Whatever Happened to Inflation?

A look back at controversial predictions about monetary policy


Since 2008, the Federal Reserve has been trying to stave off economic disaster with an unconventional monetary policy tool known as quantitative easing. By buying financial assets from commercial banks and other institutions, the Fed has massively expanded the money supply-quadrupling it since the practice began.

Many economists, particularly followers of the Austrian school, deplored the practice and predicted that the unprecedented currency and asset price manipulation would lead to huge and damaging price inflation. reason was among them, declaring on our October 2009 cover: "Inflation Returns!" A group of free market economists were asked: "Has the time come to stockpile canned goods and pick up a wheelbarrow for transporting currency, or should we be afraid of the opposite-a prolonged contraction that causes prices to crash?"

Six years later, official consumer price index inflation sits at just 2 percent annually from July 2013 to July 2014, the latest period for which figures are available. This is identical to the rate for the previous year.

We asked four economists and market analysts to revisit what they originally predicted would happen after quantitative easing and assess whether (and why) they were right. Analyst Peter Schiff sticks to his guns, saying that any "claims of victory over inflation are premature and inaccurate. Inflation is easy to see in our current economy, if you make a genuine attempt to measure it." Economist Robert Murphy believes we are in a "calm before the storm" and is "confident that a day of price inflation reckoning looms." Contributing Editor David R. Henderson writes that the "financial crisis has brought such major changes in central banking that uncontrolled inflation from discretionary monetary policy is not as great a danger as it once was," though he remains critical of the Fed's growing powers. And economist Scott Sumner claims victory for the "market monetarists," noting that both Austrians and Keynesians have been proven wrong by events, and urging both sides to "take markets seriously."—Brian Doherty

Where Is the Inflation?

Peter Schiff

Back in 2009, when the federal government began running trillion-dollar-plus annual deficits and the Federal Reserve started printing trillions of dollars to buy Treasury debt and sub­­­prime mortgages, economists debated whether much higher inflation was inevitable. Mainstream economists (who hold sway in government, the corporate world, and academia) argued that as long as the labor market remained slack, inflation would not catch fire. My fellow Austrian economists and I loudly voiced the minority viewpoint that money printing is always inflationary-in fact, that it is the very definition of inflation.

Today, with price inflation still not rampant, it's hard to ignore the victory chants coming from the White House press room, the minutes of the Federal Reserve's Open Markets Committee, the talking heads on financial television, and the editorial pages of The New York Times. They claim that the Fed's extraordinary monetary policy and the government's fiscal stimulus have succeeded in keeping the economy afloat through the Great Recession without sparking inflation in the slightest. Deflation, they argue, is still the bigger threat. Their claims of victory are premature and inaccurate. Inflation is easy to see in our current economy, if you make a genuine attempt to measure it.

The Consumer Price Index (CPI) doesn't qualify as a genuine attempt to measure inflation. The CPI report for July 2014 came in at 2.0 percent year-over-year. But because of consistent alterations in how the data is calculated, the CPI has hidden price increases under a blanket of subjective "adjustments." While the details are intricate, the results can be glaring.

For instance, between 1986 and 2003, the CPI rose by 68 percent (about 4 percent per year). Over that 17-year period, the "Big Mac Index," a data set compiled by The Economist that tracks the cost of the signature McDonald's burger, rose at a nearly identical pace. Since then, this correlation appears to have broken. Between 2003 and 2013, the Big Mac Index rose more than twice as fast as the CPI (61 percent vs. 25 percent). The sandwich, which reflects the average person's direct experience, may be a more accurate yardstick of inflation.

Meanwhile, the Fed is pushing up prices not reflected in the CPI. Through its zero-interest-rate policy and direct asset purchases via quantitative easing, the Fed has lowered the cost of capital and raised prices for stocks, bonds, and real estate. In doing so, it has argued that rising asset prices create a "wealth effect" and are thus a key goal of its monetary policy.

Over the past five years, the prices of these financial assets have risen dramatically. However, unlike past periods of bull asset markets, these increases have not been accompanied by robust economic growth. To the contrary, the last five years have seen the slowest non-recession economic growth since the Great Depression.

This Fed-driven dynamic explains the rich-get-richer economy we've seen since the alleged recovery of 2009 began. The wealth effect has allowed the elites to push up prices for high-end consumer goods such as luxury real estate, fine art, wine, and collectible cars. But that is cold comfort to rank-and-file Americans struggling to find work in an otherwise stagnant economy.

Broader consumer price inflation has been kept at bay because many of the newly printed dollars don't even hit our economy. Instead, foreign countries purchase them in an attempt to keep their own currencies from appreciating against the dollar. In the current environment, a weak currency is widely (and wrongly) seen as essential to economic growth. That's because a weak currency lowers the relative price of a particular country's manufactured goods on overseas markets. Nations hope those lower prices will lead to greater exports and more domestic jobs.

Thus we see "currency wars," in which the victors are those who most successfully debase their currencies. That policy perpetuates greater global imbalances (between those nations that borrow and those nations that lend) and the accumulation of dollar-based assets in the accounts of foreign central banks.

The more debt the U.S. government issues, the more purchases these foreign banks must make to keep their currencies from becoming more valuable relative to ours. It is no coincidence that many of the countries heavily buying U.S. dollars, such as China, the Philippines, and Indonesia, are experiencing high levels of domestic inflation. Inflation may now be America's leading export.

In recent years, U.S. federal deficits have declined from more than $1.2 trillion to less than $600 billion. This is not because the government has made hard choices to raise revenue or cut spending but because rising asset prices have resulted in greater tax receipts from the wealthy. Yet this windfall can only last until the next meaningful correction in asset prices. If tax revenues fall, growing federal deficits would compel the Fed to print the difference. In that case, foreign banks would need to buy even more dollars to maintain their currency valuations. If they lose the will to keep pace, the dollar would lose relative value. A weaker dollar could be the spark that finally ignites significant CPI inflation in the United States.

As foreign currencies gain strength, consumers in those countries will gain buying power and more finished products will gravitate toward foreign shelves. Given that a significant portion of the products we now buy are imported, the diminished domestic supply could push up prices for common products like apparel, electronics, and appliances.

The Fed used to be considered effective when it kept inflation low. Today, inflation is the goal. This is especially true for the Federal Reserve as led by Janet Yellen, who looks set to be the most dovish-on-inflation chairperson in the bank's history. The inflation created by the U.S. government has been delayed, not avoided. Already the costs of everyday goods are rising faster than incomes. This is why economic pessimism is so prevalent on Main Street. Sadly, that gap is likely to get much worse.

Mainstream economists would have us believe that inflation and a weak labor market can't exist simultaneously. Have they ever been to Argentina? Do none of them remember the stagflation of the 1970s?

The truth is that high levels of unemployment are historically correlated with higher inflation and low levels of unemployment with lower inflation. That is because an economy that more fully utilizes labor resources is more productive. More production brings down prices. In contrast, an economy that does not fully employ its citizens is less productive, and its government is more prone to pursue misguided inflationary policies to stimulate the economy.

Although America's policies may not differ dramatically from what has been disastrously tried by Argentina, the dollar is for now protected by the international reserve status that it has enjoyed for almost 70 years. But that privilege has its limits. The dollar may be bigger and more globally integrated than any other paper currency, but in the end, its value may be just as ephemeral.

Peter Schiff is CEO of Euro Pacific Capital and author of The Real Crash: America's Coming Bankruptcy (St. Martin's).

The Calm Before the Storm

Robert Murphy

Since the fall of 2008, I have been among the economists, many from the Austrian tradition, warning the public about the disastrous policies enacted by the Federal Reserve in response to the financial crisis. The Fed was generating unprecedented increases in the monetary base, which is the quantity of dollars held by the public as currency and held as reserves by commercial banks. In late 2009, I made a public wager with economist David R. Henderson in which I predicted a 10 percent year-over-year increase in the Consumer Price Index by January 2013. I lost that bet. In general, warnings about price inflation seem to have been premature at best, totally wrong at worst.

It's true that consumer prices did not zoom up as I had predicted, but my objection to the Fed's post-crisis policies was never dependent on that specific forecast. Indeed, the distinctive feature of Austrian business cycle theory is that "easy money" causes the familiar boom-bust cycle by affecting relative prices. Regardless of the purchasing power of the dollar, the Fed's actions have definitely interfered with interest rates, hindering the communication of information about the condition of the credit markets. By postponing needed readjustments in the structure of production, the Fed's actions have allowed the problems apparent in the fall of 2008 to fester.

I am still confident that a day of price inflation reckoning looms and that the U.S. dollar's days as the world's reserve currency are numbered, though I have no way of gauging the duration of this calm before the storm. Still, my 2009 predictions about consumer price inflation were wrong, and it's useful to analyze why.

At the time, I thought the Fed's policies were simply going to kick the can down the road and exacerbate the underlying structural imbalances in the economy. The housing bubble had itself been fueled by the artificial monetary stimulus and rate cuts under previous Fed chair Alan Greenspan (in response to the dot-com crash and the 9/11 attacks), and Bernanke seemed to be drawing from the same failed playbook. We would simply replace one bubble with another: in this case, swapping a bubble in U.S. Treasuries (and the U.S. stock market) for the collapsing housing market.

That all still seems true. My crucial mistake back in 2009 was in predicting that other investors would come to agree with my assessment in a year or two. In other words, I thought they would look ahead, realize Bernanke had no exit strategy, and then short the dollar (and other dollar-denominated assets) to avoid holding the bag. More specifically, I thought that commercial banks would eventually realize they needed to get their excess reserves in higher-yielding assets.

Once the commercial banks started this process, the quantity of money in the broader sense (captured in aggregates such as M1 and M2, which include the public's checking account balances at the banks) would begin to reflect the enormous spike in the monetary base the Fed had directly engineered. Remember that in our fractional reserve banking system, when the Fed buys $1 billion (say) in assets and thereby adds $1 billion in new reserves to the system, if the commercial banks proceed to make new loans, then in the process they will create (say) an additional $9 billion in new money, broadly measured. In 2009 I thought more and more investors would begin to anticipate this process, anticipating that the money supply held by the public eventually would start to soar, so that large-scale price inflation would become a self-fulfilling prophecy.

But the U.S. economy has stayed in this holding pattern, where people expect low consumer price inflation and so commercial banks keep their excess reserves earning 25 basis points parked at the Fed rather than make new loans. Thus the process I described above has been thwarted; the quantity of money held by the public right now is much lower than it would be, if the banks decided they would rather make loans and earn a higher interest rate than the 25 basis points currently paid by the Fed.

I do not believe the Federal Reserve can gracefully exit from its current position. Fed officials eventually will be in an untenable position in which they must choose to either (a) crash the financial markets by selling off assets and letting interest rates rise sharply or (b) let the dollar fall quickly in value against consumer goods and services. But in the last six years, they have been granted a very generous grace period before having this hard choice foisted upon them.

According to Austrian business cycle theory, as developed by Ludwig von Mises and elaborated by Friedrich Hayek (who would later win the Nobel Prize partly for this work), interest rates serve a specific purpose in a market economy. Intuitively, the more society saves and is willing to defer immediate gratification, the more we want entrepreneurs to invest real resources in longer-term projects. When the central bank injects new money into the credit markets, this not only lowers the purchasing power of money (other things being equal) but artificially suppresses interest rates and renders long-term projects profitable that in reality should not be pursued.

In the Austrian view, therefore, consumer prices are not a reliable gauge of the "looseness" or "tightness" of monetary policy. Irving Fisher infamously thought the Fed in the 1920s had done a good job because the CPI had been tame, whereas Mises knew that a crash was brewing by the late 1920s.

Fearing an imminent spike in consumer prices because of the Fed's unprecedented actions since late 2008 turned out to be wrong-but if wrong in spirit or merely in timing, only time will tell.

Bernanke's policies were harmful regardless of the impact on the CPI. Pumping enormous amounts of money into the credit markets doesn't make us richer. It just distorts the coordinating function of interest rates. Remember, Greenspan did us no favors by pumping up the housing bubble. Whether or not a massive bout of price inflation breaks out, a crash in the real economy should still be expected.

Robert P. Murphy ( is senior economist at the Institute for Energy Research and the author of The Politically Incorrect Guide to Capitalism (Regnery).

High Inflation Still Unlikely

David R. Henderson

Ever since Federal Reserve Chairman Ben Bernanke commenced quantitative easing in October 2008, many commentators have warned about the danger of inflation. There are good reasons to be concerned-including the unprecedented expansion of the monetary base and the Fed's bloated balance sheet-but many Fed watchers are fighting the last war.

The financial crisis has brought such major changes in central banking that uncontrolled inflation from discretionary monetary policy is not as great a danger as it once was. The Fed now has a variety of exotic tools that can prevent any sudden expansion of the broader monetary measures. These tools are partly what have already prevented quantitative easing from causing serious inflation.

Moreover, the Fed monitors banks and other financial institutions so closely that it cannot be caught napping, and implicit inflation targeting has become a dominant Fed goal. The real danger is not runaway inflation. It's that the Fed is becoming more and more intrusive in shaping how national savings are allocated.

The prevalent worry is that once the economy gets back to normal and interest rates start to rise, banks will increase their loans. And when that happens, many fear, the Fed has no viable exit strategy to hold back inflation.

Central banks traditionally dampen inflation by reducing the monetary base via selling off assets or, equivalently, calling in and not rolling over loans. Those who predict future uncontrolled inflation believe this cannot be accomplished quickly enough without major disruption of credit markets. Aggravating this problem is that the Fed's balance sheet now contains large quantities of mortgage-backed securities and long-term Treasury debt, not just the short-term Treasury securities that were its primary asset in the past. The Fed can quickly reduce its balance sheet by not buying new short-term Treasuries when the old ones mature. With long-term Treasuries, by contrast, the Fed must sell many of them on secondary markets. This could drive prices down, disrupting credit markets and causing losses for the Fed on its portfolio.

But the Fed no longer has to rely on dumping assets to impose monetary restraint. It can use four other methods to accomplish the same goal. These comprise either completely new tools or older tools that were previously of minor importance.

They are:

1. Loans to the Fed from the U.S. Treasury.

2. Reverse repurchase agreements (reverse repos)-that is, borrowing by the Fed. The Fed sells a security from its portfolio with an agreement to buy it back. Under new Fed chairman Janet Yellen, the Fed uses this device extensively, borrowing over $200 billion.

3. Term Deposit Facility, a mechanism through which banks can convert their reserves deposited at the Fed (which are just like Fed-provided, interest-earning checking accounts for banks) into deposits of fixed maturity at higher interest rates set by auction (making them just like Fed-provided certificates of deposit for banks). Fed officials have made clear their intention to employ the Term Deposit Facility liberally if necessary. This would drain bank reserves by converting bank deposits at the Fed from implicit loans to explicit, higher-interest-earning loans with fixed maturities.

4. Interest on reserves. The most important way the Fed began borrowing and continues to do so is by paying interest to banks on their reserves. Permission to do so was included in the Troubled Asset Relief Program (TARP) Act, and the Fed started using that power within days. Interest-earning reserves have encouraged banks to raise their reserve ratios rather than expand loans to the private sector. This tool thus constitutes a flexible substitute for reserve requirements.

The rate that the Fed pays on reserves started out as high as 1.4 percent on required reserves and 1 percent on excess reserves, but it is now fairly low on both: 0.25 percent. Yet the alternatives available to the banks are little better, especially after adjusting for risk. It is the gap between these rates that determines the incentive for individual banks to hold reserves. The interest on three-month Treasury bills remains lower, and both T-bills and reserves are assets that impose no legally mandated capital requirements on banks.

By paying interest on reserves, the Fed has made itself the preferred destination for much bank lending. Should market interest rates begin to increase, raising the prospect of increased bank lending and inflation, the Fed can increase the interest rate it pays, locking up bank reserves and keeping reserve ratios high.

These four tools combined make it possible for the Fed to prevent any expansion of the broader monetary measures without selling off any assets. Of course, the Fed may supplement these tools with some asset sales, but sales are unlikely to be large initially. Interest on reserves will almost certainly be the dominant exit tool.

Treasury deposits may not become significant again, given the national government's huge deficits. Use of reverse repos could be somewhat constrained by Fed concerns about the solvency of the counterparties it borrows from, whereas this is not a serious consideration for highly regulated and monitored commercial banks. Term deposits are just a modified way of paying interest to banks.

Another issue that could affect the exact mix is how these tools affect Fed income. Treasury deposits are the only exit tool that cannot reduce Fed earnings. The Fed pays no interest on Treasury deposits directly, so the Treasury would bear the cost of rising market interest rates if it engaged in extra borrowing on behalf of the Fed. This would be offset only partly by the Fed's regular remittances of its excess earnings to the Treasury. On the other hand, paying higher interest on reserves, on reverse repos, and on term deposits would all directly curtail Fed earnings, whereas any large sale of assets could impose capital losses.

Rep. John Campbell, a California Republican who heads the monetary policy and trade subcommittee of the House Financial Services Committee, has warned that central bank losses are "a legitimate concern and something we will be watching." It would be truly ironic if congressional and popular hostility to the Fed pressured the Fed to create more money to keep Treasury remittances flowing, possibly contributing to the very inflation that so many Fed critics fear. And if the Fed's exit strategy coincides with a Treasury fiscal crisis, all bets are off. That last scenario, though, would arise, not from Fed monetary policy per se, but from Congress' and the president's deficits and debt.

My analysis is not advocacy. I do not claim that it is good for the Fed to have these powers. Indeed, as I argued in a presentation at the San Francisco Federal Reserve Bank in April, I would like the Fed to have zero power. The Federal Reserve's sorry century-long record is evidence for its failure. But the issue at hand is whether the Fed's actions will produce high inflation. That is highly unlikely.

Contributing Editor David R. Henderson is an associate professor of economics at the Naval Postgraduate School in Monterey, California, and a research fellow with Stanford University's Hoover Institution. He blogs at

Neither Hyperinflation Nor a Liquidity Trap

Scott Sumner

The Fed has responded to the Great Recession with a variety of unconventional monetary policies. These policies have been interpreted, or perhaps I should say misinterpreted, in two notable ways.

On the right, many economists and pundits have expressed concern that low interest rates and lots of monetary expansion would lead to high inflation. On the left, Keynesian economists argued that monetary policy is ineffective once interest rates have fallen close to zero. This led them to advocate fiscal stimulus.

Events of the last six years have decisively refuted both of these widely held views. Instead, a relatively small and little-known group-the market monetarists-has offered the most persuasive account of recent policy. Monetary policy continues to be highly effective at near-zero interest rates, but in most cases actual monetary stimulus has been far too weak to promote high inflation, or even an adequate recovery.

I am one of the market monetarists. Here are our arguments:

1. The decline in interest rates to near-zero levels did not represent easy money, but rather the effects of a weak economy. When nominal GDP growth is very slow, as in the early 1930s or in Japan in the 1990s, nominal interest rates tend to fall toward zero. That does not mean "easy money," nor does it mean high inflation is on the way. In contrast, very high interest rates usually occur during periods of very high inflation, when monetary policy is very expansionary.

2. Once interest rates have fallen close to zero, there's no opportunity cost in holding the kind of money produced by the Federal Reserve: currency in people's wallets and bank reserves (which are essentially cash held by commercial banks, often as electronic deposits at the Fed). In previous low-interest-rate environments, such as the 1930s in America and more recently in Japan, central banks were able to "print" lots of money without generating high inflation rates.

In addition, beginning in 2008 the Fed started to pay a small amount of interest on bank reserves, which made banks even more willing to hold onto that cash. Recall that traditional economic theory says that printing money is inflationary because it's a sort of hot potato. The kind of money produced by the Fed prior to 2008 did not earn any interest. Thus, when interest rates are positive, people and banks don't want to hold onto lots of currency and bank reserves. As they try to get rid of these excess cash balances, they purchase goods, services, and assets, driving up prices in the long run. That's why printing money is usually inflationary. But when interest rates are close to zero, the hot potato effect is much weaker, and central banks can print large quantities of money without creating substantial inflation.

If printing money is not inflationary at zero interest rates, what's wrong with the Keynesian argument that we need to rely on fiscal policy because monetary policy is stuck in a "liquidity trap"?

Many Keynesians ignore the role of expectations. Although the U.S. is currently experiencing near-zero interest rates, that won't go on forever. At some point in the future, interest rates will be positive and monetary injections will have an inflationary effect. More importantly, the expectation of higher inflation in the future is expansionary right now. These expectations lead to higher asset prices (stocks, bonds, real estate, commodities, and foreign exchange), which boosts aggregate demand and inflation.

If the Keynesian argument were true, it would be possible for a single central bank to buy up all of the world's assets with newly printed money without creating inflation. Does that sound too good to be true? Do you really believe that a fiat-money central bank would be unable to debase its currency if it wanted to? Do you believe the Fed doesn't know how to create the sort of hyperinflation experienced in Germany in the 1920s and in Zimbabwe more recently?

Contrary to what you may have read in the press, the Fed has never said it was "out of ammunition"; indeed exactly the opposite. When they've made moves like "tapering"-slowing the pace of money printing-it's because they didn't think the economy needed more stimulus, not because they were running out of paper and green ink.

The Keynesians have made a number of predictions in recent years based on the assumption that monetary policy is ineffective when the economy is in a liquidity trap. Perhaps the most famous Keynesian pundit is Paul Krugman, who expressed skepticism about whether the Swiss central bank and the Bank of Japan would be able to depreciate their currencies when interest rates were stuck at zero.

Soon after he expressed those doubts, both central banks undertook bold policies that successfully held down the value of their currency in the foreign exchange market. The Bank of Japan's decision to adopt a 2 percent inflation target had an electrifying impact on asset markets in Japan and led to an acceleration in both inflation and real GDP growth in 2013.

Keynesians like Krugman also predicted that fiscal austerity would slow economic growth. And yet, though the U.S. has been more austere than the eurozone, since 2011 economic growth has been much higher in the U.S. than the eurozone. The reason for the difference is clear: The European Central Bank had a more contractionary monetary policy, leading to below-target inflation, while the U.S. engaged in unconventional stimulus efforts such as quantitative easing and "forward guidance" (trying to shape market expectations through announcements of its near-future intentions), generating slightly higher inflation.

In early 2013, Krugman said the year would be a "test" of market monetarism, specifically the assumption that fiscal policy is ineffective because it is offset by monetary policy. Most Keynesians expected 2013 to see a sharp slowdown, due to fiscal austerity such as higher income taxes, a 2 percent higher payroll tax, and lower government spending associated with the April 2013 sequester.

In late 2012, the Fed pursued a third round of quantitative easing and aggressive forward guidance with the goal of offsetting the expected fiscal austerity. The results of this experiment could not be clearer. Contrary to the Keynesian prediction, GDP growth did not slow. Indeed, real GDP growth from the fourth quarter of 2012 to the fourth quarter of 2013 was nearly double the pace of the previous four quarters.

We've seen plenty of experiments in Switzerland, Japan, Britain, and the U.S., which clearly demonstrate that monetary policy can be effective at near-zero interest rates. This should have been no surprise, as even Franklin Roosevelt was able to stimulate the economy in 1933 by devaluing the dollar when interest rates were close to zero.

Market monetarists succeeded in our pre­dictions because we take markets seriously. Conservatives who predicted higher inflation should have seen the low inflation forecasts in the financial markets as a warning sign that their models were flawed. Liberals who thought that monetary policy couldn't work at near-zero interest rates should have paid more attention to the fact that financial markets often rallied strongly on signals of monetary stimulus and fell sharply on signs that the stimulus would be cut back.

Market signals aren't perfect, but they're much better than the predictions of academic economists or government bureaucrats.

Scott Sumner ( is a professor of economics at Bentley University.

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  1. Whatever Happened to Inflation?

    It’s hiding in the depths of the ocean.

  2. We’ve got to find it. Deflation makes the masses better off, and we cannot have that.

    1. Not necessarily. In a cash based economy yes. In a debt based economy like ours it means you can’t service the debt and are foreclosed on.

      1. Short term pain long term gain.

    2. Deflation is a disaster for everyone. The masses would not do better with deflation.

      1. They would and they did for much of American history.

      2. Money deflation, yes, price deflation, no.

        1. Lol wut?

  3. $5 a lb for ground chuck, $7.50 a 6 pack of Bud. $8 a lb bacon. The 8oz blocks of Kraft Cracker Barrel Cheese that used to be 10 ozs 2 years ago are now 7 ozs and the price keeps rising…

    1. The rise in food prices has more to do with rising incomes in developing economies than monetary policy.

      1. It also has a lot to do with the California drought. And to some extent the ethanol mandate.

      2. The increase in the cost of the basic foodstuffs is probably negligible. The increased costs in the grocery store are the result of trying to keep corporate profits up.

        I doubt the ingredients of a half gallon of ice cream went up by 33% in the time the half gallon container went to 3 pints so the price could stay the same.

        1. I’m going to assume the above is sarcasm.

          1. Actually it’s sort of correct.

            It’s more that businesses tend to eat the increased input costs at first until they just can’t take it anymore and then it ratchets up in fairly large increments. At least I see this happening a lot when it comes to foodstuffs and restaurants.

        2. MarkinLA|11.30.14 @ 3:20PM|#
          “The increase in the cost of the basic foodstuffs is probably negligible. The increased costs in the grocery store are the result of trying to keep corporate profits up.”

          You just argued both sides of the issue.

  4. I have to come back to this later. I am part way through the monetarist’s list of parlour tricks the Fed can use to ‘control’ inflation. 1. Borrow what? The money the USG doesn’t have? 2& 3 are just shuffling money to the future 4. IOR is a large part of why we’re in this mess. IOR is violently deflationary you can pinpoint the DAY in October 2008 when it was implemented because that’s when stock markets go into a tailspin. All that money is being stored up, so again it’s just inflation deferred.

  5. Question: what happened in Japan? Massive monetary expansion and subdued prices for decades. I know their massive savings makes them non-comparable to America but it still needs to answered.

    1. Decades of stagnation have happened in Japan, right?

      1. Yes, but why no price increases?

        1. Price increases keep getting caught and tentacle raped before they can get very far. This IS Japan, after all.

        2. Because they save rather than spend their money.

          Inflation only causes price inflation when the new money actually enters the every day economy. If it stays restricted to finance and investment markets then as far as the broader economy is concerned the inflation doesn’t exist

    2. It likes to boomerang back at them.

      Look up the “reversal of the yen carry trade”.

      It’s complicated, but now they are actually seeing some real inflation, just not in wages.

      Also, they have reentered recession (again). The preceding quarters of GDP growth seemed to have been fueled largely in anticipation in a new sales tax which caused businesses and people to “preload” as much of whatever they thought they would use in the future to avoid the coming tax. Once the tax took effect earlier this year they had negative 7% GDP growth, and then again last quarter they had negative growth meaning they are technically back in recession.

      They’re at the end of their rope with a 250%+ debt to GDP ratio as well.

      Even with their recent currency devaluation, and devaluing faster than their neighbors their exports are still down as well.

      I could go on and on, but short answer is they’re screwed.

      What likely will happen is massive currency devaluation to deal with the debt in real terms. (after decades of deflation)

  6. While clearly, the government has been cooking the books on the inflation numbers, I do think globalization has put some downward pressure on consumer prices partially offsetting the consequences of excessive currency expansion. That said, those same globalizing forces tend to make asset prices more sensitive to dovish monetary policy. That is to say, globalization has substituted asset price inflation for consumer price inflation to some extent. That’s why at least the last two cycles have produced asset bubbles that burst with catastrophic consequences. Of course, that phenomenon has almost certainly contributed to the wealth inequality the Keynesians bemoan incessantly.

  7. I can’t read 5 pages unless there is a plot.

    1. Oh, there IS a plot.

  8. Don’t know if it worsens the plot, but you can add /singlepage to the end of the URL:…

    1. Thank you. I learned something today. Now I can drink.

  9. First, please edit the article to indicate authors under the sub-titles. It’s impossible to know who is writing what until the end.

    What isn’t mentioned in any of the articles is the fact that excess fiat currency is *primarily* being loaned to “low-risk” borrowers, like major corporations, who do massive stock buy-backs on borrowed money, converting profits into capital gains … to the benefit of their investors through lower capital gains income tax rates. I’ve read that corporate debt is now higher than at any time in U.S. history.

    Even a tiny increase in the corporate interest rates will create a cascade that the FED won’t be able to stop: runaway consumer inflation.

    1. And thus impossible to know when the first author begins.

  10. I’m still under the impression that at some point in the future, some massive political power (like China) is going to finally say “Enough is enough”. At that point, the U.S. economy will collapse in on itself because of skyrocketing inflation. The FedGov will be happy, because it can pay off its debt more easily, and the rest of us will get fucked in the ass with our worthless dollar bills.

    It’ll officially be riot and loot time. Kinda looking forward to it.

    1. Hedge with Bitcoin.

      1. Hedge with guns and ammo and be ready to use them.

  11. All I know is my paycheck doesn’t go nearly as far as it did before QE began.

    1. Did you know you could save 15% on your car insurance by switching to Geico?

      1. Go home, Napolitano. You’re drunk.

        1. “Libertarian, my dear, you are ugly, and what’s more, you are disgustingly ugly. But tomorrow I shall be sober and you will still be disgustingly ugly.”

    2. shame on you for complaining commie! the koch bros think you have too much money already! you should take a 50% pay cut as pennance and for the good of capitalism!1!

      1. Isn’t it a bit early to start boozing on a Sunday?

        1. It’s never too early to start boozing.

          1. True.

            *takes a swig of gin and ginger ale*

  12. “In recent years, U.S. federal deficits have declined from more than $1.2 trillion to less than $600 billion. ”


  13. Just never ask Peter Schiff anything ever again.

    1. How dare he be mostly right!

  14. As I told the Peanut Gallery back in 2009 you can’t have inflation with so much excess capacity in the system. Goldbugs are not rational beings though.

    1. I used to measure inflation by how much money I had left after paying for the necessities. That was before QE began. Now I don’t have any money left over. Haven’t for a while. So by my measure, there has most definitely been some inflation going on. Granted my measure is not scientific, but as they say, figures don’t lie but liars figure. As far as I’m concerned, the people who measure inflation are doing a lot of figuring.

    2. Palin’s Derplug:

      More like increasing the monetary base when hardly any of it actually left the fed isn’t going to cause inflation.

      It just gives the banks time to repair their balance sheets. It was all just another bailout.

      1. More like increasing the monetary base when hardly any of it actually left the fed isn’t going to cause inflation.

        This. The inflation hawks were wrong in their assumption that those dollars would find their way into the market through the customary mechanisms, but not about what would happen if they did.

    3. can’t have inflation with so much excess capacity in the system.

      Except there’s a clear positive correlation between unemployment and inflation, so you’re but what’s new.

  15. Legit question: What is wrong with the market monetarists’ point that inflation won’t get out of control since banks are being paid that .25% interest to hold on to government reserves?
    Not sure if that’s unsustainable deferred inflation or what, since the interest is awfully low, and I imagine it encourages banks to consistently hold onto at least SOME cash reserves. Why is inflation then a foregone conclusion (like more than is natural when an economy is going full steam)?

    1. That’s pretty much why there hasn’t been a lot of inflation.

      The whole thing was just another way to bailout the banks and give them time to repair their balance sheets. Increasing the monetary base isn’t going to cause inflation if it’s just sitting in accounts at the fed.

      And actually deflation can happen even when an economy is going “full steam”. Productivity gains… Problem is CBs always paper over both kinds of deflation, good or bad.

      1. Bail out CT. The Fed bought US Treasuries with QE funds.

      2. There is no magic. Very few ways to explain in this supposed current dollar-inflating environment the slow increase in nominal dollar cost of some general consumption basket. Productivity maybe the single most important reason, but I’d guess not more than half.

        Concurrently is the inflation of the money supplies of many international currencies, diluting dollar “inflation” worldwide by spreading it wide and thin. Competitive debasement, obvious to the rest of the world. Foreign (central bank) holdings (in custodial accounts at the US T Dept) is amazing, a major forced savings of developing countries households. Winner: US taxpayer doesn’t have to pay for all of it’s gov’t’s promised spending – inflation tax to the rest of the world. Ha-Ha! This is the most insidious factor and one that the lewinsky press suckups would avoid exposing, but they’re too stupid to understand. The Brazilians and Russians correctly whine, but there is a big first-mover’s problem to break the cycle of relying on US dollars as wealth storage and exchange medium. In other words, the US political class is milking the reserve status of the dollar.

        Another complicated possibility: less real dollar pumping due to accounting hocus pocus. “Private” banks hold excess reserves for interest payments, “recapitalizing” them via currency inflation tax. Credit expansion constrained, gov’t spending takes up slack. Net pressure on general prices lower than indicated by official Fed monetary expansion.

    2. If US treasury rates exceed the IOR rate, then money will come pouring out of the banks fed vaults into the real economy and that will light inflation on fire.

  16. Lack of comments on this thread is disappointing.

  17. Foreign goods coming in to the country mask domestically produced goods inflation.

    If a locally made door is going up at 10% a year, but a Chinese made door is staying the same, and is 1/4 the price, most of the doors sold will be Chinese – with no inflation.

    But, the local goods because of inflation are getting priced out of the market.

  18. Assets have really gone up in price, too. Which makes me happy.

    The cash has to filter down through the various levels of the economy to really produce inflation, and so far that hasn’t happened. It won’t for awhile either based on how the money is loaded into the economy through the big banks.

  19. If the world moves off the US dollar as the standard currency for trade, then you’ll see massive inflation. All the dollars will start being sold off by foreign countries and all corporations. They will return home. The dollar will plummet and anything foreign produced will skyrocket in price. It will make US made goods cheaper, but since we in North America have moved away from producing things this won’t help as much as it could.

    1. That last point isn’t true. America still has a large manufacturing base in addition to the burgeoning oil and gas sector. Everything else is true.

      1. I know….it is more white lab coat manufacturing than factory work now. But, there was a time when a person could start a factory in their garage and start building things. Not so much now. There are impediments to entry everywhere.

        If the dollars all returned home, there could be a giant manufacturing boom. But, our thinking isn’t manufacturing and meeting demand, in that way.

        That could change quick enough, too.

  20. Six months ago I lost my job and after that I was fortunate enough to stumble upon a great website which literally saved me. I started working for them online and in a short time after I’ve started averaging 15k a month… The best thing was that cause I am not that computer savvy all I needed was some basic typing skills and internet access to start… This is where to start…


  21. I really loved this article. Let’s have more of this “post-mortem” analysis, please. I hope the trend spreads to nightly weather forecasters and climate alarmists. Seriously, we need to calibrate Chicken Little.

  22. “Market signals aren’t perfect, but they’re much better than the predictions of academic economists or government bureaucrats.” Sumner for the win!

  23. Hittem up JD, I say hittem up!

  24. In the abstract, the new fiat currency isn’t “in circulation”.
    The FED wasn’t pumping money into banks, but rather propping up the value of U.S. Treasury Bonds, as well as Fannie/Freddie equity. The funny money was forcing low rates on T-Bills and bailing out all the bad loans held by mortgage investment companies. It was intentionally “boxed off” against the consumer economy.

    At the same time, the FED and Dodd-Frank induced banks to sideline assets and constrain their lending. Only the best risks got loans and the advantage went to large corporations, who borrowed billions at low rates and engaged in massive stock buy-back operations. The result was to convert dividends to capital gains, at a lower tax rate for investors. So, the most obvious “economic indicators” were booming, while the consumer economy languished.

    As a consequence, the level of corporate debt jumped to nearly $10 TRILLION, an historic record:…..n-cm366891

    So, it’s no wonder that consumer inflation hasn’t (yet) occurred, in spite of extreme monetary inflation.

  25. And no mention of credit tightening in the whole article? Credit supply dwarfs the money supply. When credit is tightened as it was post 2008, there was no way inflation was happening.

  26. Really nice post, this is really helpful for understanding monetary policy.

  27. Nice post, this post really have lots of information about monetary policy and the differences in the past few years of financial assets.

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