Inflation from all those new US Dollars

BenjAii

The Fed has certainly gone in to overdrive with the printing press lately, making crisp new US Dollars, conventionally of course that is pumping inflation into the economy. I'm reading widely varying opinions on this issue however and would be interested to hear the opinions of posters here.

On the one hand, according to certain contrarians (doomsayers ?) the US is heading for a tidal wave of inflation at some point (even if after a deflationary period), that will wipeout value & savings.

On the other hand, calm down people, the reccessionary effects on prices means we won't have to worry.

Who's more right ?

Économiste Monétaire

Links and sources to both of these views, please. I want to see why people think the Fed is monetizing the recent 'bailout' package. The Fed has stepped in where the wholesale money markets between banks has faltered/failed.

BenjAii

UCD_Econ wrote: »

Links and sources to both of these views, please. I want to see why people think the Fed is monetizing the recent 'bailout' package. The Fed has stepped in where the wholesale money markets between banks has faltered/failed.

UCD, that increasing the money supply leads to inflation is such a widely held opinion it doesn't really needed to be sourced to be discussed.

I'm puzzled why you query the Fed monetizing the bailout - where else do you think it's getting this money from if its not effectively lending it to itself ?

Économiste Monétaire

BenjAii wrote: »

UCD, that increasing the money supply leads to inflation is such a widely held opinion it doesn't really needed to be sourced to be discussed.

Yes, I know that, I never questioned whether inflation would occur when you increase money supply through monetizing general government deficits. I asked for links for this: "I'm reading widely varying opinions on this issue". I wanted to know what you were reading that said the Fed System was monetizing the debt of ABS. Elementary implementation of the equation of exchange is far too simplistic of an analysis.

BenjAii wrote: »

I'm puzzled why you query the Fed monetizing the bailout - where else do you think it's getting this money from if its not effectively lending it to itself ?

I don't think you know what monetizing a debt means, also don't confuse the Federal Reserve System and the Treasury Department. The Treasury Department doesn't have to exchange ABS for physical currency, under the widely reported $700 bn bailout. A simple exchange of securities based on reasonable market prices is what they're looking for through a reverse auction, as opposed to a fire sale of ABS to the market. Monetization of the debt, and exchanges of securities do not have homogeneous effects on inflation rates. That would have an effect on the hypothesis of: "according to certain contrarians (doomsayers ?) the US is heading for a tidal wave of inflation at some point (even if after a deflationary period), that will wipeout value & savings".

But, if you have evidence that the Fed will monetize the debt of the plan, then I'd love to read it.

BenjAii

UCD_Econ wrote: »

But, if you have evidence that the Fed will monetize the debt of the plan, then I'd love to read it.

Your question re: "debt monetization" asks is there any real increase in the money supply taking place, if the Fed is not directly buying Treasuries.

That is another one of the hypotheticals in this debate; if the exchange for Fed funds with various bank securities (of questionable worth, but thats another story) isn't in effect the same thing. Even if further down the line eventually this is financed by taxes, sales of the distressed assets or (more likely) sale of Treasuries to non-US investors, rather than a strict definition of debt monetization, i.e Fed buys Treasuries.

Here is some links referencing this;

http://ftalphaville.ft.com/blog/2008/10/27/17448/the-unthinkable/
http://www.stockhouse.com/Columnists/2008/October/24/Credit-thaw-begins
http://www.rgemonitor.com/us-monitor/253952/speculative_thoughts_on_the_macroeconomic_aspects_of_the_crisis
http://online.barrons.com/article/SB122489726575668975.html?mod=googlenews_barrons&page=2

Économiste Monétaire

BenjAii wrote: »

Your question re: "debt monetization" asks is there any real increase in the money supply taking place, if the Fed is not directly buying Treasuries.

No, my question was in response to an idea that the Fed’s actions were going to cause hyperinflation akin to the second hypothesis that you put forward, "that will wipeout value & savings". I didn’t find that in any of the links you gave. The only amount I saw was 6%. Also, in regards to your statement about collateral that can be entered for OMOs, I view as a fallacy of the current arguments against the Fed. General collateral requirements for OMOs through repos were eased to allow banks trade their MBS for liquidity, this was a reaction to primary dealers being unable to access the federal funds market at reasonable rates. The Fed doesn’t keep this collateral permanently, it's collateral for a short term loan. If that collateral were purchased and entered into the SOMA portfolio, through permanent OMOs, to be used to conduct reverse repos, then that would be a problem.

Unless the Fed were to monetize the $700 bn into high powered money, then I can't see the case for hyperinflation. Ben B is trying to avoid what happened in the great depression. He also recognises that the two situations aren't comparable to a great deal--that's why it required a response from the fiscal arm of the government, i.e. the Treasury Department's plan to remove distressed ABS from banks' balance sheets.

silverharp

The main question is where is the new liquidity or credit is going?, if the banks lend it out on a net basis then potentially it is inflationary however, you need willing lenders and borrowers, and just as likey the credit will stay on the banks balance sheets, I believe they have even being buying treasuries with these funds.
Also remember that there is a lot of credit deflation on the other side, as the process of writing downs banks balance sheets is far from complete, their ability to lend will be impaired. In the US one problem coming down the track for instance is credit card defaults
Also remember that commodity inflation is dead imho, and I cant see employees up to their gills in debt asking their bosses for pay rises in this envioronment.

BenjAii

Here's former Fed chief Paul Vocker reiterating the case for inflation fears further down the road, though he doesn't quantify how much

http://www.reuters.com/article/GCA-Economy/idUSTRE49D2QB20081014

and the reference I was thinking of when i mentioned doomsayers

http://www.contrarianprofits.com/articles/why-a-recession-is-the-least-of-our-worries/7195

Though he doesn't back up his claims with much in the way of an explanation.

I think for run away inflation (hyperinflation) to happen the currency would need to be debased in conjunction with an increase in money supply. Lucky for America its currency acts as the worlds default reserve currency.

Minder

Are these transactions not POMOs?

http://www.ny.frb.org/markets/pomo/display/index.cfm?showmore=1

Économiste Monétaire

Minder wrote: »

Are these transactions not POMOs?

http://www.ny.frb.org/markets/pomo/display/index.cfm?showmore=1

They’re short term discos with maturities of less than a year, not long-term MBS being added to SOMA with the intent of being used to conduct reverse repos. $14bn out of total holdings of $484bn isn’t something to be worried about.

142857

The spike begins about 8-10 weeks ago:

cavedave

Not exactly relevant but have you thought about how much money is involved?



That's 4616 billion. 400 billion more than WW2.

Kind of scary when you think of it like that.

142857

cavedave wrote: »

Not exactly relevant but have you thought about how much money is involved?

That's 4616 billion. 400 billion more than WW2.

Kind of scary when you think of it like that.

Nearly twice as much as that actually.

http://money.cnn.com/2008/11/26/news/economy/where_bailout_stands/?postversion=2008112615