Jonathan Christopher

Evidence That Big Inflation Is Coming

While I agree with the Hamilton conclusions of upcoming major inflation, there are several things I disagree with:
1. Deflation, in common usage refers to decreasing price levels. There is no mechanism implied in the term. It could be due to decreasing demand or decreasing cash available, or perhaps some legislative action. The result is OVERALL dropping in price levels. We may or may not have classically defined "Deflation" at present, but we are awfully close.
2. Money defined as cash in circulation is too narrow a measure. While it is clear that the Federal Reserve has created an awfully large amount of cash, part of that cash has been counteracted b a large decline in "Velocity" or how quickly that money changes hands. Due to declining economic activity, money is not changing hands as quickly, that is reducing the effective amount of money in circulation, partially or even completely counteracting the increase created by the Federal Reserve.

What this implies, of course, is that as economic activity picks up, there will be a double whammy effect on prices, Quite beyond the intent of the Federal Reserve, the amount of money in circulation will increase as economic activity increases, simply due to the effect of velocity.

It is likely that the Federal Reserve, in an attempt to eliminate the excess funds, will begin issuing huge amounts of treasuries, and will be required to pay very high interest rates to bring the money in.

This action will crush the value of corporates and other bonds, and raising interest rates on mortgages to levels not seen since the eighties. That will by itself drop house prices again.