Gary North is out with a great explanation of the inflationist case, here. I tend to agree with it.
However, I should note that I put myself neither in the inflationist camp or the deflationist camp. The Federal Reserve controls the strings and can either inflate or deflate. I just watch the money supply numbers and adjust accordingly. That said, the temptation is almost always for the Fed to inflate the money supply. Given the debt crisis approaching at the city, state and federal levels, over coming years, there is going to be enormous pressure on the Fed to inflate. Inflation is, thus, very likely.
Bottom line: Expect major monetary inflation down the road, but watch the actual money supply to confirm the expectation, and adjust if necessary.
Please excuse my ignorance but I'm trying to convert M2 seasonally adjusted growth to bls inflation. In 2011, M2 grew 9.45% per the fed, bls says inflation was 3.16% during the 2011 year. Are we to then take the M2 growth and divide by about 3 to get the bls inflation expected?
ReplyDeleteI used:
http://research.stlouisfed.org/fred2/data/M2.txt
http://www.bls.gov/data/inflation_calculator.htm
Thank you.
There is a clear link between expanding money supply and an increasing CPI, but the lag varies significantly. You cannot look at M1 or M2's rate of growth in any given month and link it to the CPI. However, if you adjust M1's YoY rate of change (M1 is a better predictor of inflation in my opinion) to lag by 12 months and 24 months, then compare that to the CPI, you will see a clear link between the expanding M1 and the increasing CPI. It is relentless...
DeleteInflation or deflation? Maybe we should call it "Bernanke's Cat".
ReplyDeleteInflation would be an issue if economic growth ever starts back at a decent pace or if worthy customers for commercial lenders ever came along en masse. However, at the current rates of growth in the US and the EU, contraction and deflation are the driving dynamics.
ReplyDeleteYou mean asset price deflation, but certainly not general price deflation. General prices continue to climb. Actually, the deflation claim is what the Fed would like everyone to believe. They will massively inflate and claim the threat is actually deflation. This provides them cover to inflate.
DeleteBut prices continue to trend higher. Even housing looks set to move higher. Before you know it, 10 years will pass and prices will double if not a lot more. Prices always move higher in a fiat currency world.
Once the election is over, a new "stimulus plan" will be initiated and printing will begin again. That's no more than 6-7 months away. The Fed will just jawbone the markets until then - same for ECB. Deflation will only follow hyperinflation. They will not stop printing.