If we double our monetary base in seven years will it cause inflation?

[Kurt_and_Hunter]

For the decade 1995-2005 inflation in Japan was negative.

Neg-a-tive. Deflation. Prices declining.

2005 -0.2742%
2004 -0.0080%
2003 -0.2486%
2002 -0.8950%
2001 -0.7581%
2000 -0.7128%
1999 -0.3301%
1998 0.6655%
1997 1.7681%
1996 0.1331%
1995 -0.1240%

http://www.rateinflation.com/inflation-rate/japan-historical-inflation-rate.php


During that period the Japanese monetary base more than doubled.




http://krugman.blogs.nytimes.com/2010/07/29/deflation-risks/

The reason Japan was able to more than double its monetary base in a decade while prices continued to decline is that they were in an economic crisis caused by the collapse of a housing bubble with a consequent crisis in banking and central bank interest rates were stuck at 0%.

Just like us.

It is assumed in America that a bigger deficit will cause higher interest rates.
It is assumed in America that printing money will cause inflation.

Neither of those things is true TODAY, in the context of existing real-world circumstances.

These things are assumed because they would be true in typical circumstances.

FIRST RULE OF CRISIS MANAGEMENT: If you need a first rule of crisis management you probably are not in typical circumstances.

We have seen this story before. Quite recently. In the only world economy remotely our size. And yet we are incapable of learning from it because it conflicts with things "everybody knows."

People who should know better--economists, bankers, political leaders--talk about how comparisons to Japan are over-done as if that's supposed to sound wise. "We are not Japan." Yeah, no shit. We read our comic books front to back instead of back to front and tend to cook our fish. But in terms of pertinent questions like deficit, stimulus, inflation and monetary base we are more like 1990s Japan than anybody has been since the 1930s. Nt identical, but more like.

So the readily available fact that Japan more than doubled her monetary base in seven years in very recent memory trying desperately to create inflation and failing should be of interest to the people who run this country. (For the record, the US Federal Reserve has a minimum inflation target of 2% and has been creating a lot of money trying to create even that pitiful level of inflation and has failed.)

This is a comment by the President of the Philadelphia Federal Reserve... not Glen Beck or a psychotic street preacher or a fourth grader. THE PRESIDENT OF THE PHILADELPHIA FEDERAL RESERVE:

“I think the fear of deflation in and of itself is probably overblown, from my perspective,” Charles I. Plosser, president of the Philadelphia Fed, said last week in an interview. He said that inflation expectations were “well anchored” and noted that $1 trillion in bank reserves was sitting at the Fed. “It’s hard to imagine with that much money sitting around, you would have a prolonged period of deflation,” he said.
http://www.nytimes.com/2010/07/30/business/economy/30fed.html?_r=3&hp

We are fucking doomed.

[xchrom]

1. It's weird out in money land.

Ive never seen any thing like this.

[Kurt_and_Hunter]

5. Nobody who wasn't an adult in the 1930s (or Japanese) has

The usual rules simply do not apply.

[sfwriter]

2. I'm coming around to this...

So much money is doing nothing, and their is so much unused capacity.

[Kurt_and_Hunter]

3. PS: In practice, wage pressure is probably as big a driver of CPI as money supply is

The cycle of inflation requires that 1) prices go up, and 2) wages go up in response so people can buy the stuff.

If wages don't go up then people just buy less of the price-inflated goods.

We have kept inflation in check since 1981, IMO, by keeping wages in check. (Since I am not profoundly wealthy I am not a fan of using downward wage-pressure as the primary tool of economic management.)

I do not see how we are going to get any consumer price inflation unless we print a lot of money and give it to consumers.

And some inflation is desperately needed. Every mortgage holder in America entered into a deal to get a house today in exchange for a lot of deflated dollars tomorrow. Inflation expectations are what make interest payments bearable.

(When a bank issues a loan it creates 90% of the the principal as new money, with the approval of the Fed. It does not, however, create the new money necessary to pay the interest on the loan. That has to come from a combination of growth and inflation. With no growth and no inflation it is a sure thing that a lot of loans get defaulted on. The loans were entered into with an expectation of average growth and some inflation.)

And with what is starting to look like chronic unemployment over 8.5% there isn't going to be any wage pressure.

[jtuck004]

4. Great post. I really like the line

"And yet we are incapable of learning from it because it conflicts with things "everybody knows.""

[unblock]

6. the thing is, painful as inflation is, we know how to squash it.

so the rational thing to do would be to do what's needed to save the economy, and *IF* inflation (actual inflation, not just inflation fears) clearly emerges, *THEN* solve it by jacking up interest rates (assuming the economy at that point can handle it.

courting deflation, which we DON'T really know how to solve, to avoid inflation, which we DO know how to solve, is just plain stupid.

[Kurt_and_Hunter]

7. +1

[Kurt_and_Hunter]

8. PS: re painfulness

People in fixed incomes with COLAs would not suffer from some inflation versus what they suffer today having a decade of almost no nominal increases.

Anyone who owes money (mortgage, credit cards, etc.) would benefit from some reasonable inflation. (We are supposed to be repaying loans with inflation-devalued dollars.)

And inflationary periods are likelier, historically, to coincide with real wage growth.

If we had ten straight years of 5% inflation it would fix a lot of our problems. Our outstanding national debt would be cut 40% (In 2010 dollars) The cost of paying off a mortgage would decrease 40% also. Foreclosures would drop.

That would help home-owners a lot but hurt the people holding the mortgage paper. (Banks, investors) Which of those classes has more political influence?

Nobody wants 20% inflation, but the idea that 5% is a bad thing is a line promulgated by the super-rich to dupe the ordinary persons.

It is idle capital that is most eroded by inflation. The last 30 years have enriched the super rich by achieving low inflation via low wages. (To people engaged in the system inflation isn't so bad. Nobody wants Wiemar Republic inflation, but I have always been struck that the famous picture of the working guy with a wheelbarrow of Marks is presented as such a bad thing. Where did some average slob get a wheelbarrow full of money? He was paid it. The story is always, "a sandwich cost a billion marks!" rather than "Laying bricks paid 15 billion marks a day!" If a sandwich cost a billion dollars than everyone would skip the fries one day and pay off their mortgage 100%. That would demolish banks but be kind of cool for home-owners...)

To pure dead-beat coupon-clipping rich bastards with a billion dollars in bonds paying 4.5%, 5% inflation would be ruinous.

[Taitertots]

9. It will be our lost decade

With the government's absolute refusal to take any steps that would make our situation any better, we are certainly doomed.

From what I recall their response wasn't to continue multiple unjustified wars of aggression, give record low tax rates to the ultra rich, or soak the poor on unemployment and other social safety nets. We may well be entering a lost generation if we can't solve these problems.

[scheming daemons]

10. Two places we're seeing very EXTREME inflation:

College costs

Health Care costs



Other than that, just about everything is either flat or deflationary.


It would be nice if everything else was inflating and college/health care costs were deflating.