Why Inflation Isn’t the Danger

[groovedaddy]

SOME people with hypersensitive sniffers say the whiff of future inflation is in the air. What’s that, you say? Aren’t we experiencing deflation right now? The answer is yes. But, apparently, for those who are sufficiently hawkish, the recent activities of the Federal Reserve conjure up visions of inflation.

The central bank is holding the Fed funds rate at nearly zero and has created a mountain of bank reserves to fight the financial crisis. Yes, these moves are unusual, but these are unusual times. Concluding that the Fed is leading us into inflation assumes a degree of incompetence that I simply don’t buy. Let me explain.

First, the clear and present danger, both now and for the next year or two, is not inflation but deflation. Using the 12-month change in the Consumer Price Index as the measure, inflation has now been negative for three consecutive months.

It’s true that falling oil prices, now behind us, were the main reason for the deflation. Core C.P.I. inflation, which excludes food and energy prices, has been solidly in the range of 1.7 percent to 1.9 percent for six consecutive months. But history teaches us that weak economies drag down inflation — and ours will be weak for some time. Core inflation near zero, or even negative, is a live possibility for 2010 or 2011.

Ben S. Bernanke, the Fed chairman, is a keen student of the 1930s, and he and his colleagues have been working overtime to dodge the deflation bullet. To this end, they cut the Fed funds rate to virtually zero last December and have since relied on a variety of extraordinary policies known as quantitative easing to restore the flow of credit.

http://www.nytimes.com/2009/06/21/business/economy/21view.html?th&emc=th

[On the Road]

1. That is True, and the Fed Has Been on the Right Side of Things

Having said that, recoveries are often stronger than predicted, and things can turn on a dime. It isn't the most pressing issue right now, but in a year or two inflation may come roaring back because of the massive monetary, commodities, and fiscal stimuli. It will be tricky for the Fed to keep from getting whipsawed by fighting last quarter or last year's problem.

[MercutioATC]

2. These are the same talking heads who said the economy was fine, aren't they?

...and then that there would be a mild correction.

...and then that there would be a v-shaped recovery.

...and now they're saying that we've turned the corner and the economy will slowly recover.


Deflation? Absolutely...but that's just the next rung on the ladder. We will have inflation and it will be bad (not Zimbabwe-bad, but 3-5 years of 20%+ annual inflation...and that's assuming everything else goes perfectly).


I believe we've crossed the point of no return. The moves we make now will determine how mad it gets and for how long, but it IS going to get bad.

[truedelphi]

3. Now now now Mercutio, no point in bringing common sense into the discussion

After all, do you not remember all the dozens and dozens of times that a nation over-increased its money supply, and everything turned out okay-dokey.

Like Germany in 1923, like Mexico in the mid-1990's, like ...

Don't worry be happy!

[MercutioATC]

5. It may be worse than that.

Not specifically the inflation, but I think we're close to a "perfect storm" of economic, political, and cultural/behavioral conditions.


At least we've got ringside seats...

[ixion]

11. and don't forget these classics:

"we've had a 'jobless' recovery...woohoo!"

and...

"the real estate crash will be a 'soft' crash"

and on and on.

Why these people are still employed is beyond me. The have zero credibility, IMO.

[Odin2005]

4. The Libertarians are always screaming about inflation, it;s their MO

Their Austrian School ideology has no grounding in reality.

[girl gone mad]

6. The biggest libertarian I know is in the deflationary camp.

Life just isn't that black and white.

I also don't see inflation as a big risk right now.

[truedelphi]

7. And so what school of economic idealogy does meet with

Your approval?

One in which (for some amazing reason) the same people that caused a problem are now in positions to "reform" the system? All the while making sure that their buddies at AIG and Goldman Sachs are taken care of, first and foremost?

I call it the "Goldman Sachs/Wall Street-revolving-door School of Economics."

[notesdev]

9. What exactly is the problem?

I agree with you that GS & friends have been looting and pillaging and that all the proposed 'reforms' help them to do so even more than they can now.

But what does that have to do with inflation vs. deflation?

[truedelphi]

12. Notesdev - I for one see nothing tremendously wrong with the

Austrian School of Economics. If the people who are "Old School" and who mention their belief in the coming hyper inflation are right, then more people will have to give up on the Univ. of Chicago economic policies.

To me the critical question to be asking is this one - has there been a historical period in the history of any country at any time when huge amounts of money were pumped into the nation's economy, and massive inflation did not occur?

[notesdev]

13. Yes

That occurred in the US during the Great Depression. We are basically going through a replay, since everyone in charge appears to be determined to repeat history. Credit bubble, asset bubble, deflationary collapse, massive interventions that didn't solve the problem, unsound banking practices, and so on and so forth. If you read the details of the GD you will be shocked at just how familiar the conditions are.

[truedelphi]

15. My reply did n't go where I thought it would -

Scroll down (inside this topic) or hit thsi URL:

http://tinyurl.com/nzdl83

[FlyingTiger]

10. Seems like a much higher percentage of Austrians saw this coming. n/t

[galileoreloaded]

8. Deflation exist until it dosen't. Then, well you know. n/t

[truedelphi]

14. Did read the article - and thus object to what I see as mis-info

Which is what I have come to expect of the New York TImes.

Quibble especially with these paragraphs -
In normal times, banks don’t want excess reserves, which yield them no profit. So they quickly lend out any idle funds they receive. Under such conditions, Fed expansions of bank reserves lead to expansions of credit and the money supply and, if there is too much of that, to higher inflation.

In abnormal times like these, however, providing frightened banks with the reserves they demand will fuel neither money nor credit growth — and is therefore not inflationary.

It is not that these statements are in fact false - its is simply that I am not sure that what the banks are doing is that. I woul ddescribe the banks' lack of lending out differently.

RATHER - here is what I perceive -
NYT somehow avoids mentioning what Issa and Kucinich constantly bring to the topic - the monies that the banks are not lending out will help them do all the commodity buys their little hearts desire. Such as purchasing the parking meter franchise in your home town.

Or the water utility in my home town.

We are seeing the Enronization of our nation - and worse than Enron - it is being done with our grandkids' financial circumstances. (After all, who is going to eat the "rewards" of the eleven trillion bucks spend on propping up this faux economy - if not the kids and grandkids.) Which pretty much look like they will be nil - unless people get out in the streets eventually.

SIDEBAR - In Bolivia after the public utilities supplying water were sold off - the people eventually took to the streets and though some were killed, Bechtel went packing - with water utilities being restored to the Public.