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I think you're sort of trying to have it both ways here. The Fed has been printing money for 12 years in hopes of increasing CPI. But real people, who buy the

I think you're sort of trying to have it both ways here. The Fed has been printing money for 12 years in hopes of increasing CPI. But real people, who buy the stuff in the CPI basket, don't have M2, so no CPI bump. It took a long time for central banks to realize this. And even astute minds like John Paulson got tripped up on this one. Starting in 2009, he bought as much gold as he could because he feared rampant CPI inflation (which never came).

dternyak 6y ago
Yup, this gets it right. As a thought experiment, imagine someone builds a real, functional money printer in their basement and dialed it to print 10% of current M1. Would prices at the grocery suddenly skyrocket? Obviously not. Even though the money printer is running, and the money supply has grown, no one really knows about it. Even if a press release was put out about the increase in M1, there would likely not be CPI inflation (putting aside any concern about the money printer itself). Now, to take the example further, let's say the owner of the money printer started buying up real estate with the cash. Would you see CPI? Still, no. You'd probably see some inflation in the local areas where the real estate was being purchased, if it was done in sufficient volume. Now, to bring the argument to a close, what if you started buying junk bonds and securitized mortgages? Would you see CPI inflation? No. Would you see asset price increases? Yes, probably. It would be hard to correlate the asset price increases to the money printing, which might be the point. Mortgage originators can start climbing the risk ladder now that the money printer is buying up all these securitized mortgages, and companies can also behave in more risky ways and know that they'll get the financing from the money printer. Increased risk can drive an increase in earnings, which will be rewarded with stock appreciation. With the money printer stepping in and providing loose financing, the cost of money goes down. Now, previous money lenders have a harder time getting yield, and may climb the risk ladder as well to find the yield they need. This will also be seen in asset appreciation, across bonds, stocks, real estate, & more.
marvin 6y ago
To get CPI up, why don't they just deposit money straight into ordinary people's bank accounts? I think that would do the trick.
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- marvin 6y ago
  A follow-up, which was less obvious to me than it should have been: Are we sure that central bankers really want CPI inflation, when they choose not to use such an obvious path to it?

dternyak 6y ago

Yup, this gets it right. As a thought experiment, imagine someone builds a real, functional money printer in their basement and dialed it to print 10% of current M1. Would prices at the grocery suddenly skyrocket? Obviously not. Even though the money printer is running, and the money supply has grown, no one really knows about it. Even if a press release was put out about the increase in M1, there would likely not be CPI inflation (putting aside any concern about the money printer itself). Now, to take the example further, let's say the owner of the money printer started buying up real estate with the cash. Would you see CPI? Still, no. You'd probably see some inflation in the local areas where the real estate was being purchased, if it was done in sufficient volume. Now, to bring the argument to a close, what if you started buying junk bonds and securitized mortgages? Would you see CPI inflation? No. Would you see asset price increases? Yes, probably. It would be hard to correlate the asset price increases to the money printing, which might be the point. Mortgage originators can start climbing the risk ladder now that the money printer is buying up all these securitized mortgages, and companies can also behave in more risky ways and know that they'll get the financing from the money printer. Increased risk can drive an increase in earnings, which will be rewarded with stock appreciation. With the money printer stepping in and providing loose financing, the cost of money goes down. Now, previous money lenders have a harder time getting yield, and may climb the risk ladder as well to find the yield they need. This will also be seen in asset appreciation, across bonds, stocks, real estate, & more.

marvin 6y ago

To get CPI up, why don't they just deposit money straight into ordinary people's bank accounts? I think that would do the trick.

deleted 6y ago
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deleted 6y ago
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marvin 6y ago
A follow-up, which was less obvious to me than it should have been: Are we sure that central bankers really want CPI inflation, when they choose not to use such an obvious path to it?