What would it take for us to rapid price increases?

[Madison320]

I heard someone the other day (Jim Rogers?) saying that the reason we have seen relatively low price inflation despite all the QE'ing is because of the way that the money is being added to the economy: from the top down. Consequently it is taking a while to filter down to us mundanes.

That makes sense to me.

 

[cbc58]

Let me reask the question, "What good is QE (or any money) if you can't eventually spend it?

It is being spent and lent... which is why the housing market and general economy hasn't collapsed yet... and why things you actually need have gone up in price via speculation. The "reserves" are just numbers on a computer - journal entries. smoke and mirrors. ponzi of monumental proportions. The major inflation effect hasn't kicked in because it's battling deflation.

 

[Seraphim]

CBC's post #13 is correct, but I add;

QE allows their toxic assets to be taken off their balance sheet. It's balance sheet reperation for banks, balance sheet destruction for taxpayers.

What's the point of QE if the recipient of the QE can never spend it?

 

[Madison320]

It is being spent and lent... which is why the housing market and general economy hasn't collapsed yet... and why things you actually need have gone up in price via speculation. The "reserves" are just numbers on a computer - journal entries. smoke and mirrors. ponzi of monumental proportions. The major inflation effect hasn't kicked in because it's battling deflation.

My "theory" is that QE is the "true" inflation. I believe inflating the monetary base is permanent, while deflationary forces like recession and reductions in lending are temporary. In other words our inflation is permanent and our deflation is temporary. So in the end inflation will win.

 

[bbjaylive]

Let me reask the question, "What good is QE (or any money) if you can't eventually spend it?

It isn't being spent. QE is having no effect on the economy.

 

[cbc58]

My "theory" is that QE is the "true" inflation. I believe inflating the monetary base is permanent, while deflationary forces like recession and reductions in lending are temporary. In other words our inflation is permanent and our deflation is temporary. So in the end inflation will win.

Unless you adhere to the concept that there are 3 types of money - commodity money, bank money and govt. money. Some here have argued that the govt. can create and destroy as much govt. money as it wants without causing inflation. If you believe that then I have a bridge for sale.

I do think it is possible to reduce the monetary base - in fact it's inevitable with devaluation.

 

[seraphson]

BTW, QE is irrelevant to price increases, since QE is just accumulating as bank reserves which don't enter the economy for the simple fact that banks don't lend reserves.

Ron Paul seems to disagree.

 

[Danan]

M*V=P*Q

If the Fed creates bank reserves and the banks store them at the Fed and don't loan them out (which evidentely is the case) it's no wonder it doesn't affect the general price level.

If the government decided tomorrow that it would replace all $-bills, as well as deposits, loans and contracts denominated in US-$ with the new "Micro-$" (which is essentially the same as the previous face value but times 1000) all nominal prices would go up 1000-fold the next day too. That's absolutely clear to anyone and empirically that's also what happened to prices in Europe after the introduction of the Euro.

That's not what the Fed is doing right now, though. The Fed is simply giving reserves to comercial banks who store it at the Fed. Of course that doesn't affect the general price level directly. Indirectly the increased liquidity of all banks restores their confidence in each other and protects them from failing and going bankrupt. Banks going bankrupt would have deflationary effects. So in a sense the Fed prevents massive deflation.

But we will only see massive inflation if the money gets lent out to private businesses and/or consumers. Currently that's not happening because a) banks changed their lending standards and b) businesses (and consumers) are more risk averse and/or don't have any confidence in the future and don't believe that investments could pay off.

The Fed and the government distorted the economy over decades. And they prevent the reallocation of resources (or recession) from happening. That creates an environment in which nobody wants to invest in the future, even though not many business men even know exactly why things do not look very good. I don't believe we will see massive inflation in the upcomming years.

 

[The Free Hornet]

Here's my question: What would it take to have rapid price increases (in $) here in the US?

Disruption in the supply of goods.

Let's say we have a big-ass drought or an oil shortage. We're faced with craploads of ethanol corn which is not as good for food and the government insists on and subsidizes its production.

Middle East crisis leads to oil spiking to $200. In a matter of weeks, that price is reflected throughout the economy.

Compliance with Romneycare causes prices to increase. It also leads to unemployment and fewer people having to pay even more for Romneycare. The non-subsidized (cash) price goes up. Meanwhile, a few directives are issued and hospitals are forbidden from cutting cash deals. The only affordable route for any healthcare becomes through the Romneycare/HMO/"insurance" plans.

A black market for necessities (food, shelther, clothing) arises. Maybe this market accepts bitcoin and silver in preference to cash.

 

[Madison320]

I do think it is possible to reduce the monetary base - in fact it's inevitable with devaluation.

Can you explain that for me?

The only way I see the fed shrinking the monetary base is by selling their assets. The problem is that their assets won't be worth anywhere near the amount they paid for them when they sell. So if they try to sell all of their 3 trillion in assets my guess is they might only be able to sell those assets for half that. The other problem is that as soon as the fed tries to sell it's assets, interest rates will skyrocket and the banks will fail and we'll default on our debt. So they won't do it.

The ultimate proof as far as I'm concerned is to look at the history of all fiat currencies. The failure rate is basically 100%. I don't see why the US is somehow different. I think we're overthinking this. Printing money to finance government is the path of least resistance. And printing money leads to rising prices.

 

[Seraphim]

NO effect is incredibly inaccurate. It is having PROFOUND effects - just not (yet?) in most consumer prices, specifically non-essentials (which make up a lot of spending for Western citizens).

QE is systematically keeping rates down by removing toxic assets off the balance sheets of banks and injecting them with new cash. From there those banks are depositing the cash at the Fed to generate SOME return OR purchasing UST. The latter is one of the actions guiding UST yields lower.

Instead of having value circulated amongst the productive, it is being stolen from the taxpayer and foisted onto the balance sheet of TBTF banks where they simply hoard the illgotten gains into areas that serve their political purpose (such as UST - if the USG can borrow cheaply, it has more leverage for further bailouts and corporate welfare).

It isn't being spent. QE is having no effect on the economy.

 

[Madison320]

That's not what the Fed is doing right now, though. The Fed is simply giving reserves to comercial banks who store it at the Fed. Of course that doesn't affect the general price level directly. Indirectly the increased liquidity of all banks restores their confidence in each other and protects them from failing and going bankrupt. Banks going bankrupt would have deflationary effects. So in a sense the Fed prevents massive deflation.

What happens when interest rates rise? The banks will lose money and they'll have to use those reserves to pay their bills.

Like I said before I think most everyone is overthinking this. Printing money leads to rising prices. Look at the history of fiat currency. I doubt if this time is any different.

 

[Danan]

What happens when interest rates rise? The banks will lose money and they'll have to use those reserves to pay their bills.

Like I said before I think most everyone is overthinking this. Printing money leads to rising prices. Look at the history of fiat currency. I doubt if this time is any different.

When interest rates rise many debtors will default on their debt. Considering that the Fed owns a huge amount of mortgage backed securities and government bonds I doubt they will allow that to happen any time soon. They control the interest rate, why would they let it rise?

The only good reason to increase interest rates would be if inflation kicks in, in order to bring it down again. I doubt that this is going to happen, though. I believe a Japan-style big stagnation for years to come is more likely. Until fiscal issues like entitlements in a more and more weakened economy seal the deal eventually.

Anyway, rising interest rates are generally deflationary, not inflationary. And they are an effect, not a cause. Interest rates cannot rise on their own without changes in supply or demand. They are a price.

 

[MelissaWV]

What would it take for us to rapid price increases?

Probably another verb or something.

 

[oyarde]

Lack of wheelbarrows will keep prices down.

Ahh Danno , I not only have a wheelbarrow, I have two new spare tires for it . "Be Prepared "

 

[oyarde]

Disruption in the supply of goods.

Let's say we have a big-ass drought or an oil shortage. We're faced with craploads of ethanol corn which is not as good for food and the government insists on and subsidizes its production.

Middle East crisis leads to oil spiking to $200. In a matter of weeks, that price is reflected throughout the economy.

Compliance with Romneycare causes prices to increase. It also leads to unemployment and fewer people having to pay even more for Romneycare. The non-subsidized (cash) price goes up. Meanwhile, a few directives are issued and hospitals are forbidden from cutting cash deals. The only affordable route for any healthcare becomes through the Romneycare/HMO/"insurance" plans.

A black market for necessities (food, shelther, clothing) arises. Maybe this market accepts bitcoin and silver in preference to cash.

Yeah, I accept silver instead of cash , now.

 

[oyarde]

What would it take for rapid price increases ? One more year of drought.That , in itself would probably do it , or , big middle eastern war ( oil prices) , which in turn would drive up food prices and take away all discretionary income from many Americans, downward spiral for an already , permanently stagnated economy .Etc

 

[Madison320]

The only good reason to increase interest rates would be if inflation kicks in, in order to bring it down again.

Don't we need higher interest rates to encourage savings, to enable investment?

I believe a Japan-style big stagnation for years to come is more likely. Until fiscal issues like entitlements in a more and more weakened economy seal the deal eventually.

That's possible but although Japan has a lot of debt and low interest rates, they have not done QE like we have. They've been increasing their monetary base by around 5% a year, we've increased ours by 400% in the last 4 years! Now that Japan has announced an increase of 100% of the monetary base (still nothing compared to us) their prices are starting to rise rapidly.

 

[Zippyjuan]

Don't we need higher interest rates to encourage savings, to enable investment?



That's possible but although Japan has a lot of debt and low interest rates, they have not done QE like we have. They've been increasing their monetary base by around 5% a year, we've increased ours by 400% in the last 4 years! Now that Japan has announced an increase of 100% of the monetary base (still nothing compared to us) their prices are starting to rise rapidly.

If interest rates are too high, it discourages investment because the interest rates are the cost of borrowing. They do encourage savings. Low interest rates encourage borrowing but discouage savings. If rates are high, a company will need to be pretty certain of getting a high return before they are willing to make any investments- since it cost more to borrow. If rates are low, they can take on riskier projects with lower potential returns because the costs of borrowing to finance them are lower.

The problem today is not a lack of funds to borrow for investement (savings to tap into and borrow from)- encouraging more savings will not increase investment today. Banks have vast sums of money available but aren't being lent or borrowed. They have an unprecidented $2.6 trillion dollars in excess reserves stashed at the Federal Reserve- and that does not count excess reserves they have in their own accounts and banks. Business is not investing becasuse they aren't seeing the economic growth yet to justify putting money into increasing their business.

The near zero interest rates we have today is not encouraging a significant increase in investment. Raising interest rates won't help either.

The monetary base is not really a measure of money. It indicates potential money. Monetary base is the sum of bank reserves at the Federal Reserve (that $1.6 trillion plus their required reserves) plus all the cash printed and in banks and circulation. If the banks reduce their excess reserves, the monetary base goes down. But that means that money getting borrowed and spent is going up finally and that increase in money chasing after goods and services could mean higher price inflation. It is not the rising monetary base which could cause price inflation- but its decline.

 

[Seraphim]

In this environment, raising rates WOULD lead to higher investment.

The first step to investment is saving (producing more then you consume). These low rates are encouraging debt which is the opposite.

If interest rates are too high, it discourages investment because the interest rates are the cost of borrowing. They do encourage savings. Low interest rates encourage borrowing but discouage savings. If rates are high, a company will need to be pretty certain of getting a high return before they are willing to make any investments- since it cost more to borrow. If rates are low, they can take on riskier projects with lower potential returns because the costs of borrowing to finance them are lower.

The problem today is not a lack of funds to borrow for investement (savings to tap into and borrow from)- encouraging more savings will not increase investment today. Banks have vast sums of money available but aren't being lent or borrowed. They have an unprecidented $2.6 trillion dollars in excess reserves stashed at the Federal Reserve- and that does not count excess reserves they have in their own accounts and banks. Business is not investing becasuse they aren't seeing the economic growth yet to justify putting money into increasing their business.

The near zero interest rates we have today is not encouraging a significant increase in investment. Raising interest rates won't help either.

The monetary base is not really a measure of money. It indicates potential money. Monetary base is the sum of bank reserves at the Federal Reserve (that $1.6 trillion plus their required reserves) plus all the cash printed and in banks and circulation. If the banks reduce their excess reserves, the monetary base goes down. But that means that money getting borrowed and spent is going up finally and that increase in money chasing after goods and services could mean higher price inflation. It is not the rising monetary base which could cause price inflation- but its decline.