by definition, the economy has not recovered.

|6.24.09 @ 11:15AM|#

Eventually the government is going to have to balance the budget and massively cut its costs. Once, the government is no longer running a deficit, people will be willing to buy T-Bills again.

I don't see the government balancing the budget and massively cutting its costs without (a) a comprehensive replacement of the political class in this country and (b) a repudiation, to some degree of outstanding debt (even if via inflation), simply because the interest alone precludes balancing the budget and cutting costs.

Seriously. Look at the proportion of our budget that goes to debt service, the projected deficits over the next ten years, the gargantuan spending plans being teed up in Congress, and tell me, with a straight face, that (a) our current leadership can get us out of this and (b) we won't have to devalue our currency/repudiate the debt.

rand|6.24.09 @ 11:17AM|#

"Monetization occurs when the Fed matures issues that they hold"

Actually, as soon as the govt. spends the money that they've borrowed, de facto monetization occurs...

|6.24.09 @ 11:19AM|#

Actually, as soon as the govt. spends the money that they've borrowed, de facto monetization occurs...

how do you reckon?

Rice Bingham|6.24.09 @ 11:19AM|#

I think a lot of "unthinkable" things are going to happen.

I think you may be right. What everybody is currently, and really have always been thinking for like the past 35 or 40 years is inflation.

arnie|6.24.09 @ 11:20AM|#

Default is no longer an option... it is a certainty. Whether it will happen through inflation or repudiation... there is NO WAY that debt can be repaid honestly.

|6.24.09 @ 11:20AM|#

If the Fed buys the securities (they've largely stopped that, btw, that's why treasuries have crashed over the last few weeks), that expands their balance sheet, but is emphatically NOT the same as printing money.

I believe the entire financial community will be watching this week's auction with intense interest. We'll see if the Fed has to step in (again) to prevent the auction from failing.

If the Fed buys the securities (they've largely stopped that, btw, that's why treasuries have crashed over the last few weeks), that expands their balance sheet, but is emphatically NOT the same as printing money.

Not sure I agree. When the Fed buys T-bills, aren't they paying for those T-bills with cash, which the government then spends? How is this not putting (new) cash into circulation, that is, "printing money."

If the Fed buys a trillion dollars of 30 year notes, isn't that trillion dollars circulating now, rather than only when the notes mature in 30 years?

you|6.24.09 @ 11:22AM|#

Actually, as soon as the govt. spends the money that they've borrowed, de facto monetization occurs...

...as the new dollars enter the bidding for goods and services...

T|6.24.09 @ 11:27AM|#

If there is no market for MBS, almost by definition, the economy has not recovered.

Would these be new MBS offerings, or the old toxic ones? I see some of the old ones being unsellable. If enough of the tranches you're holding on any particular MBS have defaulted, even if the economy recovers it's worthless. The MBSs with enough non-defaulted tranches may be worth something, but I have to think the discount on them is going to be pretty substantial, especially if you see inflation take off. Who wants a slice of mortgages paying off in the 5-6 percent range when inflation kicks in?

|6.24.09 @ 11:29AM|#

We'll see if the Fed has to step in (again) to prevent the auction from failing.

Dunno - the last couple auctions went hard, but the bid to cover was solid...

Not sure I agree. When the Fed buys T-bills, aren't they paying for those T-bills with cash, which the government then spends? How is this not putting (new) cash into circulation, that is, "printing money."

Well, ok, it is, but it's reversible if those securities get sold. As far as when they mature - as long as the fed keeps them honest by requireing payment (obtained by issueing new debt) monetization does not occur. Here is a good summary of the process

yuo|6.24.09 @ 11:36AM|#

yep, I like the summary... but as far as prices are concerned, it's the spending that matters...

Duncan|6.24.09 @ 11:49AM|#

I hate to inject facts into the discussion but this is incorrect:
"The assets the Fed has to sell are, primarily, the T-bills it is now buying at auction, because no one else is willing to buy them. Those are going to be sold off, how, exactly, in the future?"
As you can see from the Fed's balance sheet, it has over $600 Billion in MBS and Commercial Paper. These two categories are about 1/3 of the Fed's balance sheet.
http://www.federalreserve.gov/releases/h41/Current/
PS Domo--good to see you injecting facts into economic discussions again

squarooticus|6.24.09 @ 11:50AM|#

Well, ok, it is, but it's reversible if those securities get sold.

It's only reversible if the Fed can sell them for a price equal to or greater than the price at which they were purchased.

This is not going to happen, if for no other reason than because demand for bonds goes down when the stock market (and economy) recover.

Furthermore, the problem this time around is a lot worse because of the sheer volume of bonds issued: demand is not keeping up with supply, as demonstrated by the wide yield curve, even during a time of greatly increased demand (the recession).

Sorry, domo, but you are 100% wrong. I wasn't willing to say it months ago, but I am willing to say it now.

Duncan|6.24.09 @ 11:54AM|#

"yep, I like the summary... but as far as prices are concerned, it's the spending that matters..."
What drives prices is complicated and debated. However, two factors to consider are capacity utilitization (unused factories) and unemployment. With high unemployment, workers have a hard time getting raises--which limits inflation.
Another key factor in inflation is commodity prices which are driven by global economic growth. The growth in China and India is reaching a key point where many households are able to afford things like their first car and other 'luxury' goods that go beyond food and shelter. Commodity price could drive inflation even with low capacity utilization and high unemployment.

|6.24.09 @ 11:56AM|#

It's only reversible if the Fed can sell them for a price equal to or greater than the price at which they were purchased.

Fair enough, the capital loss IS monetized - but this will be orders of magnitude less than what is commonly meant by "monetizing the debt" which usually refers to: the government spends money, and prints money to pays back the entire principle.

|6.24.09 @ 12:19PM|#

Dont forget that when the fed raises rates, the government will be rolling over debt at higher rates. Are we going to reconvene then to discuss how the Fed is un-monetizing the debt?

Thanks for the shout, Duncan - hope all is well.

|6.24.09 @ 12:35PM|#

Thanks, domo. I'm trying to raise my game on this stuff, and you are always a help.

As you can see from the Fed's balance sheet, it has over $600 Billion in MBS and Commercial Paper.

Of course, if that crap paper was worth anywhere close to $600BB, it wouldn't be on the Fed's books in the first place.

Duncan|6.24.09 @ 12:43PM|#

The wide yield curve can be understood under the idea that long-run rates are based on the bets on future short-term rates. Since, unlike in the past, short-term rates can't decline in the future (zero bound)--they can only rise or stay flat, the spread would naturally be wider than in a situation where future rates could rise or fall. Another somewhat ignored driver of rates are the returns on other investments. As the stock markets have improved interest rates have risen partly due to the improved returns offered in the stock markets.

|6.24.09 @ 12:55PM|#

I think Bernanke's foray into long rate manipulation went more poorly than he hoped. They propped up the mortgage market for months, but couldn't really sustain it. As soon as the word was out that the fed was no longer buying, rates spiked. I think that showed a fair amount of contempt for Bernanke's famed solutions for dealing with the 0% interest rate boundary.

The reality is that the market has a tendency of avoiding manipulation, even punishing those who try - even if you are a central bank, there are limits.

Ducan|6.24.09 @ 12:56PM|#

RC Dean,
This is a good point:
"Of course, if that crap paper was worth anywhere close to $600BB, it wouldn't be on the Fed's books in the first place."
However, it is worth something and could be sold at a future date. The balance on the existing MBSs will be reduced as many people refinance. However, on a net basis, the Fed will continue to add MBSs (see down the balance sheet.)

|6.24.09 @ 1:06PM|#

Mr. McGuire: I want to say one word to you. Just one word.
Benjamin: Yes, sir.
Mr. McGuire: Are you listening?
Benjamin: Yes, I am.
Mr. McGuire: WHEELBARROWS.
Benjamin: Just how do you mean that, sir?

|6.24.09 @ 1:07PM|#

5 year auction just cleared at 2.70% with a 2.58 bid-to-cover ratio. This is a higher rate than the last 3 auctions, but in no way indicates that "no one will buy treasuries"

|6.24.09 @ 1:11PM|#

oh, and the indirect bidders portion (china and japan, mostly) was back up to "normal" levels of 60-odd percent.

|6.24.09 @ 1:14PM|#

domoarrigato, transalate please.

squarooticus|6.24.09 @ 1:16PM|#

but this will be orders of magnitude less than what is commonly meant by "monetizing the debt" which usually refers to: the government spends money, and prints money to pays back the entire principle.

I think if the dollar loses another 30-50% of its value (not terribly far-fetched), this will drive rates high enough that those long-term bonds the Fed purchased will be worth less (and possibly far less) than 1/2 of what they paid. At that point, by monetizing >=50% of the loss in value you are 2-competitive with monetizing the entire principal. Under this scenario, the distinction is more academic than practical.

The issue I think you are neglecting is the speed with which the Fed will need to sell these bonds: once inflation starts raging, they will practically need to dump their entire supply on the market, sending the yield curve to the moon, therefore limiting the number of dollars they can recover and destroy. There's an optimal rate at which they can sell them to recover the highest number of FRN's, but even if they can find that optimal rate, that will probably still mean several years of double-digit inflation.

There is simply no way out of this that doesn't involve inflation: the market will not allow the impossible to become possible.

|6.24.09 @ 1:23PM|#

We had a 5 year note auction today, they use a dutch auction process, so 2.7% was the market clearing yield. 2.58 times as many people wanted to buy treasuries as there actually were securities for sale - that means there was plenty of demand for the paper. 2.7% is high compared to recent auctions, but not so high that the market is rejecting the paper - even if you didn't believe the bid-to-cover ratio.

Indirect bidders bid in the auction directly, not through Wall st. firms - I know, I know, it's kind of a misnomer. Central banks geenrally bid this way, but also real money managers. When 60 odd percent of the auction is being taken down by indirect bidders, you can comfortably say that the debt has been well placed in strong hands, not in the leveraged and easily spooked portfolios of government bond dealers.

|6.24.09 @ 1:29PM|#

domoarrigato, does this seem to indicate some confidence in our economy? Or are there troubling reasons why indirect bidders would be interested?

|6.24.09 @ 1:34PM|#

I think if the dollar loses another 30-50% of its value (not terribly far-fetched)

The market thinks that's far fetched - if you disagree, I would pick up some cheap out of the money puts - who knows, maybe you'll get rich!

this will drive rates high enough that those long-term bonds the Fed purchased will be worth less (and possibly far less) than 1/2 of what they paid.

Ok, but the federal deficit is front loaded maturity wise. Lets assume you are right about long dated rates - they rise to 9-10% wiping out 50% of their value. Fine, even THEN, most of the debt is much shorter maturity - mostly in bills. you'd have to get 2 year rates to 40% to wipe out half the capital. In that situation, the dollar wouldn't be in shitter, money would be flooding in. You see, you can't have it both ways.

At that point, by monetizing >=50% of the loss in value you are 2-competitive with monetizing the entire principal. Under this scenario, the distinction is more academic than practical.

True, but again, this applies only to long dated bonds which are MAYBE 3-4% of the debt. 50% is under 5 years maturity, 40% under 3 years. The losses are not trivial, but they are much less significant than you are figuring, plus the process is self-stabilizing.

|6.24.09 @ 1:37PM|#

domoarrigato, does this seem to indicate some confidence in our economy? Or are there troubling reasons why indirect bidders would be interested?

I think it indicates that china and japan, despite their "concerned" rhetoric of diversification will move gradually and sytematically - not suddenly or out of retribution. Remember, they need our market as much as we need their goods. No one has the upper hand - we are all in this together. The chinese have been far more sensible and pragmatic than certain members of congress.

|6.24.09 @ 1:41PM|#

domoarrigato, thanks for simplifying to the point that even I can understand.

|6.24.09 @ 1:43PM|#

The chinese have been far more sensible and pragmatic than certain members of congress.

Despite the fact that they are a murderous human rights violating bunch of fuckers, they are good businessmen.

squarooticus|6.24.09 @ 1:53PM|#

Fine, even THEN, most of the debt is much shorter maturity - mostly in bills. you'd have to get 2 year rates to 40% to wipe out half the capital.

Given the rate at which M0 has grown, a real CPI (including food and energy, and not substituting hamburger meat for steak) averaging 18% over two years is not unreasonable. At that point, 2 year rates would have to be at least 40% to be break-even.

The market thinks that's far fetched - if you disagree, I would pick up some cheap out of the money puts - who knows, maybe you'll get rich!

No one knows when it is going to happen, so I'm heavily invested in the next best thing: TBT. I bought in back in December during bond-mania. It has done quite well since then, even considering the "not-so-high" long-term rates we have now.

squarooticus|6.24.09 @ 1:56PM|#

Remember, [China and Japan] need our market as much as we need their goods.

Bzzt. The "China needs us as much/more than we need them" meme needs to die, because it is demonstrably not true: despite our on-going recession, China has pulled back into positive growth by developing other markets, including its own.

BTW, they are doing with their dollars exactly what I suspected they would do: buying commodities, including gold. Although I have no proof of it, I suspect they are behind the IMF's decision to sell 400 tonnes of gold, most of which will probably end up in China in exchange for a cargo container of dollars.

|6.24.09 @ 2:01PM|#

Given the rate at which M0 has grown, a real CPI (including food and energy, and not substituting hamburger meat for steak) averaging 18% over two years is not unreasonable.

Once again, the market disagrees with you. I would pick up some TIPS, and more TBT - that gets you long inflation as a variable. 18% actually is pretty unreasonable: I'm guessing this impression may stem from the fuzzy logic that I have seen on this board occasionally which says that increaseing the money supply by x% IS x% inflation rather than the correct observation that increasing the moeny supply can cause inflation.

At that point, 2 year rates would have to be at least 40% to be break-even.

Not sure how you are figuring.

|6.24.09 @ 2:11PM|#

The "China needs us as much/more than we need them" meme needs to die, because it is demonstrably not true: despite our on-going recession, China has pulled back into positive growth by developing other markets, including its own.

To the extent that their domestic demand (and demand elsewhere in the world) rises, it can offset demand here in the states. This is called the "decoupling" argument. The recent downturn - which has affected everyone - cuts against that argument. all indications are that US demand is still a very important part of the global economy. Odds are this will change over time - but it will take decades for their standard of living to rise to the point they will consume or contribute as much to global GDP as much as the US does now.

Gold is right where is was a year ago. I saw some really tight research on gold that suggested that a major bull market in gold preceded inflationary periods by an average of 8 years - and that the size of the run-up in price could be used to estimate the average inflationary bubble. He figured 5-8% was the range we could expect. He is considered an "inflation alarmist" by his colleagues - but around here, he'd be a super-dove. I reckon something toward the low end of his range.

|6.24.09 @ 2:19PM|#

This just in - Fed leaves rates unchanged, and declines to purchase more treasuries/MBS/agency debt.

|6.24.09 @ 2:20PM|#

The fed expects inflation to be tame - the bond market banged around a little, but doesn't seem spooked in either direction.

squarooticus|6.24.09 @ 2:28PM|#

averaging 18% over two years is not unreasonable.

...

At that point, 2 year rates would have to be at least 40% to be break-even.

Not sure how you are figuring.

I think I was unclear: I mean averaging 18% per year over two years, so 1.18^2 = approximately 1.40.

And I do not think this is unreasonable: never in the history of the US has the money supply grown so rapidly. As a result, using historical comparisons e.g. to the 1970's is not predictive in any rational sense.

I am the first to admit that I have no idea when or how quickly prices will rise, but I do know that they will rise, and by a large amount: the Fed has simply backed itself into a corner by inflating the currency, where the very assets it claims it will sell to mop up the money it printed will necessarily be put on the market at the precise time when demand for fixed income securities will be at its lowest.

This will turn out badly for people holding dollars, which is why the Chinese are getting rid of theirs.

fuzzy logic that I have seen on this board occasionally which says that increaseing the money supply by x% IS x% inflation rather than the correct observation that increasing the moeny supply can cause inflation.

And as I've said before, it's not fuzzy logic: it's a difference in how one defines inflation. According to the Austrians, inflation IS an increase in the money supply. CPI is the best equivalent of what you are referring to as "inflation."

|6.24.09 @ 2:45PM|#

I think I was unclear: I mean averaging 18% per year over two years, so 1.18^2 = approximately 1.40.

If I said "right, I'll give you 10,000 dollars now, and you return $14,000 in two years" (assume no risk of default) you reckon you would be ok with that? I mean I hope you are in debt up to your eyeballs if that is the case. It's real easy to throw numbers around - but you are asserting you are smarter than literally EVERY economist and market participant out there.

it's a difference in how one defines inflation.

There is only a difference in how YOU are defining inflation. No one else defines it that way, and doing so repeatedly is confusing and detracts from the conversation.

Duncan |6.24.09 @ 3:07PM|#

Squarooticus--inflation would be directly linked to growth in the money supply if the velocity of money remained constant. So while the money supply has grown, the velocity has fallen. It's a ying-yang effect in that the one action is offsetting the other.
Squarooticus--Do you expect home prices to grow rapidly? Think about how much of your consumption is related to housing prices. So if those prices don't rise quickly, then the prices on everything else would have to rise much faster than the rates you're describing to achieve net inflation in that range.

Domo--all is well--hope you're doing well too.

Mike Laursen|6.24.09 @ 3:20PM|#

That means the Treasury has to buy them, which just printing money.

Your right in essence, but a technical correction: the Treasury sells the debt, the Federal Reserve prints the money and buys the debt.

Mogambo Guru|6.25.09 @ 1:44AM|#

The mighty Mogambo sez! Velocity is just a stooopid abstraction to match an incomplete equation. It is never measured directly, only inferred from MV = PT.

So speaking of ying-yang is bullshit, it's gotta be like that by definition.

WHEELBARROWS!!!!!!|6.25.09 @ 1:57AM|#

BoE study: M1 to CPI lag: 18-20mths

Watch out for Q1 2010!

ok, maybe DIGITAL WHEELBARROWS|6.25.09 @ 3:25AM|#

when banks switch from accumulating reserves in their Fed accounts and start to loan out... we'll see the multiplier leverage on the largest M1 ever... things can happen very fast.

36 south puts money on hyper|6.25.09 @ 6:46AM|#

36 South Starts Hyperinflation Bet After Black Swan
http://www.bloomberg.com/apps/news?pid=20601087&sid=aku06Rgam3n0