Tag Archives: Inflation

Rapid Money Supply Growth Does Not Cause Inflation

Neither do rapid growth in government debt, declining interest rates, or rapid Increases in a central bank’s balance sheet
By Richard Vague – Monetarist theory, which came to dominate economic thinking in the 1980s and the decades that followed, holds that rapid money supply growth is the cause of inflation. The theory, however, fails an actual test of the available evidence. In our review of 47 countries, generally from 1960 forward, we found that more often than not high inflation does not follow rapid money supply growth, and in contrast to this, high inflation has occurred frequently when it has not been preceded by rapid money supply growth.

The purpose of this paper is to present these findings and solicit feedback on our data, methods, and conclusions.

To analyze the issue, we developed a database of 47 countries that together constitute 91 percent of global GDP and looked at each episode of rapid money supply growth to see if it was followed by high inflation. In the majority of cases, it was not. In fact, the opposite was true—a large percentage of the cases of high inflation were not preceded by high money supply growth. These 47 countries all rank within the top 70 largest economies as measured by GDP and include each of the top 20 countries. If a country was not included, it was because we could not get a complete enough set of historical data on that country.

There are several reasons to want to better understand the causes of inflation. Currently, central banks in Japan, Europe and elsewhere are trying to engender a moderately higher level of inflation in order to stave off the drift toward deflation and under the belief that it will add to job and economic growth. Also, both public and private debt have reached such high levels in ratio to GDP that some policymakers are beginning to reflect on potential paths to deleveraging, and inflation is one such path. Lastly, a number of countries are trying to moderate levels of inflation that are deemed too high. For these countries, too, a deeper understanding of the mechanisms of inflation is important. more>

Analyst Predicts Another Recession in 2014, Eventual Failure of the Dollar


Currency Wars, Author: James Rickards.

By Joshua Shnayer – For naysayers who claim that there is little or no inflation, Rickards reminds us that there is a constant tug-of-war between nominal inflation and nominal deflation, and so 1 percent inflation might be the combination of 10 percent inflation and 9 percent deflation.

He would have us understand monetary policy as a relation between the money supply and velocity. Unfortunately, the U.S. money supply has increased 400 percent since 2008.

Sometimes deflation is a solution, but Rickards insists that deflation is the government’s worst enemy: During a deflationary period, people find that their purchasing power goes up without a corresponding increase in income, thus leaving less money for the IRS to confiscate€”a tax-and-spend politico’s worst nightmare! more> http://tinyurl.com/ljqymvx

Fed’s Rosengren gives textbook argument for more easing

By Svea Herbst-Bayliss – In a textbook argument that appeared to push back at some of his more hawkish peers, Boston Fed President Eric Rosengren brushed aside concerns over inflation and made it clear that he will support the central bank’s efforts to relieve U.S. joblessness, which was 7.8 percent last month.

“Continued monetary accommodation is absolutely appropriate and indeed needed as long as we are projected to miss on both elements of the Fed‘s dual mandate, inflation and employment,” he said in prepared remarks to the Greater Providence Chamber of Commerce. more> http://tinyurl.com/cxv3wlg

Fed hawks worry about threat of inflation

By Ann Saphir and Alister Bull – In remarks that stamped her as a hawk on the Fed’s policy-setting committee, Kansas City Federal Reserve President Esther George warned that the Fed’s near-zero interest-rate policy – aimed at boosting the economy – could spark inflation.

“A prolonged period of zero interest rates may substantially increase the risks of future financial imbalances and hamper attainment of the 2 percent inflation goal in the future,” she said in her most extensive remarks in a year on policy.

St. Louis Fed President James Bullard, who votes as well this year on U.S. monetary policy, also warned about the potential for inflation, although he noted that inflation was so far running under the Fed’s 2 percent goal. more> http://tinyurl.com/bx3k9y7

PIMCO’s Gross warns investors of looming inflation

By Sam Forgione – Bill Gross, founder and co-chief investment officer of bond giant PIMCO, wrote in his first letter to investors this year that money printing by central banks will lead to a destructive bout of inflation.

“The future price tag of printing six trillion dollars’ worth of checks comes in the form of inflation and devaluation of currencies either relative to each other, or to commodities in less limitless supply such as oil or gold,” Gross wrote.

Gross, whose Pacific Investment Management Co. had $1.92 trillion in assets as of September 30, 2012. more> http://tinyurl.com/bcf5j7e

The real winner: Inflation

By Matthew Stevenson – Inflation won because it is the panacea for all that ails the body politic: a short-term cure-all that promises economic growth, the possibility of paying off runaway national and international debts, new-found prosperity for the middle classes and liquidity for the impoverished, who otherwise would be voting in the streets with rocks and burning tires.

The magic of inflation, before it turns everything to dust, is that it papers over a number of intractable financial problems. The United States is now able to run monumental trade and budget deficits, fight multiple foreign wars, vote tax cuts, extend unfunded pension and healthcare benefits to citizens over age 65 and spend money with Medici-like munificence on myriad federal programs by printing money or borrowing in national and international capital markets. more> http://tinyurl.com/a4l5tpf

Watch Bernanke’s ‘Little’ Inflation Capsize U.S.

By Amity Shlaes – A little is all right. That’s the message Federal Reserve Chairman Ben S. Bernanke has been giving out recently when asked about the evidence of inflation in the U.S. recovery.

Sometimes Bernanke doesn’t even go that far. He simply says he doesn’t see inflation. The Fed chairman recently described the prospects for price increases across the board as “subdued.”

“Sudden” is more like it. The thing about inflation is that it comes out of nowhere and hits you. Monetary policy is like sailing. You’re gliding along, passing the peninsula, and you come about. Nothing. Then the wind fills the sail so fast it knocks you into the sea. Right now, the U.S. is a sailboat that has just made open water, and has already come about. That wind is coming. The sailor just doesn’t know it. more>