Wednesday, September 26, 2012

Bob Murphy Says Bernanke's Plan is Price Inflation

And he is correct, though it remains to be seen if Bernanke can pull this off in the short-term. Will the new money he prints up enter the system or end up as excess reserves, short-term?

At some point it will likely to hit the system, as Fed president Charles Plosser points out, but the timing is unclear.

To expand on Murphy's point, the price inflation that is likely to come is likely to be much greater than the Bernanke led money manipulators expect. It could get way out of control because of all those funds sitting in excess reserves. As Plosser points out, the Fed will likely raise rate slowly and reluctantly, which will result in a booming money supply and very high price inflation. Here's Plosser:
 I have been a student of monetary theory and policy for over 30 years. One constant is that central banks tend to find it easier to lower interest rates than to raise them. Moreover, identifying turning points is difficult even in the best of times, so timing the change in the direction of policy is always a challenge. But this time, exit will be even more complicated and risky. With such a large balance sheet, our transition from very accommodative policies to less accommodative policies will involve using tools we have not used before, such as the interest rate on reserves, term deposits, and asset sales. Once the recovery takes off, long rates will begin to rise and banks will begin lending the large volume of excess reserves sitting in their accounts at the Fed. This loan growth can be quite rapid, as was true after the banking crisis in the 1930s, and there is some risk that the Fed will need to withdraw accommodation very aggressively in order to contain inflation.
Here's Murphy:

6 comments:

  1. I'm not so sure Bernanke's open ended QE just announced will hold up. A lot of focus is now on it, and a lot of criticism. This criticism is coming from Fed members(Plosser), ex. Fed Heads(Lindsey) and in a recemt WSJ Op-Ed, a gaggle of economists (Schultz, Boskin, Taylor, Meltzer, Cogan)took issue with the unsustainable Fiscal state, but was also aimed at the Fed as 'enabler.'

    True, these are out of power economists, not the present voting Fed Head's that love to manage all aspects of the economy, and print like no tomorrow; but still these people are cautious, they do not lightly go public with criticism unless they recognize how out of whack the Fed is at present.

    As such, I predict the Fed will be forced to backtrack on open-ended QE in late 2012 or 2013. If they do not, kiss the economy, the $U.S., and likely the Fed goodbye.

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  2. "As Plosser points out, the Fed will likely raise rate slowly and reluctantly, which will result in a booming money supply and very high price inflation."
    How will raising interest rates lead to more inflation. Aren't the low interest rates the cause of inflation?

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    1. The inflation would come because they don't raise them fast enough or high enough. Because they refuse to let the market set interest rates based on a stable money supply (i.e. gold).

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    2. It's not the Fed raising interest rates per se that will result in high price inflation; it's the fact that the Fed will most likely raise interest rates slowly. When the Fed sees inflation picking up, they will raise rates to counteract this, but the rates will not be raised high enough . . . this is because the market rates will be even higher because of expectations of even higher inflation in the future. This is what is meant by the colloquial expression "tiger by the tail."

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  3. Won't the Fed "sterilize" excess reserves by raising reserve requirements? Does anyone have any thoughts on this?

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    1. No - raising reserve requirements would be one way to raise interest rates. The interest rates are not set directly by the Fed, but through control of the money printing and reserve requirements.

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