Inflation

[Kurt_and_Hunter]

We need inflation. Unless we magically get a congress that wants to give 2 trillion dollars directly to poor people in cash, inflation remains the ONLY way to repair our economy.

The number one reason our current economic crisis is so deadly is that going into it we already had very low inflation. Our “normal” inflation level had become dangerously low… so low that if we were hit with a bad downturn the Fed would have no power to stimulate the economy.

The Fed stimulates the economy primarily by making money cheaper—reducing interest rates. It usually works really well. But in this case, when the demand-side of the economy collapsed the Fed couldn’t do much of anything. They cut the Fed interest rate to (essentially) zero, but doing so provided very little stimulus.

The Fed needed to cut interest rates about 8 points to counter the demand-shock. But since rates were only 2-3% to begin with the Fed could only cut 1/3 of what was needed.

The Fed funds rate should be around –5% but that’s impossible.

What does this mean? That interest rates throughout the economy are Much Too High. The people with good enough credit to borrow are not borrowing because borrowing is a bad deal. We have probably never seen interest rates this high in real terms!

But aren’t interest rates at record lows? Yes they are… nominally. A mortgage at 4.5% sounds like a low rate but it is actually a terrible rate. If a mortgage “should” be 4-5% above the Fed funds rate and the Fed funds rate is supposed to be –5% then mortgages should be in the 0-1% range to be a good deal.

But again, that cannot happen.

The Federal Reserve’s chief power to stimulate the economy is to reduce the real cost of borrowing.

Here is the real cost of borrowing:

INTEREST RATE – INFLATION = REAL COST OF BORROWING

We cannot make interest rates below 0% because no sane person would lend… cheaper to keep the money.

When you cannot lower interest rates any further then the only way to reduce the real cost of borrowing (traditionally the most powerful form of economic stimulus, when available) is to increase the inflation variable.

[The Northerner]

1. Didn't the early US, Weimer Republic, and Zimbabwe encourage the same policy

and weren't they faced with disastrous results? Isn't inflation what gave rise to the phrase "Not worth a continental (dollar)"?

I'd prefer reducing military spending and ending tax cuts for the rich and out-sourcers.

[BzaDem]

3. No. In those situations, you had a lack of supply to meet the demand created by newly printed

dollars. So prices went up.

In this case, we have EXCESS supply (unemployed workers, idled factories, etc), and not ENOUGH demand. So the situation is really the exact opposite.

[Kurt_and_Hunter]

5. No on all counts

equating 3.5% inflation (about where our Fed target should be right now) and hyper-inflation is useless

[Vincardog]

2. So the supply siders are heard from. Better to create a Civilian Projects Administration that HAS

to create jobs for Americans to do and PAY them.

[BzaDem]

4. Given that that will NEVER happen, the Fed is our only hope. n/t

[Vincardog]

6. Is that the SAME FED that is complicit in the fraud? The one that will never be audited?

[BzaDem]

7. The Fed wasn't "complicit in fraud," despite some assertions to the contrary here. n/t

[Kurt_and_Hunter]

8. Better to be right before getting insulting

The OP is the precise antithesis of what supply-siders want or believe.

The rich do not want any level of inflation. It terrifies them.

Inflation hurts bond portfolios and cash.


Young couple buys a house with a 30 year mortgage.

A bet is being made. The couple are betting on higher inflation. The bank is betting on lower inflation.

Which side of that bet will the powers that be prefer?

There is a reason we have been conditioned to think of inflation like it was the Black Death.

[taught_me_patience]

9. Of course, Bernochio raining cash on the economy could lead to stagflation

the worst of all worlds.

[BzaDem]

10. Except that it can't.

In this economy, with excess supply and depressed demand, inflation cannot happen without an improving economy. Stagflation (inflation without an improving economy) only happens when there are supply shocks (such as the international price of oil going up, etc).

[taught_me_patience]

11. I disagree.

There does not necessarily have to be supply shocks for inflation to occur in commodities. I think you'll see excess liquidity funneled into equities and commodities. This will be exaserbated by the falling dollar. You'll see inflation in everything except wages.

[Kurt_and_Hunter]

12. How would that happen?