johnbee

Prophet Bernanke Plans for Inflation

Its a good argument and I hope you are right. So according to you we need watch out for mild inflation right away and so this could be a time to buy knocked out stocks?


On Dec 28 02:04 PM BS Detector wrote:

> This article seems either to be simplistic so that it can be frightening,
> or else frighteningly simplistic. The author seems to ignore the
> linkage between deflation and inflation; namely, that there is a
> point in between where there is neither inflation nor deflation.
> If a central bank is taking action to avoid deflation, it must risk
> overshooting its mark to be effective. Clearly, the Fed is more concerned
> with preventing a deflationary spiral than it is with causing higher
> than desirable inflation in the future.
>
> However, this does not mean that high inflation is certain. To understand
> this, one must have a little basic knowledge about the money supply,
> and more than a cursory look at Bernanke's quotes above.
>
> First off, there are basically two major economic actors when it
> comes to the money supply. There are the banks (collectively) and
> the central bank (the Fed). The former is far more powerful than
> the latter. The creation of money in the economy primarily occurs
> through banking activity; then a bank takes a deposited dollar and
> lends it, that loan is are subsequently deposited in another account,
> and where there was one dollar in deposits there are now two. When
> the banks stopped lending, this primary driver of money creation
> also stopped. Worse, as banks have collectively moved to shore up
> their capital positions, they have been reducing the money supply,
> which will tend to make money more valuable - deflation.
>
> The Fed (backed by Treasury) is a much smaller player than the collective
> banking sector, and so to counteract the deflationary actions of
> the banks has had to move in unprecedentedly large ways. But these
> actions are not necessarily inflationary.
>
> In a normal time, in fact, in any other time since 1933, recent Fed
> actions would have had huge inflationary impacts. But because of
> the shrinking the money supply resulting from the credit contraction,
> these actions are not currently inflationary. The question is what
> impact these actions will have in six months or a year or two years,
> as the credit markets heal and begin expanding again. The author,
> and lots of others, are quite sure that the answer is that we are
> certain to see very high levels of inflation.
>
> But a more careful look at these carefully considered actions is
> warranted. After all, Bernanke's been studying the Great Depression,
> or more specifically the monetary aspects of the Depression, for
> virtually his entire academic career. Those who would assume he doesn't
> know what he's doing, or has not thought this through, or doesn't
> care about future inflation, don't really understand the problems
> and solutions.
>
> The trick here is not in flooding the markets with Fed-derrived money
> to replace that lost through the credit collapse. The trick is on
> the other end, in removing the additional money as the banking industry
> moves back to a more normal money-creating paradigm. The combination
> of Fed actions to date and Bernanke's quote above show that the Fed
> is well aware of the upcoming problem.
>
> The TARP preferred investments in the banks are a good example of
> thoughtful government action (even if it wasn't what they originally
> said, and even if the idea came from overseas). The banks will take
> the money and it will help them improve their capital positions,
> enabling them to get to normal lending faster (that it hasn't happened
> yet doesn't mean that it won't). As banks become more comfortable
> with their position, and more importantly with the economy as a whole,
> they have a strong incentive (high dividend payments) to pay back
> the government equity, which will take money out of circulation,
> which will be anti-inflationary.
>
> Bernanke's discussion above about buying 2-year Treasuries to manage
> interest rates is also very thoughtful. The idea here is that a two-year
> period is long enough for the economy to recover from vitually any
> deflationary shock (if managed well on the front end through massively
> expansionary monetary policy). The Fed buys the 2-year-ish notes,
> injecting money into the economy, which then goes elsewhere. In two
> years, when the credit markets are recovering, the federal government
> pays off those notes, but instead of the cash re-entering the markets,
> it goes to the Fed instead.
>
> Basically, the Fed puts money into the market now that would normally
> not re-enter the market for two years. The net result in the money
> supply in two years is zero, so that beyond the two-year period the
> action has no impact on inflation. In the short term, however, it
> is inflationary -- or anti-deflationary, which is exactly what is
> needed.
>
> Basically, the Fed isn't run by a bunch of morons. Give them some
> credit for being thoughtful and being studied, and take some time
> to try to understand the forces at work. What they're doing may not
> work exactly, as crisis intervention is sloppy work. But it is NOT
> sure to fail.