How does the Federal Reserve cause Inflation?

[Carson]

Am I correct to say that - if we moved back to the gold standard and population increases faster than new gold is discovered, we would have deflation?

The population would be creating wealth as it grows.

I'm not thinking the trade going on is based solely on gold or silver. Gold and silver are just a convenient medium for exchange.

If a group of people make a ton of steel and another group turns the steel into sewing needles they create real wealth.

If someone doubles the money supply, it isn't creating wealth, it is counterfeiting the money supply and ripping everyone off of the wealth in all of their everything.


If you had an honest system of fiat I would think as the population grew or doubled the number of dollars might double without any inflation or deflation. It would take work. It also might mean rules like a person might create notes on his own property to make trading more convenient.

The problem we have now is people with nothing are firing up the fake money presses whenever the want to get their way. They've collapsed banking to the point it is just a bunch of false front organizations to dish out what they don't even possess. Oops...when I said don't even possess I was thinking in terms of real money. Now that I think about it I wonder how much in our real assets we still posses that haven't' already been turned over to the banks as collateral. It looks like they have Greece. Sometimes I wonder about our National Forest or lumber and minerals and such. We're increasingly being charged to drive on the roads we built.

 

[DamianTV]

Probably only need to watch one of these...









As short as I can make it. The Federal Reserve Bank is a private company and is NOT part of the Government. The Government creates "currency" by borrowing from the Federal Reserve Bank, at INTEREST. It is an oversimplification, but there it is. The Govt borrows $1.00 from the Fed and now owes $1.10 in total Debt. In order to pay the initial interest rate, the Govt must again borrow more currency from the Fed, again, at interest, which increases the currency supply. Inflation is an increase in the currency supply. Result is perpetual debt. First vid does a good job of explaining what the "Debt Ceiling" is. Other smoke and mirror terms are "National Debt". The real National Debt can not be repaid. All National Debt means is that "we are late on payments".

Key Points

You need to know the difference between Money and Currency

You need to know the Debt to Central Banks can NEVER be fully repaid, EVER.

You need to know the function and purpose of a Central Bank.

You need to know the Federal Reserve Bank answers to NO HIGHER AUTHORITY, PERIOD. It can not be audited, its policies and procedures can not be decided.

You need to know why the Revolutionary War occured.

You need to know Inflation is a Hidden Tax on the VALUE of Currency.

You need to know the difference between Fiscal and Monetary Policy. Fiscal destroys currency, Monetary creates currency.

You need to know our very "Money System" is a massive Ponzi Scheme.

You need to know how the existence of Central Banks only benefit those with the "Power to Print".

You need to know that Wars cost such huge volumes of money that War is literally Profitable to those with the "Power to Print".

You need to know that this iteration of the "Debt and Death Paradigm" is coming to an end.

If you arent ready to wake up, then dont. Go back to sleep. For most people, this very harsh reality is too hard for them to deal with. You can ignore this reality and believe this is not the most important thing facing this planet, but you will NOT be able to ignore the consequences of reality when this system comes crashing down, because it will crash on YOUR head. Tyranny needs three Monopolies to control the people, Belief, Money, and Violence. Peoples Belief is faltering to a degree that has never been seen, because of people like Ron Paul and the Forum Members here. Money is Fiat, and EVERY Fiat Currency has destroyed its countries. They will only be left with Violence. And that ability to enact Violence is based on those in the Violence arms of the Govt to Believe they are fighting for "Freedom". It also depends on their ability to PAY their Prison Keepers. Two legs of Tyranny are very very weak. And we can continue to do what we do and WIN this without trying to take on the Violence arm of Tyranny. We are having a much larger impact than most people are aware. This is why you are seeing so many End Game moves being played right now. End of Uncensored Internet. End of Self Ownership. End of Rights, completely. What is really happening is we are watching the End of Tyranny.

 

[angelatc]

If someone doubles the money supply, it isn't creating wealth, it is counterfeiting the money supply and ripping everyone off of the wealth in all of their everything.

Exactly right. Inflation takes the biggest toll on the savers, and the elderly who live off of fixed incomes.

 

[Zippyjuan]

Disagree. Most of the printed money since 2008 has gone directly into the USA treasury bond market and mortgage backed securities. (Home notes)

That money has hit the system. It's how we've funded the government for the last 7 years. Giving out welfare both corporate and personal as well as funding the Great War machine.

In my opinion the reason we've not seen massive inflation yet is that everyone else around the world has been on a quest to print more then we have.

At some point the chicken comes home to roost. We will have jimmy carter inflation at some point here.

Money has to be spent to cause price increases. Supply and demand. More money chasing the same amount of goods which means each good can be exchanged for more dollars. If the supply of money increases at the same rate as the supply (value) of goods and services, the economy can also absorb those dollars without prices increasing due to changes in the money supply.

Example. The economy consists of two apples. Our money supply is two one dollar bills. One apple can be sold for one dollar. Now we get a bigger crop of apples. Four apples were grown this year. And the Fed printed up two more dollars for people to spend. One apple can still be sold for $1 because we still have one dollar available for one apple available (four dollars, four apples). No price inflation. If we increased the money to four dollars and our apple harvest was the same, then we have four dollars trying to buy just two apples so now each apple can cost $2. Price inflation. If the supply of apples increases to four but the money supply did not increase, then a dollar could buy two apples.

The Fed QE has added about $3.5 trillion to their balance sheet by purchasing securities. $2.5 trillion of that is sitting in banks in the form of "excess reserves". http://research.stlouisfed.org/fred2/series/EXCSRESNS Excess reserves is money sitting in bank vaults not being lent out. Before QE, Excess Reserves were close to zero. If that money does get lent out and spent, it could cause prices to go up. How big an impact depends on how quickly that money is released. As our example above shows, if the money is released at the same rate as the economy grows, it should not cause price increases. If it is released (lent out and spent) at a faster rate, then it could cause prices to rise.

Other things can also effect prices of goods and services.

Money can go to other things too. Instead of going to price changes it can also go to wage changes for workers or profit changes for companies. Instead of raising prices, a company could take a cut in profits. Or they could reduce their labor costs (reduce wages they pay).

 

[acptulsa]

Example. The economy consists of two apples. Our money supply is two one dollar bills. One apple can be sold for one dollar. Now we get a bigger crop of apples. Four apples were grown this year. And the Fed printed up two more dollars for people to spend. One apple can still be sold for $1 because we still have one dollar available for one apple available (four dollars, four apples). No price inflation. If we increased the money to four dollars and our apple harvest was the same, then we have four dollars trying to buy just two apples so now each apple can cost $2. Price inflation. If the supply of apples increases to four but the money supply did not increase, then a dollar could buy two apples.

Or an apple could go up to two dollars anyway, or an apple could fall to a penny anyway. Demand is not dependent upon the money supply.

The Fed QE has added about $3.5 trillion to their balance sheet by purchasing securities. $2.5 trillion of that is sitting in banks in the form of "excess reserves". http://research.stlouisfed.org/fred2/series/EXCSRESNS Excess reserves is money sitting in bank vaults not being lent out. Before QE, Excess Reserves were close to zero. If that money does get lent out and spent, it could cause prices to go up. How big an impact depends on how quickly that money is released. As our example above shows, if the money is released at the same rate as the economy grows, it should not cause price increases. If it is released (lent out and spent) at a faster rate, then it could cause prices to rise.

And the trillion you admit has been dumped on a moribund economy...?

 

[Zippyjuan]

Or an apple could go up to two dollars anyway, or an apple could fall to a penny anyway. Demand is not dependent upon the money supply.

Which I also explain.

And the trillion you admit has been dumped on a moribund economy..?

IN 2008 (the start of the crisis and before QE) our GDP was about $14 trillion. Today it is about $17 trillion. The growing economy absorbed it.

 

[acptulsa]

Which I also explain.



IN 2008 (the start of the crisis and before QE) our GDP was about $14 trillion. Today it is about $17 trillion. The growing economy absorbed it.

Obviously not. Even though the economy is moribund and the march of progress is bringing certain (technology, for example) prices down, the majority of prices are up significantly.

And the wonderful thing about using GDP as some kind of benchmark is that devaluing the dollar makes a moribund GDP look x% bigger.

 

[Slutter McGee]

Obviously not. Even though the economy is moribund and the march of progress is bringing certain (technology, for example) prices down, the majority of prices are up significantly.

And the wonderful thing about using GDP as some kind of benchmark is that devaluing the dollar makes a moribund GDP look x% bigger.

The majority of what prices? Price increase % haven't changed at all. We can use CPI, the GDP deflator, or other measures. Most of the money supply increase, which has increased dramatically these last few years is sitting in banks as reserves

The big question is how is the FED going to be able to buy back its reserve liabilities once they start jacking up interest rates. If the banks have enough incentive to flood the market with loans you could have an inflation problem.

Slutter McGee

 

[TheTexan]

Money can go to other things too. Instead of going to price changes it can also go to wage changes for workers or profit changes for companies. Instead of raising prices, a company could take a cut in profits. Or they could reduce their labor costs (reduce wages they pay).

When wal mart increased wages, that meant poor people had slightly more disposable income. So, this would cause the shit that poor people buy to increase in price. Lawn gnomes for example, probably increased a small amount in price due to this additional demand.

 

[Zippyjuan]

The majority of what prices? Price increase % haven't changed at all. We can use CPI, the GDP deflator, or other measures. Most of the money supply increase, which has increased dramatically these last few years is sitting in banks as reserves

The big question is how is the FED going to be able to buy back its reserve liabilities once they start jacking up interest rates. If the banks have enough incentive to flood the market with loans you could have an inflation problem.

Slutter McGee

Actually you sort of answered your question. If they feel the economy is growing too quickly and the bank reserves are being lent out and spent too fast threatening price inflation, raising interest rates is what they would most likely do. Higher interest rates increases the costs of borrowing which lowers demand for loans.

I suspect they will never sell off the assets they have purchased but will allow many of them to eventually mature and be redeemed at that time rather than purchasing replacement securities (as they are now doing- they stopped buying new securities but are rolling over the ones which are expiring).

The question is at what point and how much to raise rates. It isn't a science but a guessing game.

 

[Slutter McGee]

Actually you sort of answered your question. If they feel the economy is growing too quickly and the bank reserves are being lent out and spent too fast threatening price inflation, raising interest rates is what they would most likely do. Higher interest rates increases the costs of borrowing which lowers demand for loans.

I suspect they will never sell off the assets they have purchased but will allow many of them to eventually mature and be redeemed at that time rather than purchasing replacement securities (as they are now doing- they stopped buying new securities but are rolling over the ones which are expiring).

The question is at what point and how much to raise rates. It isn't a science but a guessing game.

But the FED is now paying interest on those reserves. If they don't raise the reserve rate at the same time as the federal funds rate rises that money is going to start being lent out. Sure, they can try and damper overall inflation by raising the federal funds rate even higher through open market operations or raising the discount window substantially, but the market is going to be flooded with those reserves if banks no longer have the incentive to hold them because the reserve rate doesn't rise.

If they raise the reserve rate you can create plenty of other problems. I just don't see anyway out of this for the FED unless they desperately sell securities.

But you are right, this is going to be a gradual thing. I am curious as to how they handle it.

Slutter McGee

 

[Zippyjuan]

The Fed currently pays one quarter of one percent on those excess reserves- practically nothing. You are right- they could raise that too if they want to discourage it from being lent out. How much the Fed has to do will depend on how quickly the funds are making their way into the economy. If they trickle out with the economy growing slowly, they may have to do nothing.

 

[TheTexan]

The Fed currently pays one quarter of one percent on those excess reserves- practically nothing. You are right- they could raise that too if they want to discourage it from being lent out.

Could the Fed afford it, without making the problem worse?


Excess Reserves: 2.6 trillion dollars
Monetary Base: 3.9 trillion dollars
Excess Reserves as % of Monetary Base: 66.7%

 

[Zippyjuan]

The monetary base is really not a terribly useful figure. Yes, it includes excess bank reserves (note how closely the charts follow each other). What is the remaining portion? Cash money. Prior to QE, excess reserves were basically zero so MB was equal to cash in the system. It does measure POTENTIAL money should it eventually get lent out. The base goes down if banks start lending that money out. It goes up if banks stop lending and keep more back. Is that good or bad? Depends on how quickly it goes out and how the economy is doing.

 

[TheTexan]

It does measure POTENTIAL money should it eventually get lent out.

Yes, but thats a shitload of potential, to try to keep under control. The smallest mistake represents a very large increase in inflation, and this margin for error is only getting smaller.

I don't believe it can be done at this point.

 

[Zippyjuan]

You are right. It may be difficult to control. It will depend a lot on the overall economy. Does it grow slowly? Does it suddenly accelerate? Does it slow again?

 

[angelatc]

Obviously not. Even though the economy is moribund and the march of progress is bringing certain (technology, for example) prices down, the majority of prices are up significantly.

And the wonderful thing about using GDP as some kind of benchmark is that devaluing the dollar makes a moribund GDP look x% bigger.

I just happened upon a book written by a guy who was the Secretary of the Treasury under Nixon, Ford and Carter, and he was basically a Ron Paul guy. In his book, he points out that the problem is hidden by the fact that government spending is such a huge piece of the GDP.

The book is called "A Time For Truth," and I'm only about halfway through it. This review seems to express my thoughts:

A must-read for anyone concerned not just about our country's economic future, but about personal freedom as well. Easy to read, trenchant, and incisive. William E. Simon comes across as one of our nation's greatest (and most overlooked) thinkers.

 

[Carson]

Probably only need to watch one of these...









As short as I can make it. The Federal Reserve Bank is a private company and is NOT part of the Government. The Government creates "currency" by borrowing from the Federal Reserve Bank, at INTEREST. It is an oversimplification, but there it is. The Govt borrows $1.00 from the Fed and now owes $1.10 in total Debt. In order to pay the initial interest rate, the Govt must again borrow more currency from the Fed, again, at interest, which increases the currency supply. Inflation is an increase in the currency supply. Result is perpetual debt. First vid does a good job of explaining what the "Debt Ceiling" is. Other smoke and mirror terms are "National Debt". The real National Debt can not be repaid. All National Debt means is that "we are late on payments".

Key Points

You need to know the difference between Money and Currency

You need to know the Debt to Central Banks can NEVER be fully repaid, EVER.

You need to know the function and purpose of a Central Bank.

You need to know the Federal Reserve Bank answers to NO HIGHER AUTHORITY, PERIOD. It can not be audited, its policies and procedures can not be decided.

You need to know why the Revolutionary War occured.

You need to know Inflation is a Hidden Tax on the VALUE of Currency.

You need to know the difference between Fiscal and Monetary Policy. Fiscal destroys currency, Monetary creates currency.

You need to know our very "Money System" is a massive Ponzi Scheme.

You need to know how the existence of Central Banks only benefit those with the "Power to Print".

You need to know that Wars cost such huge volumes of money that War is literally Profitable to those with the "Power to Print".

You need to know that this iteration of the "Debt and Death Paradigm" is coming to an end.

If you arent ready to wake up, then dont. Go back to sleep. For most people, this very harsh reality is too hard for them to deal with. You can ignore this reality and believe this is not the most important thing facing this planet, but you will NOT be able to ignore the consequences of reality when this system comes crashing down, because it will crash on YOUR head. Tyranny needs three Monopolies to control the people, Belief, Money, and Violence. Peoples Belief is faltering to a degree that has never been seen, because of people like Ron Paul and the Forum Members here. Money is Fiat, and EVERY Fiat Currency has destroyed its countries. They will only be left with Violence. And that ability to enact Violence is based on those in the Violence arms of the Govt to Believe they are fighting for "Freedom". It also depends on their ability to PAY their Prison Keepers. Two legs of Tyranny are very very weak. And we can continue to do what we do and WIN this without trying to take on the Violence arm of Tyranny. We are having a much larger impact than most people are aware. This is why you are seeing so many End Game moves being played right now. End of Uncensored Internet. End of Self Ownership. End of Rights, completely. What is really happening is we are watching the End of Tyranny.

That is an awesome post.

I'm saving it to a Word document. It's a keeper.

 

[DamianTV]

We're off topic. Lets address what Inflation is and what Inflation is NOT.

What Inflation is:
- Increase in supply of Currency
- Decrease in the Value of the Currency

What Inflation is NOT:
- Increase in Price of Goods or Services

The point that must be acknowledged is that the value of goods and items does not change. The Value of Currency is variable. The price increase of goods and services is a Symptom but not the actual Cause of Inflation. Since the Value of Currency goes down, then the price of goods and services goes up. Basically it is putting the cart before the horse. They try to say that Price Increases cause Inflation and the exact opposite is true. The purchasing power, or value of the currency went down first, because there is more of it, each individual bit of that currency has less and less value. Many things factor into this, such as supply and demand, but Inflation really is just an Increase in the Supply of Currency. If there were no inflation, then the value of currency would not change and the price of goods and services would also not change according to the value of currency alone.

 

[The Gold Standard]

In order for the Federal Reserve to affect the supply of money and credit, it has to buy something first. From there you follow the money to find your price inflation. When the Fed buys U.S. debt, what does the federal government do with the new money? Pockets some, sends some overseas, blows a lot of it up overseas, some goes to the welfare state here, and lots of corporate welfare which goes right into their bank accounts and into the stock market and real estate. When the Fed buys junk securities from insolvent banks, that all goes into the stock market and real estate.

Not to mention the Fed creates money in order to keep interest rates at zero. That is how it is accomplished. So that means you get nothing by putting your money in a CD, so off to the stock market that money goes. It's clear as day the effect of the Fed's inflation, you just have to follow the money. It's also why the rich get richer while the poor get poorer. The vast majority of that new money goes right to Wall Street, the MIC, drug companies, etc. The poorest get some from the welfare state, but they and everyone pay higher prices for everything, especially the vehicles of storing wealth like stocks and real estate.

So why no hyperinflation here? Because the world still needs our dollars to buy oil, and because their own toilet paper currencies are garbage too. They know we are going to go down with brute force defending the dollar all over the world. Once the rest of the world has had their fill of dollars and refuses them, then we will have nowhere to dump the inflation but right here. Until then, enjoy your "prosperity".