I see there is at least one respected(?) analyst suggesting we may be seeing a period of inflation soon. Although he makes his prediction really significant by saying maybe not, and deflation is also possible.
So, uh, in other words, the money supply might go one way, might go the other, and might stay the same. That is really useful information. I hereby enhance my own credibility by saying we might see deflation, inflation, or no change. I can’t wait to be proven right, but I know I will be!
Seriously, so far no signs of serious inflation but if it does happen, well, it happens. Economically it’s unhealthy long term but believe it or not inflation can have positive effects. It might be a necessary correction, for one thing. For another, while it causes all sorts of chaos, it actually tends to help some people. It eats away savings, but it helps people who have, say, home or business mortgages. In the long term.
I have been wondering for quite some time how we’re avoiding inflation, actually.
(Link via Glenn.)
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It’s already happening in India:
http://www.bloomberg.com/apps/news?pid=20601087&sid=aUXNPMmbrvC0&pos=1
And most likely China too. Our salary demands in China are up 20-30% compared to a year ago.
I also read where electricity usage in China was up 40% in January versus a year ago. That’s not necessarily related to inflation, but it is a mind boggling statistic!
I have been wondering for quite some time how we’re avoiding inflation, actually.
The Fed started paying interest on reserves last year. Combined with very low interest rates, this has the effect of encouraging banks to keep excess reserves instead of writing new loans, so most of the money we’ve been creating is tied up in bank vaults (metaphorically; it’s actually numbers in a computer in a Federal Reserve office) instead of circulating.
Dean,
I know you don’t much care for Glenn Beck but he pretty much has been saying what Eric Rall just said.
Beck breaks it down:
Just another little tidbit, our sales are up about 80% versus last year. Most of this is in Europe and Asia. US sales are up about 9% ( I don’t have firm numbers for Europe and Asia,), so we’re definitely lagging the rest of the world in coming out of the recession. That’s no doubt helping to keep inflation under control here.
With the interconnectedness of the global economy today, it’s hard to see how this imbalance can continue for long. But I think we’re basically in uncharted waters, and that’s why so many economists are hedging their bets.
Ditto Rall. The money is sitting in the banks, and as soon as it goes out, here comes inflation like a freight train, maybe even hyperinflation. The only thing keeping it back is a weird sort of prisoner’s dilemma situation, where as long as no banks are lending money, none of them are having their existing loans ruined by inflation, but as soon as one of them opens the floodgates, they will have no choice but to go on a lending frenzy.
And yeah, some bit of deflation is going to happen unless there is a very careful, controlled release of this credit.
And the more I think about it, the massive influx of cash in the beginning of 2009 only did one thing for certain — create instability. It’s like we are balancing on a point. We could tip and fall down the inflation side, or we could tip and fall down the deflation side, but unless the Fed calls that money back or there is MASSIVE economic growth, we are eventually going to fall.
Sales going up should have little to do with inflation one way or the other. Bad loans by banks, somewhat–if the bad loans came because the Fed printed a bunch of money to cover the bad loans.
As much as I have problems with Mr. Beck, I will say that if his numbers are correct then it is hard to believe we won’t be seeing hyperinflation. However, my problem is, I don’t know if I can trust his numbers. It’s interesting to consider, however.
I always wonder where the official inflation estimates gets their information from. There’s a website that gives the “you’re broke and need to feed your family for a week, here’s the 45$ menu.” That 45$ was in 2006, and when she re-did the pricing (at Walmart even), it went up to over 70 bucks. We’re talking staples like flour and milk. That’s a huge increase in just three years.
OK, so the price of TVs haven’t gone up, which is also part of the inflation index from what I hear. But it’s not like you need to buy a TV every week.
It’s not just the money sitting in banks, it’s also the governments borrowing most of the money available for loan due to the unprecedented size of the deficits.
Dean, take a look and weep. Straight from the horse’s mouth.
http://research.stlouisfed.org/fred2/graph/?s%5B1%5D%5Bid%5D=AMBNS#
The Fed has almost tripled the money supply in two years.
Phelps,
Beck showed that exact graph on another video.
Dean,
Beck is spot on with this. You should really give him a second listen.
One reason we’ve avoided inflation is there’s powerful deflationary forces in the economy, and as long as they persist, they’ll mute out the inflation. One huge deflationary force is China, who’s weak RMB policy means that nearly all manufactured items are extremely cheap and intense competition between manufacturers in China means that productivity improvements go immediately into lower prices without any “profit lag”. Another deflationary force is tech generally, which has permitted a massive burst of productivity in the private sector.
The line between economic predictions and horoscopes is a thin one indeed.
The quantity theory of money says:
Money*Velocity = Quantity * Price
While the government has drastically increased “Money”, Velocity is significantly down due to the recession (among other things) which argues that the right side of the equation Quantity (which can loosely be thought of as GDP) and Price can stay reasonably stable, and hence low inflation.
Another note, economist predictions are one thing, but I find where people (especially professionals, especially in super efficient markets) put there money to be more informative. So, what is the concensus from the capital markets for inflation expectations?
The yield on treasuries at the moment are:
10 year treasuries are yielding 3.7%
30 year treasuries are yielding 4.6%
For TIPS (treasury inflation protected securities) the yields are as follows:
10 Year TIPS yield 1.5%
30 Year TIPS yield 2.1%
These securities are identical in all ways save for one is inflation protected and the other is not. Therefore, any differences in yield can be thought of as the implied inflation expectation. Or put another way, investors require the added yield to compensate for the risk of inflation that they face with Treasuries, but not TIPS.
So, implied inflation expectations are 2.2% annually for 10 years and 2.5% for 30 years.
Dean,
“It eats away savings, but it helps people who have, say, home or business mortgages.”
True, but it hurts those that hold the mortgages by an equal amount.
I’ve seen that graph…
and I keep wondering…
Why are we not dead yet?
Are we in a Wiley E. Coyote moment?
We aren’t dead because the banks are holding us by one hand at the ledge.
As soon as they let go, we are gone.
I’m not an ecomonist, don’t understand most of their analysis.
But I shop and I pay bills.
No inflation?
Every month what I can do with my available funds is contracting.
I can’t afford my lifestyle anymore, which was already pretty modest to begin with.
None of you have seen anything remotely likely the destructive levels of inflation that surely will come with the true beginning of the steep downside of the Hubbert bell curve for world peak oil, which is increasingly likely to happen within 2-4 years. Some economists are projecting gasoline prices at the pump of $12-$15 per gallon, as the supply of newly-refined gasoline falls into increasingly shorter supply in the face of still-increasing world demand of a finite resource. That is when Americans will come to know just what economists mean by the term “inflation”.
Right now, Europeans pay an average of 1.30 Euros/liter, which translates to about $7.40/US gallon. That price obviously is inflated by european level sales taxes. But Europeans also have the most highly developed systems of rail transit in the world. Our rail systems, in general, are about on a par with most second-world countries. And it takes time to change over from a system of primary reliance on private automobiles to a system of public transit. Especially in the overly-suburbanized and exurbanized society we have created here since the end of World War II.
Will any of this be alleviated by ethanol and biodiesel? Not too much. There are very few automobiles sold in this country that can burn E85 right from the pump, Brazil style. And even fewer of us own Volkswagen Jetta TDIs which have diesel engines, such as mine. And industry-wide design standards never can be changed overnight, especially to take into account the fact that America’s favorite fuel has suddenly become the first in a coming series of Unobtaina as the earth-extractable resources of this planet begin running out under the impact of a world population that has more than tripled in size in less than a century.
Based on that, I think this economy is going to crash even more than it has in the past couple of years.
Maybe I’m wrong about the dates and the severity. I’m a data processing specialist with training as an urban and regional planning, and anything but a resoure economist. But think about all the probabilities, before anwering with the usual wisecracks.
Arnold Harris
Mount Horeb WI
Yeah, yeah Arnold. Peak Oil has been 2 – 4 years away for 20 years, and every year they discover new sources of oil, and that’s not even talking about all the ways that converting coal, oil sands and oil tar to oil will become economical with a very minor increase in oil proces.
I don’t buy into peak oil any more than I buy into Global Warming or the 2012 end of the world. I’m just not much into doom and gloom prophecies that get their deadlines reset every year or so.
What Arnold says is certainly a possiblity, but it is one that is waaaaay out in the tails in my opinion. Moreover, there are no prices of any energy commodities that are reflecting even the possibility of peak oil coming to fruition. I would probably find it more plausible though, if there was at least one example of using up a particular resource in human history, but there isn’t.
Finally, I would note that oil futures for delivery anywhere from 5-8 years from now are priced between $80 and $90 dollars, so anyone who is that confident in peak oil, could make a boatload of money going long on oil futures.
Are any of those proponents of peak oil doing so? Arnold’s price at the pump of 12-15 bucks implies oil at $320-$400 per barrel, or in the neighborhood of 400% return per contract. Easy money, right?
We will run out of easily-findable-and-cheaply-extractable oil someday. The big questions are when, and what will take its place. “When” is a difficult open question — imminent oilpacolypse has been predicted for decades, but the proverbial stopped clock is right twice a day.
As for the latter question, more-expensive oil is the most likely short-term possiblity (extracted from tar sands and deep-ocean wells, as well as from places that are currently technologically and economically feasible but politically off-limits like ANWR and off the shore of California). Fission is another likely short-to-medium term alternative. Solar isn’t ready for prime time as a large-scale power source, but it isn’t all that far back and the technology continues to improve. And way over the horizon, the imminent viability of fusion power has been predicted nearly as often as imminent oilpacolypse, and like the latter the former will almost certainly happen someday.
Back on the inflation question, Bernanke has any number of tools to dial back the money supply by any amount necessary when the banks start lending again. First and foremost are raising the interest paid on reserves (making holding cash even more attractive to banks relative to writing loans), and selling bonds owned by the Fed on the open market (bidding up interest rates and vacuuming money out of the bond market).
The trick is to pull back the money supply at the right time and to the right degree. Pull back too late or not enough, and you get renewed inflation. Pull back too early or too much, and you get deflation and a double-dip financial crisis.
I think the most likely scenario is the the Fed errs slightly on the side of inflation, and we wind up with inflation rates in the mid-to-high single digits for the next several years.
I wonder if 100 years ago we had constant fear mongering about the inevitable horse-feed shortage, or horse plague or something.
When I was in college, I took a semester of economics. So I am by no means an economic expert. However, lately I’ve been concerned that our President, Speaker of the House and other top leaders know less about economics than I do. Because I think the course they are steering us on is going to end when the organic fertilizer hits the rotating air movement device.
There are signs that make me think we could be heading for inflation, and other signs that make me think we could be headed for deflation.
Important update to Dean’s note about those helped by inflation: It helps people with fixed rate mortgages. If you have an increasingly common adjustable rate mortgage, you’re just as screwed as everyone else.
how is Beck’s OMFG-inflation!! any different than peak oil, really?
Honestly, my problem with Mr. Beck is I don’t know if I can believe his numbers. He doesn’t have the credibility with me to trust them. I’d need independent verification. Otherwise I don’t know what to make of it.
Aziz,
Yeah, clearly you watched the videos. Do some research then come back. You did go to college, right?
Dean,
How about you do some research then, eh? I already linked the video where Beck talks about the numbers Eric Rall linked. Where Beck got his “120%” increase in the money supply. Mr. Rall puts it closer to tripling the money supply. Do you not believe Eric too? They’re both citing the same frickin’ source!
No one will have any credibility unless you do some research yourself. It’s not the media’s job to do it all for you. Eric and I have both given you great places to start.
If you really care about inflation, you’d do your own legwork now.
I didn’t actually link any sources in this particular discussion, but the St. Louis Fed’s Adjusted Monetary Base graph Phelps linked is one source. It corresponds to M0 (the amount of physical dollars in people’s wallets, plus the amount of cash banks have on hand including reserves held in their Fed accounts) with some arcane adjustments.
To understand why we don’t have massive inflation, compare with the MZM graph from the same source, which tracks the amount of money in people’s wallets plus the total of everyone’s bank balances. It’s been on the upswing, but there’s no massive spike like in the AMB graph, because banks are lending less and holding more of their deposits and assets as reserves.
Kevin: It is normal in research, including even professional research, to ask for independent verification of someone’s numbers. How about you not get your panties in a bunch and just answer, “here’s your independent verification, suck on it” and go ahead and give it to me? ;-)
Anyway, I hadn’t noticed others in this thread, which has been about several things, were giving the same numbers. Now I have. Thanks. We have independent confirmation of the assertion that the Fed’s tripled the money supply. Now the question would be what’s going to happen with it. If it comes flooding out into general circulation, inflation is guaranteed. If it gets sucked back in by the Fed before that happens, it probably won’t. Hmm.
http://www.theoildrum.com/node/6281
http://europe.theoildrum.com/node/6197
http://www.energybulletin.net/node/51950
http://www.odac-info.org/peak-oil-primer
Eric, world peak oil has more to do with the inflation question than any other single projected event in the past 110 years.
CC, nothing I have discussed here has anything to do with global warming. For the rest of it, your response sounds like a 21st century version of the Flat Earth Society.
The rest of you, think about clicking on the links above, and see what some of the world’s leading energy industry economists and experienced oilfield geologists think about the near imminence of world peak oil. US peak oil happened only 40 years ago. Demand for petroleum energy increases now at 1.7 per cent per year, largely because China has super-industrialized and is now in the process of motorizing its 1l3 billion people, and India is now headed on the same path.
Like it or lump it, believe it or avert your eyes and ears from it; it doesn’t much matter anymore. Because shortly, the population of this planet will all find themselves residing in Unobtanium City . Which means up Shit’s Creek with no paddle and a rapidly sinking canoe.
Arnold Harris
Mount Horeb WI
The prisoner’s dilemma with the banks just got a little more interesting.
http://www.cnbc.com/id/36012522
This makes me wonder if the banks can loan the money out that they are sitting on and keep their fractional reserves. I’m wondering now if the only purpose of all that cash is to let already failed banks claim that they can cover their reserves.
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