Tuesday, October 22, 2013

Alan Greenspan Warns of Double Digit Price Inflation

Out of office and out of power , the Maestro is speaking some truth again. NYT reports:

Alan Greenspan, the former Federal Reserve chairman, has largely avoided public comment on the Fed’s efforts to stimulate the economy, but he has said enough to make it clear that he is not a fan.
The latest volley, from his new book, “The Map and the Territory,” is a warning that the Fed’s balance sheet expansion — $3.8 trillion and counting — may unleash inflation.
“It is easy to contemplate price acceleration, with today’s Federal Reserve balances unchanged, ranging from 3 percent per annum to double digits over the next 5 to 10 years,” he writes.
It’s been a long time since anyone accurately predicted higher inflation. Instead, inflation has sagged to the lowest levels on record. But here’s why Mr. Greenspan is worried.
Each time the Fed buys a bond, it pays the bank that sells the bond by creating money and putting it into an account that the bank keeps at the Fed. Mr. Greenspan’s inflation prediction is based on his estimation of the consequences as that money flows out into the economy.
The Fed could neutralize this threat by selling the bonds, sucking the money back out of the economy. Fed officials are confident in a second plan: The Fed pays interest on the money that banks keep on deposit, and as the economy improves, the Fed can increase the interest rate to induce banks to keep the money on deposit, eliminating the inflationary pressure.
Mr. Greenspan acknowledges this possibility, but he wonders aloud whether the Fed will have the courage to act. “Unless the economy unexpectedly moves quickly into high gear, any credit tightening will, as usual, run into considerable political opposition. It always has.”

13 comments:

  1. Where would the Fed get the money to pay the higher interest rates to the banks. It seems if rates rise the Fed's balance sheet would turn negative in a hurry.

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    1. The Fed reimbursed 82 billion in interest to the Treasury last year. They have plenty of money coming in Obviously they can print money if cash flow is not sufficient.

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    2. http://en.wikipedia.org/wiki/Ponzi_scheme

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  2. http://www.shadowstats.com/alternate_data/inflation-charts
    real consumer inflation rate is now around 10%

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    1. Can't you tell by looking at the graph on that page that whoever runs that site simply takes the published number and adds a constant to it? He's not recalculating inflation. It's obviously a bogus web site. Use that number to calculate the real interest rate on BBB corporate bonds. 10% inflation makes no economic sense.

      Anyone who believes inflation is currently 10% does not spend money. Gasoline is 10% cheaper today than it was a year ago.

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    2. and it's 350% higher than when I started driving 15 years ago.....thanks Wolfie


      -Gitz

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  3. I have a feeling his book's title is a big inside joke -- it's based on the old phrase "the map is not the territory". Well, considering he's most famous for his monetary exploits, the closest analogue would be "the currency supply is not the money supply"; e.g. the outstanding claims are not the same as the underlying wealth. Which is really the key point needed to understand the current crisis. Extreme amounts of claims are emitted whilst the underlying capital is being destroyed.

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    1. The underlying capital is not being destroyed. Fiat money is not a claim. That's why it's called fiat money.

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  4. The writer spoke the truth when he said "inflation has sagged to the lowest levels on record." He was speaking the truth when he said "it’s been a long time since anyone accurately predicted higher inflation."

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    1. Then he put his foot in his mouth:
      "The Fed could neutralize this threat by selling the bonds, sucking the money back out of the economy. "
      At what price? Who's gonna buy that junk?

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  5. Robert/Chris - Can the Fed increase it's "excess reserves" interest rate without raising the Fed funds rate (or other interest rates)?

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  6. Greenspan should be in prison.

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  7. Greenspan and the whole financial cartel should be in prison.
    The problem is they are all above the law because they own the government.
    Just google Bilderberg Group and Trilateral Commision

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