6 ms·

A couple of weeks ago a friend pointed me to a blog entry about the coming inflation since the Fed supposedly printed vast quantities of new money. The blog ent

A couple of weeks ago a friend pointed me to a blog entry about the coming inflation since the Fed supposedly printed vast quantities of new money. The blog entry felt very religious in proving someone defined as "deflationists" wrong, so I didn't think much of it. I am very much interested in open government data so I wondered how much of the financial data is actually available from the Fed in its raw form. It started as me wondering how full of shit this guys is and turned into five to six hours of trying to understand the raw data that is readily available from the Fed online. Their website is surprisingly good. What I saw did not make me happy. The Feds actions resulted in an EXPONENTIAL increase in monetary base of our economy: http://en.wikipedia.org/wiki/Monetary_base http://en.wikipedia.org/wiki/Monetary_base Note that all I did is plot the numbers that the Fed supplies: http://img180.imageshack.us/img180/2792/44768686.png http://img180.imageshack.us/img180/2792/44768686.png It seems that all those "bad mortgages" that the Fed bought were not bought with "debt." The Fed bought them with freshly printed bills. Go on the Fed's website and download the data for yourself, don't take my word for it. Regardless, I dismissed my findings as "I don't actually know what I'm doing" and forgot about it. This article however is absolutely in line with what I saw happening from the raw economic data, so it makes me wonder. We _did_ print exponentially more money than we have ever done before. Look http://img180.imageshack.us/img180/2792/44768686.png http://img180.imageshack.us/img180/2792/44768686.png The Fed literally DOUBLED the amount of money in our monetary base in a matter of months. I can't imagine the Fed being able to take that much money out of circulation in nothing less than years. I also can't image how that could not be a very bad thing. Another thing that I saw is a rather sharp increase in how much banks are keeping in reserves since the Fed now guarantees interest on reserves. http://www.federalreserve.gov/newsevents/press/monetary/20081006a.htm http://www.federalreserve.gov/newsevents/press/monetary/2008... All this money in reserves has nowhere to go but into the economy once banks start spending it. It also pisses me off that our banks were essentially given a lot of money (when you see a doubling of money in the economy, thats a lot) for them to sit on and for us to pay interest on it! I am failing to understand the Feds plan. Can anyone enlighten me or is it really this simple?

fauigerzigerk 17y ago
I think the concern is justified. However, considering Japan during the 90s and the Great Depression makes deflation appear much more dangerous and persistent than inflation because no one knows how to fight it once it's become entrenched. We know how to fight inflation. Interest rates can be raised without limit. They cannot fall without limit. The Fed can sell the bonds they are now buying back into the market and thus reduce money supply. And you need to consider two other facts. First, the monetary base you plotted is just a small fraction of overall money supply (M1, M2, M3). Other parts of the money supply are growing as well but not as fast. Second, money that isn't used has no effect on inflation. The speed of circulation is sharply reduced in recessionary times and that's why the amount of money has to be sharply increased to counteract that potential deflationary spiral. The line you want to plot is the amount of all monies (the Ms) normalized over the speed of circulation. That line is flat to falling, but it's true that there is a potential for a sharp rise down the road. Inflation is very likely in say two years time. It's very difficult, politically, to raise interest rates while unemployment is still high. And inflating debt away is rather convenient for a heavily indebted nation like the US as well.
- likpok 17y ago
  The Fed has made politically difficult decisions in the past. During the 80's, they kept interest rates high, despite the massive unemployment.
  - jhancock 17y ago
    They certainly did not make politically difficult decisions over the last decade, which would have been to cool off the growth. They generally only make these difficult decisions in hard times, not good times.
- BearOfNH 17y ago
  no one knows how to fight [deflation] once it's become entrenched. Personally I agree with this, but remember FED Chairman "Helicopter Ben" Bernanke's oft-repeated quip that the FED has (metaphorically) a printing press and can whip up however many dollars are needed to prevent deflation. So in theory, the US has the right man in the right place for this very problem. I don't see a whole lot of success yet. With all the layoffs and offshoring it's not clear additional dollars are the right approach -- wait, I take that back. It would be a great help if there were more early-stage Googles to employ people to make others more productive. If only there were some way to encourage talented people to start new companies...the US needs a Startup Czar!

fauigerzigerk 17y ago

I think the concern is justified. However, considering Japan during the 90s and the Great Depression makes deflation appear much more dangerous and persistent than inflation because no one knows how to fight it once it's become entrenched. We know how to fight inflation. Interest rates can be raised without limit. They cannot fall without limit. The Fed can sell the bonds they are now buying back into the market and thus reduce money supply. And you need to consider two other facts. First, the monetary base you plotted is just a small fraction of overall money supply (M1, M2, M3). Other parts of the money supply are growing as well but not as fast. Second, money that isn't used has no effect on inflation. The speed of circulation is sharply reduced in recessionary times and that's why the amount of money has to be sharply increased to counteract that potential deflationary spiral. The line you want to plot is the amount of all monies (the Ms) normalized over the speed of circulation. That line is flat to falling, but it's true that there is a potential for a sharp rise down the road. Inflation is very likely in say two years time. It's very difficult, politically, to raise interest rates while unemployment is still high. And inflating debt away is rather convenient for a heavily indebted nation like the US as well.

likpok 17y ago
The Fed has made politically difficult decisions in the past. During the 80's, they kept interest rates high, despite the massive unemployment.
- jhancock 17y ago
  They certainly did not make politically difficult decisions over the last decade, which would have been to cool off the growth. They generally only make these difficult decisions in hard times, not good times.
BearOfNH 17y ago
no one knows how to fight [deflation] once it's become entrenched. Personally I agree with this, but remember FED Chairman "Helicopter Ben" Bernanke's oft-repeated quip that the FED has (metaphorically) a printing press and can whip up however many dollars are needed to prevent deflation. So in theory, the US has the right man in the right place for this very problem. I don't see a whole lot of success yet. With all the layoffs and offshoring it's not clear additional dollars are the right approach -- wait, I take that back. It would be a great help if there were more early-stage Googles to employ people to make others more productive. If only there were some way to encourage talented people to start new companies...the US needs a Startup Czar!