Why Isn’t There More Inflation?

Huge deficits and ultra-low interest rates should have led to serious inflation by now. The great mystery of the past three years is why they haven't.

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The economy of the past three years has puzzled experts and policy makers in all sorts of ways, but the greatest mystery has been the recent decline in the rate of inflation. That may not seem remarkable in a stagnant economy, except that all the major economic theories suggest that prices should now be rising at a fast clip. Like the dog that didn’t bark – which provided the crucial clue for Sherlock Holmes in the story Silver Blaze – the current absence of significant inflation provides a tipoff to what is really happening in today’s economy.

On a very simple level, inflation occurs when there is more money in circulation than there are things to buy. A big Federal deficit can increase the money supply, because it means either that the government is spending more or that tax cuts are boosting individuals’ disposable income. Low interest rates can also expand the money in circulation because they signal that the Federal Reserve is making it easier and cheaper for banks to lend. And an even more potent way for the Fed to intervene is through so-called quantitative easing – i.e., buying government bonds and effectively creating additional money out of nothing.

(MORE: Is the U.S. Headed for a Double-Dip Recession?)

What’s most striking today is that all three of these factors are now at extremes that should be fanning the flames of inflation. Deficits of more than a trillion dollars a year are the highest in history. At close to zero, short-term interest rates are at their lowest level in more than 30 years. And the Fed’s monetary base has been expanding at an unprecedented rate. The remarkable thing is that none of this is translating into serious inflation. Over the past three years, some volatile prices, such as those for food and gasoline, have indeed gone up. But there still haven’t been sustained widespread price increases throughout the economy.

Generally speaking, inflation becomes dangerous when it exceeds 3%. Last year, the rate did begin to pick up and reached a disturbing 3.9% in September. But since then, instead of getting worse, inflation has actually slowed down again to a paltry 1.4%. The explanation is that all the money in the world won’t push up prices unless people are willing and able to spend it. So the dog that didn’t bark in this story is the money that didn’t get spent.

Because the 2007-09 recession hit the financial sector especially hard, banks are holding back on lending as they rebuild their capital. Many consumers are over-indebted and are trying to pay down their balances instead of borrowing more. In some cases, their credit lines are being cut or they are having a hard time getting additional credit. Depressed housing prices have not only slowed the turnover of real estate, but have also removed one of the cheapest ways of borrowing – home-equity loans. Finally, although companies are piling up huge amounts of cash, they have no reason to spend aggressively on expansion and new ventures when consumer demand is depressed and the financial and political outlook remains so uncertain.

(MORE: What’s Your Personal Inflation Rate?)

More stimulus, by itself, won’t be able to get the economy moving again. The government can run a huge deficit, the Fed can hold interest rates down, and Fed Chairman Ben Bernanke can pump money into the system with a third round of quantitative easing, but that won’t necessarily make the economy speed up – at least not right away. On the other hand, the fiscal cliff, with its spending cuts and tax increases, could depress the economy further. So could a crisis in the euro zone that delivers a shock to the global banking system or a jump in oil prices induced by war in the Middle East.

What the economy really needs for a full recovery is time and stability. Once U.S. banks have cleaned house and rebuilt their balance sheets, once consumers have their debt under control and their home values have stopped falling, and once companies have to start putting their cash to work, spending will pick up. When that tipping point occurs, real estate prices will likely stabilize and then begin to rise again. The price of oil is also likely to start moving higher.  By contrast, the outlook for bonds, especially low-yielding government bonds, is terrible. If the Fed allows interest rates to rise, bond prices would fall. And if inflation resurges, the purchasing power of the bonds’ principal would be eroded. If both things happen simultaneously, it could produce the worst bond market of a lifetime.

No one can accurately predict the timing of any of these changes, of course. And it’s worth keeping in mind that much of this may be beyond anyone’s control. Policymakers can put more money into circulation, but they can’t actually make it circulate. And they have even less influence on the euro zone or on Iran. The current stagnation may simply have to run its course. But once it does and the economy really begins to rebound, it could well be accompanied by a surprisingly fast resurgence of inflation.

MORE: The Six Daunting Financial Problems Facing America

65 comments
NEWS2VIEW
NEWS2VIEW

The author says the banks are rebuilding capital. Really? Consumers are saving more? Or are Americans spending less because discetionary spending has taken an unrecovered hit?


I thought the dirty little secret of the post financial crisis is that we have even BIGGER too-big-to-fails, who are as over leveraged as ever! Likewise, after a period of belt tightening consumer savings are again in decline and debts on the increase! 


This article reflects the immediate aftermath of the Great Recession, not where banks and consumers are four, five years into "recovery". The author makes outdated and unsourced claims for which there is no excuse. If anything, we are tempting another bubble-and-bust scenario given that nothing has been done to send bad actors in the financial services sector to jail, and nothing has been achieved by Democrats or Republicans to shore up the fundamental or "real" economy. The actions of the Fed returned the investor class to profitability but only by kicking the can --- economic reckoning --- down the road. 

JohnSalv
JohnSalv

Real inflation, experienced by citizens, is definitely higher than the data the U.S. government publishes. Official U.S. inflation is below 2%. However, alternative methods of calculation - as well as some surveys - puts inflation between 4-10%.

The U.S. is not the only country that experiences price inflation though. In most countries the costs of goods and services are increasing and real wage growth is not keeping up pace – leading to a loss of purchasing power and wealth.

The reason behind the increase in inflation is primarily the stimulus packages that most governments launched in the wake of the credit crunch in 2008. The U.S. is probably the best example, but many other countries have followed suit. In fact, in 2009 all G-20 countries were on some sort of stimulus plan.

Today, Japan also stands out with a $1.4 trillion 2-year stimulus package in an effort to double the monetary base. The ECB in Europe, China, South Korea and a host of other countries are on similar programs.

Even though inflation clearly is higher than what the government says one can make some interesting observations when looking at how much the monetary base has grown and how much money we actually see in circulation. Doing so will reveal that we have yet to see significantly higher inflation numbers – maybe even hyper-inflation.

read the full article here: https://www.saveguards.com/en/news/why-isnt-inflation-higher/

lachlanwells1990
lachlanwells1990

Another reason inflation is not occurring is because of the nature of the US-China trade relationship. If relatively more money chases Chinese goods, spurring imports, then inflationary pressure ripples through Chinese factors of production and ends up in the US in the form of higher prices of Chinese-made goods. This does not occur because China intervenes in the currency market and forces its banks to take ever-higher reserve ratios: China creams off the extra dollars, places it into forex, and buys US Treasury bonds with the,. Effectively, the US is getting a free lunch by China's continuously eroding the purchasing power of its own citizens. It matches its phenomenal growth with ever-higher erosion of purchasing power. Hence you have the situation where China approaches a $6,000 GDP per capita economy but it has a relatively small domestic market compared to other similar-sized economies.

It is sort of a "Chimerica" as Niall Ferguson coined. If there were free floating exchange rates, China's currency would have appreciated to make Chinese goods much more expensive. QE would have caused "hot money" to flow into China which would have meant the US dollar falling relative to the Yuan, thus an even stronger Yuan, thus more expensive Chinese goods. Inflation would have happened in other words if the system was free-floating. However because China cuts the stem off at the currency exchange, the circle is broken. Instead of higher prices, China creams it off and simply amasses gigantic reserves instead. Demand due to higher spending in the US disappears because China offsets it with removing that hot money train from circulation and amassing reserves with it instead. Thus no inflation, but also no real effectiveness of QE and monetary policy (as it pertains to China; it still affects other countries without strict currency pegs). This just about sums up why QE is both failing to spur inflation and failing to spur demand and production.

DraimanForMayor
DraimanForMayor

I purchased groceries for the past 5 years and I have seen goods that have gone up by as much as 70%.

Food and energy are the staples of society. Inflation is here, do not minimize it. Yet income has been reduced.

Premdayal Gupta
Premdayal Gupta

If the Fed allows interest rates to rise, bond prices would fall. And if inflation resurges, the purchasing power of the bonds’ principal would be eroded. If both things happen simultaneously, it could produce the worst bond market of a lifetime.

I wonder how can you live and die simultaneously ?Read more: http://business.time.com/2012/...

Paolo Bernasconi
Paolo Bernasconi

Basically, as a French (or Swiss French) saying goes: "on peut pas forcer l'âne à boire de l'eau"...

Meaning that you can't compel the ass to drink  the water...

The Fed can offer money, but it's up to banks and consumers to use them...

spongeblog
spongeblog

Tell Obama to stay out of my business, then maybe I'll be able to remain in business and keep the blood flow of the economy pumping and circulating

sheldondanto
sheldondanto

Inflation will grow when there is available cash for purchases and strong consumer desire to buy. Today while the consumer has the money and is willing to spend they are much more careful with their purchases. The consumer does not want to get stretched and is concernd with the quality of our recovery. It's this type of cheapness which keeps inflation in track.

On he flip side, once they believe we have turned a corner, I expect housing prices and inflation will come back.

Ronald Pires
Ronald Pires

Why is this a mystery? Because all the major economic theories are wrong, of course.  But we fully intend to keep pretending that they are right, dont we, because it would injure the professional reputations of 90% of the people who call themselves economists if we didn't.

Is the economy here to serve the people, or the people to serve the econmy? Neither, it turns out. It's here to serve the economists.

Bob Burnitt
Bob Burnitt

So we are stuck in long term STAGFLATION????  Maybe.  But you know the government and everybody else that measures "inflation" uses warped indicators like th CPI for instance.  They can make thse estimates read anything they want.  However, it is pretty clear from just "being out there" in the "world" that we are not having the inflation I remember in the 1970's.  Boy, that was scary and a tough time for ME.  But you know, sooner or later, if they keep pumping the funny money at this insane rate, something is going to blow up in THEIR and our faces.  You just cannot pull "money" out of thin air and not have a terrible reaction sooner of later.  One thing I have noticed for several years now, owners of large tracts of LAND just do NOT really want to sell it.  You can look at the super high PRICE TAGS on land all over the USA.  Not much is SELLING, but if you want to BUY any of it people are asking HUGE PRICES for the stuff.  They do NOT CARE if they sell it or NOT.  They do not CARE if YOU BUY it or NOT.  They would rather have the LAND than the "money".  To me that shows an expectation of SERIOUS INFLATION. 

They are certainly TRYING to CREATE inflation, that is obvious.  I am betting on very high inflation fairly soon.  Money pulled out of thin air is going to show its true value sooner or later.  Bob Burnitt Ellis County Texas

Troey Edwards
Troey Edwards

The decline of the Middle class is reason there isn't inflation.  A millionaire can only eat so many Commodity items like milk, corn, eggs, etc.  The higher end items are already over inflated.

Economists need to take into account the shrinking middle class into the equation then it makes sense.  There is no glut of money, the greedy horde.   

If we had a larger middle class then yes, we would see more inflation. But then again if we had a larger middle class we would have a larger buffer to long term unemployment as larger savings keeps people positive longer and off welfare.   In other words, if we had a larger middle class like we did in the 50's, there would have been massive inflation since majority of budget deficit has nothing to do with Medicaid or Social Security. It is Military, TARP bailouts for the rich, and interest payments.  Even those didn't increase money supply, it wasn't until Fed bond purchases where money was printed out of mid air. At least the government borrows and pays interest for Wars.

The Fed is blessed we don't have a large middle class and Rich people like to horde in order to gain rank on the Forbes 500 richest Americans list. Lord knows they don't invest it, otherwise we'd have more new business.

Case in point, look at the interest rate charged new businesses. it is no where near what a Homeowner pays.  Why does a Business have to pay 7-8% interest when a Homeowner only pays 3-4% even though for small business the amounts are the same. Reason? Rich Investors have no faith in the economy, but they have faith in owning property specially if backed by US tax payer from default.

smulthaup
smulthaup

Two words:  Excess Reserves

peter_rabbit_the_original
peter_rabbit_the_original

I have no idea why that is the claim of the economic indicators as to inflation. Maybe some products' price increases are being masked in the aggregate. What I know is what I see from recent experience. e.g.:

- I buy glass in  large amounts for past ten years; cost has increased consistently 10% per yr over past ten yrs! What do you call that?

- food prices have been increasing steadily for years now; many items such as meat cost 50-100% over the last few years;

- rent has gone up steadily before the crisis and insanely over the past couple of years the increase in California;

- batteries for my watch went from 4.99 installed to 10.99 for the batteries alone;

etc.

- food and oil do not appear to register in indicators; yet they represent the largest expense of many; maybe not the top 5%...

Maybe the indicators do not serve us well in their aggregate form. What about some sub-categories of inflation in products, regions and/or consumers, eg 5% to the 95%?

Matthew Ferrara
Matthew Ferrara

To simple reasons "inflation" hasn't spiked are 1. The official measurements includes housing, which is at a 50-year low, unlike food, energy and health care; and 2. Banks are holding the cash, not letting it circulate in physical or credit form, because of more regulations and fears of lawsuits by government agencies. So, more dollars are being pumped right into the holding tanks of banks, rather than into the economy.

SMIA1948
SMIA1948

Budget deficits do not add to the money supply.  If you don't know that much, you have no business writing an article like this.

The reason that tripling the size of the monetary base hasn't caused inflation is because the Fed is paying interest on bank reserves at a rate higher than the rate on 90-day T-bills.  The newly created money just sits there at the Fed--it does not circulate.

Yacko
Yacko

The demand is not there. Demand is stoked by wages. Wages come with a job. Currently automation and information technology is either eliminating or downsizing or exporting jobs. Therefore no demand. What were the job gains 2000-2010?

And this is just the start. We are at the very beginning of a societal change as significant as the industrial revolution. Be afraid for the future and what happens to jobs. There are few occupations that won't be affected significantly; nothing is automatically safe.

sclmlw
sclmlw

Or perhaps when the Fed created a program to pay interest on excess reserves to banks they were able to directly control the money supply and head off inflation.  (I.e. if the government spends a trillion dollars, but pays banks money NOT to spend a trillion dollars it's a wash as far as inflation is concerned.)  But what they should have counted on is that when you pay banks not to lend money you're taking that money directly out of the economy in the form of investments that create future economic growth.

In other words, we traded economic prosperity for a huge lump of government spending.  Did we get our money's worth?

InjunTrouble77
InjunTrouble77

Instead of being so confused, why don't you just read Paul Krugman's analysis on why there is low inflation? It is not that mysterious. The economy would be much better off, if people had been reading his column instead of watching Fox News or CNBC.

jeffreydurbin
jeffreydurbin

The reason that 'inflation' has not spiked up is because the government has changed the way they calculate inflation during the past 30 years.  The quick answer is to be found at 

http://www.shadowstats.com/alt... .

As one example, if you replace your iPhone 3 with an iPhone 4 for the same amount of money, the economists at the Commerce Department say that you are experiencing price deflation because you are getting a BETTER phone for the same amount of money.  Mix that so-called price deflation with price inflation for other goods in the CPI basket and it undercounts inflation.  Furthermore, in difficult financial times when people have less discretionary income they replace their iPhones less frequently but they still have to buy fuel and food but the CPI basket doesn't recognize this fact.

rjs0
rjs0

you're not in a money economy..you're in a credit economy...amp;, except for studentloans, the supply of credit is shrinking

nepr
nepr

I've got a BA, and some grad study,  in Econ, so here's my view.

"A big Federal deficit can increase the money supply, because it means

either that the government is spending more or that tax cuts are

boosting individuals’ disposable income."

I disagree with this statement.

When the government runs a deficit it borrows money that already exists from the private sector.  This has no affect on the money supply.

Also, inflation does in fact occur when there's more demand for goods and services than there are goods and services when the economy is at full-employment; that this, when the economy doesn't have any unused capacity to bring on-line to meet increased demand.  Note that this is obviously not the situation in our present economy, so one shouldn't be surprised that there's little sign of (core - that is, excluding food and energy) inflation.

 As noted in this article and in some comments, the supply of money is relevant only insofar as that supply increases demand.  This means that monetary policy is not the most effective stimulus tool because it doesn't directly affect demand.  A member of the Fed's OMC called it, "pushing on a string".  Tax cuts suffer from the same deficiency because the extra income from tax cuts can be saved instead of spent on goods and services, which defeats the purpose of borrowing the money in the first place.

The only way the government can directly affect demand is by deficit spending; that is, by borrowing money from the private sector, money that would not have otherwise been spent on goods and services, and spending that money on goods and services.  This is the basis of so-called Keynesian economics, from which the notion of stimulus arises.  There is no doubt that the government can increase demand in this way, so the accuracy of the article's statement that, "More stimulus, by itself, won’t be able to get the economy moving again.", depends on whether or not  the stimulus uses deficit spending, as opposed to tax cuts, and on how one defines "moving again".

gorak
gorak

The CPI is specifically designed to show low inflation. Items that show high inflation like energy, food and health care are excluded because they show inflation. That is why the real standard of living has plummeted so badly that even with 24/7 media adoration, the incumbent might very well lose. Just think about it, how bad does the loss in real income have to be for a nonstop media makeout session to fail?

Rick Fitzgerald
Rick Fitzgerald

Michael, thank you for bringing up the subject of inflation.

What would Joe say? Joe's research on inflation showed clearly that the money supply can grow at any rate without creating inflation as long as the economy has the capacity to purchase aggregate expenditures. The dollar is not a commodity therefore no inflation as we still find we have plenty of food and stuff available. Our purchasing power does not exceed our production capacity. The "quantity theory" is baloney since we left the gold standard.

The issue with the stimulus is the money was not put into consumer pockets which drives the economy. The money went to banks, buying bonds and city/state pockets. Only a small amount was in consumer's pockets with the suspension of some taxes.

Joe said before he passed that the lack of cash without incurring debt will hinder any consumer advance. In fact, the whole system of creating cash in our economy only by a lending mechanism is our issue. The US government can and should increase our purchasing power without borrowing it. We have been fooled into believing that "printing money" out of thin air is a bad thing.

Lincoln once argued that the element that made bonds financed through (28 dealers today?) banks good was the same element that made "printed money" good. Look at us today. Still making big bankers and bond traders rich. Bonds and money are both printed paper and backed by the word of the American people.

Joe would say; enough said.

formerlyjamesm
formerlyjamesm

All that money isn't circulating in the middle class, but in the 1%.  I'm not in market, but I would guess in the world of personal yachts, Lear jets, multiple mansions, and other luxury items such as art and jewelry, inflation is greater than the more basic economy.  Still, because of manipulations, weather disaster, and who knows what else, the middle class does face significant inflationary effect in food costs, fuel, and living standards.

valente347
valente347

The author argues that another round of stimulus wouldn't do anything, saying we should just wait till everyone is done deleveraging for the economy to pick back up. However, if a new stimulus was allocated appropriately, even if it was simply used for further deleveraging, wouldn't the "tipping point" occur sooner?

keithpridgeon
keithpridgeon

we are in an inflationary cycle. Just cause a house is cheap....ish doesn't make everything all right. We need to get back to the 70's(honest) inflationary metrics. If energy and food is going higher, thats called inflation. If tv's and cars go higher thats called discritionary items and should be included but not the only factor.

keithpridgeon
keithpridgeon

Right politicians and government moles decided to change the metrics of inflation over the last thirty years to include only durable discrestionary items. The non-discretionary items were deemed to "voliatile" for their inflkation figures. So now the price of your house, which may be a once in a lifetime purchase, is inflationary or deflationary. Where as the price of gas is not. The price of your car, which may last for a decade or more, is inflationary but the price of a loaf of bread is not. The price of your tv, which you can live without, inflationary. Electricity, not so much.

Feels good to be living in a deflationary cycle doesn't it, where you dollar goes so far. Unless of course you have to drive there.

rampantlion
rampantlion

True. Banks are being PAID 0.25% to 'borrow' excess reserves. Why would anyone lend/risk this money when you are being paid to hold it...

rampantlion
rampantlion

Correct, Jeffrey. It is estimated that this 'correction' for 'enhanced functionality' built into reported inflation statistics reduces reported inflation by approximately 1% PER YEAR...

nepr
nepr

 So, you don't think that the fact that the economy isn't at anywhere near full employment has anything to do with relatively tame inflation?

jeffreydurbin
jeffreydurbin

As someone with both a BSBA and MBA in econ and finance, I suggest that you make sure you take some econ classes in subjects other than Keynesianism.  

I agree with your statement that when the government runs a deficit it is borrowing money from the private sector that already existed and that it doesn't affect the money supply.  However, do not forget Milton Friedman's point that "inflation is always and everywhere a monetary phenomenon."

cm6096
cm6096

Perhaps a better stimulus, one guarranteed to be spent, would be if the gov't rebated money to the Taxpayer in the form of some kind of 'debit card'...  And if they spend the money, then they get a check for three times the amount they spent.

jeffreydurbin
jeffreydurbin

You did not mention the stock market but stocks are goods just like Porches and Maseratis.  We're ticked off when the price of bread and gasoline go up but if our shares of McDonald's and IBM go up we get excited and pat ourselves on the back.  It's nothing more than the Fed inflating another bubble.

rampantlion
rampantlion

Well, valente347, here is the result of the so-called 'stimulus' over the past few years:

GDP – US$

2007: 14,028.7 B

2008: 14,369.1 B

2009: 13,939.0 B

2010: 14,526.5 B

2011: 15,094.0 B

2012: 15,601.5 B (US budget)

Annual federal deficit in US$:

2008:    458.55 B

2009: 1,412.69 B

2010: 1,293.49 B

2011: 1,299.59 B

2012: 1,326.95 B (US budget)

%GDP Increase (annual):

2008: +2.43%

2009: -2.99%

2010: +4.21%

2011: +3.91%

2012: +3.36%

%GDP Stimulus (annual; federal deficit $/avg. GDP):

2008: +3.23%

2009: +9.98%

2010: +9.09%

2011: +8.77%

2012: +8.65%

%GDP Net ‘Growth’ (%GDP increase - %GDP Stimulus):

2008: -0.80%

2009: -12.97%

2010: -4.88%

2011: -4.86%

2012: -5.29%

The above Net GDP ‘Growth’ assumes zero growth from the private sector. Our stimulus ‘investment’ has earned us a negative return.

The implied multiplier effect is as follows (assuming 0% private sector growth is ‘best case’ for stimulus):

2008: +0.75

2009: -0.29

2010: +0.46

2011: +0.45

2012: +0.39

The Keynesian multiplier needs to be at least 1.0X (X being the interest rate on the deficit spending). Keynesianism is a complete MYTH.

jeffreydurbin
jeffreydurbin

What is "appropriate"?  The government has spent the past 3 years replacing private sector debt with government debt but as long as the government debt is used for misallocated spending then it isn't accomplishing anything good.

Debt is a good thing when it is used to replace an old bad car with a new one or to purchase a home but it is a bad thing when it is used to finance vacations.  So much of government spending is not for true investments but for consumption.

LuapLeiht1
LuapLeiht1

So the answer is to throw another few trillion at the problem?

And "further deleverging" is basically paying off people's debt.  What of those of us who acted in a financially responsible way?  Now, we pay for the irresponsible behavior of those who did not.

Nobody is too big to fail.  Stop blocking foreclosures and then let the banks that bet unwisely with other people's money go under.

Matthew Ferrara amp; Co
Matthew Ferrara amp; Co

Agreed; our "official" inflation numbers are about as "accurate" as official unemployment numbers. It's a game that the media willingly plays along with, and even economists are loathe to call them out on it. The truth is, the inflation has ALREADY occurred - the money supply IS larger - it just hasn't filtered into consumer goods at a crazy rate yet because the banks are holding it very tight. But it will come - and the Fed, which believes it can absorb the excess thru some undefined process - will find what all countries in history find: Once the genie is out of the bottle, you can't put him back. It's coming.

Matthew Ferrara amp; Co
Matthew Ferrara amp; Co

Good point. Why would a bank take a risk on making a home loan, while prices continue to decline, unemployment rise/persistent, and wages falling, when it can take a SAFE AND SECURE "loan" from the Fed, and buy "guaranteed" treasuries with it? So, home prices remain depressed because even with "pent up" demand, there's no money in the system to fuel any growth, even if it *were* the start of another inflationary bubble...

jeffreydurbin
jeffreydurbin

That's straight Keynesianism.  Therefore, I disagree.

nepr
nepr

 "Milton Friedman's point that "inflation is always and everywhere a monetary phenomenon."

I'd never argue with Uncle Miltie, but don't you agree that money's affect, however strong, on inflation is indirect?  Conceptually, you can have inflation without money.  A glass of beer could be worth one camel one day and two camel's the next.

jeffreydurbin
jeffreydurbin

Stupid idea.  There is no question that the government giving citizens a blank check to spend is better than politicized spending like Solyndra but it isn't going to do anything other than generate more cash in an economy with the same amount of goods.  That is what causes price inflation.

valente347
valente347

I thought part of the reason people were upset about the stimulus is because it didn't do enough to put (or keep) money in the pocket of the little guy, but, instead, was most effective in giving perceived handouts to large corporations.

valente347
valente347

I was just suggesting that if the economy worked like the author was suggesting, it doesn't make sense for him to be against another round of stimulus. It seems that his argument contradicts itself.

Michealbez
Michealbez

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Nathan Wittry
Nathan Wittry

Theory says you CAN put the genie back -- the Fed CAN shrink the money supply. The problem is timing, and the Fed usually gets the timing wrong.

Nathan Wittry
Nathan Wittry

Jeffrey, the method of calculating the CPI doesn't matter as much as the trend in the CPI. Look at the old method of calculating CPI and you still see a trend DOWN in inflation, not up as we would expect. The premise remains the same -- why is inflation going down?

jeffreydurbin
jeffreydurbin

In your example, the camel IS the money.  A better example would be to turn around your example.  On day 1, one beer buys one camel.  Then I figure out how to brew beer more efficiently (perhaps by reducing the amount of hops in it.)  Now I have two beers but the same amount of camels in the marketplace.  I have debased the beer in just the same way that the Fed debases the U.S. dollar except in my case beer has some intrinsic value and the U.S. dollar's only intrinsic value is to wipe my *ss.  I suppose if the alternative is to use a handful of sand on my *ss then having dollars to use to wipe my *ss might not be so bad.  LOL.