Inflation : Is All Well or Is All Hell About to Break Loose?

Mr. Bernanke, Chairman of the Federal Reserve,  has told us  many times that inflation is under control. Yet, we on Main Street don’t see it that way, do we? The Fed’s target for inflation is 2% and even their manipulated calculations put inflation at 3%. I guess missing their target by 50% is Fed speak for under control.

Paul Krugman, the Nobel Laureate Keynesian economist and columnist for the New York Times likes to make fun of Austrian economist. You see, Austrian economist believe that government stimulus will invariably lead to inflation. Krugman points to all the stimulus we have had and asks the Austrian economist  to show him the inflation.

Earlier this month I made a post in which I claimed that the EU was bankrupt and so was the US.  Also, in this post I made a wish. I wished an expert economist would come by and answer a question I raised:

The Keynesian economist are laughing at the Austrian economist. The Austrian economist say that when governments stimulate, inflation will follow. The Keynesians are laughing and saying: Look! There was about three trillion of stimulus put into the economy and there has been no inflation. Okay, but we are also told the banks are sitting on two trillion dollars and that the private sector is sitting on another trillion dollars. My question is this: if these three trillion dollars should start circulating through our economy, won’t that bring on some serious inflation?

Of course, no expert came by. But, yesterday I came across this article Conditions Ripe for Inflation Inferno, St. Louis Fed Economist Warns  at Real Time Economics.  It appears that a staff economist for the St. Louis Federal Reserve Bank has addressed the issue I raised. Let’s take a look.

New research from the Federal Reserve Bank of St. Louis warns there is more than enough kindling to start an inflation inferno.

The paper, written by staff economist Daniel Thornton, stands in opposition to the views of key central bank officials like Chairman Ben Bernanke and others, who argue that even as the Fed has pumped liquidity into the financial system, it has the tools it needs to control the inflationary potential of those actions.

This is a short article so please take time to read it. Here is the crux of Mr. Thornton’s concern:

Thorton’s worry is rooted in the massive and ongoing liquidity the Fed has provided the economy since 2008. Much of that money actually hasn’t made it out into the economy, with banks parking the funds back at the Fed in the form of excess reserves.

These reserves “constitute an enormous potential to increase the money supply as the economy improves and banks’ opportunities to lend and invest improve,” the economist wrote. “The extent of this potential is demonstrated by the recent marked increase in the growth rate for total checkable deposits and required reserves.”

So, do I get to claim an “I told you so” on Mr. Krugman? I’ll let you decide.  The article goes on to suggest that Bernanke nay be able to keep these trillions of dollar from circulating  indefinitely.

…If those reserves look like they’re going to stampede out of the Fed’s corral and overheat the economy, the central bank can simply raise the interest rate it pays and draw the money back in.

Maybe Mr. Bernanke can keep a lid on it. He is going to have to be very nimble,  in my humble opinion.  I guess Mr. Bernanke doesn’t believe in a free market economy, does he?

Well, that’s what I’m thinking. What are your thoughts?

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32 thoughts on “Inflation : Is All Well or Is All Hell About to Break Loose?

  1. It is only a matter of time I fear. One of the reasons energy is where it is,is because of the devaluation of the dollar. I cant find the source, but I had read that in terms of real value, a 20 cent gallon of gas in 1910 would be the same price today if not for inflation. Up until the Federal Reserve came into existence, the dollar actually was getting stronger, and worth much more in 1910 that at the time of the end of the revolution. A dramatic slide since.

  2. The FED announced at the last FMOC that they would keep their loan rate at 1% through 2014.

    The purpose of extending that low lending rate is purposely crafted to keep inflation low. The Fed right now is 100% devoted to fighting inflation.

    I do not know this for certain, but I suspect the St. Louis Fed report you are talking about was part of the information reviewed by the FMOC that prompted them to extend low interest rates through 2014 to meet their 2% inflation target.

    That means member banks can, with certainty, make low interest loans to their customers. As long as customers can borrow money cheaply enough then they will not be forced to dip into cash reserves.

    The reason there are cash reserves in the first place is to deal with economic uncertainty that could have a major impact on the cost of doing business.

    Those uncertainties are:
    1-The possibility of another downturn in the economy
    2-The unsettled tax burden on businesses and individuals surrounding the Bush Tax cuts
    3-The constitutional uncertainty over Obamacare and its unknown costs to business
    4-The unknown impact on the cost of doing business resulting from Dodd-Frank changes

    The cash reserves are being maintained to deal with those uncertainties should any or all of them increase the near-term cost of doing business and the cash reserves will be needed to deal with those unpredictable expenses.

    1. AZ, I know you are a fan of Bernanke and Krugman but if the republicans should sweep in November and they make the necessary moves in their first 100 days like repeal of Dodd-Frank and Obamacare and slash corporate taxes and repeal the tax on foreign income, the economy is going to take off. How long do you think the banks will continue to sit on their trillions? If it it comes into the market to fast, there will be serious inflation, my friend.

  3. Hey CoF: Krugman is carrying water for the marxist contingency in this country…not to mention that he is an arrogant SOB and he is egotistical intelligentsia elitist moron. The problem with them is that they look at we bible-thumping gun loving hillbillies as totally devoid of any intelligence, therefore they MUST according to their faith and rationalism religion to lead us around and make rules. laws and regs that “protect us from ourselves” because we are too stupid to make those decision for ourselves AND of course they are correct in ALL of their beliefs and pronouncements because of their “enightened state”-so much so-that they can FORCE us to listen and of course believe in what THEY beleive in simply because we are too stupid to think for ourselves…and all of that is ALL ok under their rationalism…stupid people must be herded and coerced into “correct” thinking…
    Here is the bottom line for me…this group and their comrades are pilfering the treasury…plain and simple…they are walking away with billions perhaps TRILLIONS of our money for their greed and arrogance…I am not bashing capitalism…I’m saying their goal is to enrich themselves (all the time railing against greed) and bankrupt us- the American people-via Congress, all Federal agencies and the Fed…I have heard that there is in reality 15% inflation and each and everyone of us feels it, sees it and is experiencing it…tell me where is all the hysterical desecrates in Congress demanding to have hearings on high gas prices and hauling every oil executive before their kangaroo courts? But NO one is talking about REAL inflation…we are feeling and experiencing because they need to convince the lemmings to re-elect their chosen one….people can see and feel it but refuse to accept it…mass delusion…*CHIRP*CHIRP*CHIRP*** is what you hear and will continue to hear because this does not fit their narrative…OR we will just continue to hear its all Bush’s fault or GOP policies from the last 8 years…here is the stupid part…lemmings will beleive it…TPC

  4. All hell is about to break loose, to answer your question.

    The only way this expansionary gamble works is if it sparks very fast economic growth, expanding the economy fast enough that it absorbs the extra money without creating an inflationary explosion.

    I don’t see any economic forecasts predicting Reaganesque growth, so we are probably in trouble. The only thing saving the US right now is that there is so much economic turmoil everywhere else. We are the least dirty shirt.

  5. Reblogged this on Thepoliticalchef's Blog and commented:
    Krugman is carrying water for the marxist/socialist/intelligentsia elite contingency in this country…not to mention that he is an arrogant SOB and he himself is an egotistical intelligentsia “enlightened” elitist moron. The problem with Krugman et al is that they look at we bible-thumping gun loving “hillbillies” as being totally devoid of any intelligence, therefore the enlightened contingency MUST according to their faith and belief in rationalism religion to lead us around and make rules, laws and regs that “protect us from ourselves” because we ‘unenlightened” (re: don’t agree with them) are too stupid to make those decision for ourselves AND of course they are correct in ALL of their beliefs and pronouncements because of their “enightened state”-so much so-that they can FORCE us to listen and of course believe in what THEY beleive in simply because we are too stupid to think for ourselves-of course they don’t see it as coercion, they see it as “helping us” in a marxist kind of way…and all of that is ALL ok under their rationalism…stupid people must be herded and coerced into “correct” thinking…
    Here is the bottom line for me…this group and their comrades are pilfering the treasury…plain and simple…they are walking away with billions perhaps TRILLIONS of our money for their greed and arrogance…I am not bashing capitalism…I’m saying their goal is to enrich themselves (all the time railing against greed) and bankrupt us- the American people-via Congress, all Federal agencies and the Fed…I have heard that there is in reality 15% inflation and each and everyone of us feels it, sees it and is experiencing it…tell me where is all the hysterical desecrates in Congress demanding to have hearings on high gas prices and hauling every oil executive before their kangaroo courts? But NO one is talking about REAL inflation…we are feeling and experiencing because they need to convince the lemmings to re-elect their chosen one….people can see and feel it but refuse to accept it…mass delusion…*CHIRP*CHIRP*CHIRP*** is what you hear and will continue to hear because this does not fit their narrative…OR we will just continue to hear its all Bush’s fault or GOP policies from the last 8 years…here is the stupid part…lemmings will beleive it…TPC

  6. The Fed would not be able to raise interest rates easily just to stop those reserves from hitting the street without a major official turn-around on his pro-growth policy presently in place. The only excuse that they can use for that turn-around is if unemployment drops to the 5-6% level.

    That is not going to happen in 2012 or 2013.

    1. “The only excuse that they can use for that turn-around is if unemployment drops to the 5-6% level.”

      I don’t agree, John. The Fed won’t allow a past policy statement stand in their way if those excess reserves started hitting the street. The question I have is could they respond with just the right touch? Fighting inflation with interest rates can be very tricky; too little or too much can have serious adverse consequences.

      1. I agree, Jim, a past policy statement would not stop them. What would is the danger of being crucified if they tighten monetary policy without a proof of rising inflation or an unemployment rate significantly improved. In fact, I don’t think Bernanke would even get the votes inside the Fed.
        Also don’t forget that the Fed has become politicized and that it does the bidding of the White House.

  7. Krugman is among those navel-gazers who can’t look around the world and see what happens when government gets too big, too “stimulative.” How’d that work out for the EU and Japan? But it’ll work here. Don’t you worry.

    The only way that $3 trillion sitting on the sidelines won’t produce inflation is if the economy grows into it. Not much chance with Obamanomics and the recession he has planned for 2013 (expiration of Bush tax cuts, implementation of Obamacare taxes, etc.).

  8. It’s easy to say inflation is only at 2% when you don’t factor in fuel and food–which the fed doesn’t.
    Quick–name 2 things just about every American HAS to purchase: fuel and food.

    Do they think we are stupid? You can tell me inflation is only 2% (and an employer can provide cost of living/tied to the inflation index raises at that %) but when I was paying $2. 89 for a gallon of milk two years ago and today I am paying $4.99, I’m paying more than 50% more.

      1. Well, if you’re really intrerested I’ll come back to this post in a reply and give you a rundown of my last trip to Wal-Mart. 🙂 Dog food–OMG! 20-1b. bag of Purina One costs $19.99, a few years ago it could be had for $15.99. But a big difference if you haven’t been back to the states in a while is the packaging. Alot of food manufacturers have made their packages smaller so that you’re getting less product –and the prices have gone up as well. No such thing as a 1/2 gallon of ice cream, it’s 1.75 qt and expect to pay up to $5.00 unless you catch a deal. Don’t have a clue how these prices compare to Argentina (I think that’s where you are?) but the uptick in food prices is affecting alot of folks budgets.

      2. Thanks again, Freedom. I write often about inflation in the US but I have no actual experience with it. I wonder how much of the inflation in food prices has to do with using corn for making ethanol?

        BYW, I live in Venezuela.

      3. Regards to the dictator. 🙂 An American patriot in Venezuela–there’s a story there, I’m sure.

  9. Jim, there are some numbers available as to the effect of ethanol on corn and gas prices. The International Monetary Fund determined that increased demand for biofuels accounted for 70% of the rise in corn prices. The Congressional Budget Office determined that the ethanol mandates enacted by Bush accounted for a 15% rise in the price of gas at the pump.

    Here is another measure of inflation showing it at over 8% currently that seems to be much more practical than the government numbers – http://www.cbsnews.com/8301-505144_162-57387655/inflation-not-as-low-as-you-think/.

  10. So inflation hasn’t gone through the roof, but the value of the dollar has gone through the floor.

    So those who saved their money find that it’s worth less, but no krugman is right, the world is a wonderful place, there i see some flying fairies and pigs too.

  11. Austrian economists like Peter Schiff (and Ron Paul) predicted the housing bubble years in advance. I’m not sure what else they need to do to convince people to stop listening to these know-nothing keynesians. The Republican party needs to realize Austrian Economics is the only camp of economics that makes sense. Maybe then the Republican party can have an actual identity again, since I’m not sure exactly what it is that they stand for.

    1. “Maybe then the Republican party can have an actual identity again, since I’m not sure exactly what it is that they stand for.”

      My sentiments exactly, Ivan. However, I also place blame on those organizations that do promote the Austrian approach for spending far too much time preaching to the choir. Until some well funded organization creates a message that will educate Main Street America, I think we are fighting a losing battle.

  12. Reblogged this on Citizen Tom and commented:
    Since I have not done a post on the Obama economy for awhile, I thought reblogging this Conservatives on Fire post would help fill in the gap. Hopefully you will agree.

    Note that inflation is essentially a math problem that we can solve using the Law of Supply and Demand.

    If the amount of money in circulation decreases relative to the amount of goods and services, prices go down. When money becomes scarce relative to the things we can buy with it, we get more for our dollars.
    If the amount of money in circulation increases relative to the amount of goods and services, prices go up. When money becomes more plentiful relative to the things we can buy with it, we get less for our dollars.

    Sounds simple. So why do we have so much trouble predicting inflation? Well, there are lots of variables.

    The total quantity of goods and services is not static. For example, increases in productivity or relaxed government regulations can quickly alter the supply of various goods and services.
    Just because the government runs a deficit or the Fed prints more money does not mean the amount of money in circulation will increase instantly. For various reasons we sometimes choose to sit on our money. Then that money is not circulating.

    The fact many people are just sitting large quantities of money is currently the biggest restraint on inflation. How does that restrain inflation? Here is a simple example. Suppose you collect coins. So you have the mint send you brand new coins protected in a plastic case. Like as not that money will never ever be circulated. Nobody but you a few friends will see it, and no goods or services will be purchased with it. Because those collectable coins are not in circulation, for all practical purposes, they are not part of the money supply — but, if you lost your job and had to spend them, they could be.

    Because businessmen and consumers are so uncertain about the economy, many people are behaving like coin collectors. Instead of investing or buying goods and services, many people are sitting on their money like coin collectors. That, however, could change. Then, if the amount of money in circulation rapidly increases, inflation will also increase rapidly.

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