The economy is cratering, so the Fed is printing money. When the Fed prints money, this eventually produces inflation (more dollars, same amount of goods).
Ben Bernanke assured us yesterday that, this time, the Fed's money-printing won't eventually lead to inflation because the moment the economy begins to recover, the Fed will stop printing money and start burning it. Specifically, the Fed will start selling assets instead of buying them and thus shrink the money supply.
Unfortunately, Ben is unlikely to keep this promise.
Why?
Several reasons:
• First, it will be hard to confidently assert that the economy in full recovery. Remember, in 2007, Ben (and most other people) thought the economy was in great shape as far as the eye could see. He and most other observers missed that disastrous turning point. So why do we think he'll correctly spot the next one? Especially because, if he blows it by jacking up rates too early, he'll kill the recovery.
• Second, there will be intense political pressure to MAKE SURE that the economy is in rip-roaring health before hammering consumers and businesses by raising interest rates. Everyone loves low interest rates. And they'll only stop screaming about your taking them away when they're fat and happy (which will be long after inflation really gets going).
• Third, the US government desperately needs low interest rates to fund its soon-to-be-monstrous debt load, so there will be another source of pressure on Ben to keep rates low. When we finish with all this stimulus, we're going to owe a boatload of money. We're really going to allow our Fed chief to send interest rates to the moon and jack up our refinancing costs?
• Fourth, many of the assets that Bernanke has been buying to print money won't be easy to sell. This time around, the Fed isn't just buying easy-to-sell Treasuries. It's buying trash mortgage assets, et al. To reduce the money supply, it will need to sell them to someone. But who?
In the latest issue of the Institutional Risk Analyst, Chris Whalen hammers this last point home. Chris thinks we're now officially addicted to low interest rates and that Bernanke will be both unwilling and unable to raise them significantly when the time comes. And the failure to raise, them, of course, will lead to hyper-inflation.
The better answer? Stop denying reality and force the country to take its losses. Restructure existing debts, instead of encouraging people to borrow more. That, after all, is what got us into this mess in the first place.
See Also: How Bear Markets End
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From a strictly mechanical perspective, we can't have inflation right now - the banks need to sort out the damage from the biggest bubble in modern history bursting, and we're not letting the bankrupt big institutions go belly up. Point being: there's no way to get the money to the people who will spend it.
However, what will ultimately determine if the US dollar blows out Weimar-stylee is human behavior. If the people holding dollars 'round the world decide to dump them, and it would not necessarily be irrational for them to do so, well... hyperinflationary blowout it is. How I'd picture it going down: foreigners begin to dump dollars. Fed tightens initially, causing even worse deflation for a brief time, but intense political and business pressures force them to ease once again, and an unstoppable run ensues.
Rather, the velocity of money plunged, and the money multiplier dropped below 1:1, and the fed printed no money at all, but lent money, and inflation has a relationship both to new money and to the velocity of money, and any analyst who does not know this, or fails to inform their readers, really, is part of the problem, not the solution.
Since your precepts are so very wrong, Occam's razor pretty much sinks your entire argument.
Hyperinflation indeed. Once we stop worrying about deflation, when we again get to worry about inflation, we should all just sigh a big sigh of relief.
Plus all that extra money is getting leveraged over and over again.
The classic definition of inflation is simply an increase in the supply of money. This leads to PRICE INFLATION whenever that increase in money supply is not matched by an increase in the number of goods and services available.
One has only to look at recent unemployment numbers to see that the supply of goods and services is currently DECREASING.
Couple an increase in money supply to a decrease in supply and you get Price Inflation. This is currently being offset by a precipitous decrease in demand. That won't last, because supply will eventually decrease until it comes into equilibrium with demand.
When that happens, Price Inflation is going to catch up with Money Supply Inflation.
The REAL PROBLEM is the United States already has an accelerating redistribution of wealth ... it's being sucked out of the middle and working classes to be redistributed to Goldman Sachs and all the other Wall Street Thieves.
Before the end of the year, the only "change you can believe in" will be "spare change".
Stock up on pencils, apples (the eating kind) and strike anywhere kitchen matches. They're the traditional income sources from the last time we let a bunch of lying bankers take us for this kind of ride.
Copper is a really "great" investment right now, especially if your aim is to lose money:
http://ewweb.com/current_copper_prices/
Copper dropped by over a factor of three in the past twelve months and it's still a factor of two below its peak. The US dollar is, by far, the better investment.
Hyper-inflation WILL occur IF any of the bailout money plus the 1 trillion the Fed is printing touches ground zero. Our dollar will sink like a stone
The Argentina banks enouraged the homeowners to get US dollar based mortgages. This meant after their peso dropped to 1/3rd value, the monthly payments effectively tripled. This is similar to the US bank system. Geithner/Bernak e recently bought $100 billion of foreign currencies. Then they lent the foreign currencies to the big insolvent banks who provided toxic assets as collateral. Geithner is preparing the banks for a large drop in the value of the dollar. The banks will make many billions from the preplanned devaluation but the government & citizens will be left to twist in the wind.
We know who Geithner works for and it is not us.