Sooner or Later, Inflation
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Frankfurt School of Finance and Managment professor Thorstein Polleit gives a sobering overview of just what we’re in for, as the Federal Reserve increases base money from $870.9 billion to $1735.3 billion in just five months, with much more to come. There is a bit of disagreement in Austrian-ish circles as to when inflation might hit — Mike Shedlock, for example, has argued that we’ll experience deflation first. (Some of the disagreement hinges on the definitions of “inflation” and “deflation” — whether prices, base money, credit, or something else is the key measurement.) I suspect that the deflationists are right in the short term: the annihilation of so much ledgerbook money should create a deflationary pressure. But the Fed is doing everything in its power to print its way out of deflation — which would actually be beneficial as a correction to the inflated real estate, stock, and other prices we’ve seen over the last 20-odd years — and into inflation. Shedlock argues that as long as the banks aren’t lending, we won’t see inflation, and Polleit notes that they have indeed massively increased their excess reserves (from $1.9 billion to $798.2 billion so far). Trouble is, eventually the banks will start loaning out that money again, which is when inflation explodes. (Though even here, some economists dissent from the idea that base money leads the creation of credit money.)
Filed under: Economics
Well here’s where I think there’s actually a window to cautious optimism for Obama’s policies in the long term – what we clearly need is deflation, and that is a politically incorrect untruth that has to be danced around.
A financial commentator I read a while back seemed to have it exactly right when he said “Geithner is haplessly trying to assert control, Larry Summers is doing nothing but sit around and tell everyone he’s in charge, and Paul Volcker is the only adult in the room and completely beside himself”.
And this is why Volcker seems to be there – he got Reagan through the short term traumas of doing what needed to be done, which in that case was to simply get inflation under control, and the optimistic reading at any rate is that this is what’s going on now when actual deflation is necessary.
I say this fully aware of the mess Obama has made by effectively having three competing Councils of Economic Advisers, and here we see how the situation is extremely analogous to the foreign policy situation, where the adults in the room have to contain the crazies inside the Beltway and also simultaneously dance around and weather the storm of politically incorrect realities.
The amount of credit which is going to vaporize is 52 trillion. 52 trillion. Monetizing even 10% (and we aren’t even there yet) is not going to have an effect.
But this is where the inflation/deflation is going to be decided. Some of the 52 trillion is ephemeral as well. I don’t know where the precise line is but it will require the Fed to not only turn on the afterburners, but run into shrapnel to break open the fuel tanks and ignite it.
Meanwhile Ron Paul’s bill to audit the Fed moves forward…
Jack, your has ignorant about economics has you are about the middle east. Volcker is over 80 yrs old and is NOT in the room. This is a world wide problem with no clear solution. They are just groping here and the surest way to completely destroy consumer confidence is by deflation
Attention BillBot programmers:
Paul Volcker is indeed chairing one of those “competing councils of economic advisers” Jack mentioned.
http://en.wikipedia.org/wiki/Economic_Recovery_Advisory_Board
“…the surest way to completely destroy consumer confidence is by deflation’ – Mr. Pearlman
Consumer confidence needs to be shaken so that consumers get out of the habit of borrowing to spend. Yes, this means that a lower standard of living is necessary – more saving, more deferred gratification, less $5 lattes, less pronography, less electronic gadgets.
I”ve noticed the premiums for physical gold have gone up alot
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