Inflation is essentially a tax on anyone that holds wealth, whether or not that wealth is in the form of federal reserve notes. Citizens must pay capital gains tax after they sell their assets. The tax is on the difference between the original purchase price and the selling price. Unfortunately, the law is being interrpreted such that the price is dominated in central bank currency, rather than actual value. If the currency becomes worth less, the gains from the sale are still taxed even if the asset did not actually incrase in value. There is are many arguments to be found on the internet about the unfairness of taxing inflation-generated gains. As for the central bank "creating money out of thin air", this is how it works: The central bank simply orders the printing of money, lends it to smaller banks, then uses the loan obligation of those smaller banks as "collateral" to justify the printing of the money. In other words, the value of such a currency note [paper money] actually reflects the value of another entity to repay it back to the central bank! And as soon as it is repayed (assuming it is not again borrowed by someone else) it must be destroyed! So the question naturally arisses over whether the central bank lending more money causes inflation. The answer is somewhat complicated. Whoever borrows the money will have to take on debt, the limits and willingness of people, corporations, and smaller banks to take on debt is the limiting factor to inflation. On the other hand, the central bank will often lend at a lower interest rate than the open market rate. Because the borrowers can then get a higher interest rate from the new money, and make a profit, this is effectively a transfer of wealth to the borrowers of the new money from those that previously held currency notes (or any other type of asset because of the capital gains tax). What people need to understand about inflation is that the whole financial bubble created inflation. When everyone finally realised that much of the money in bank accounts did not actually exist [that the mortgages that backed them would never be repaid], there was effectively less money in the market before. This would have played havoc with private contracts, and the central banks were concerned about deflation, which is why they wanted to "create" (lend out) more money to fill the void. But in actuality the deflation that would have resulted would have merely taken the value of central bank notes back to the time before the bubble started growing. In other words, the bubble created the inflation as it was growing, but the governments did not want the value of the currency to deflate back, so they intervened and propped up the inflation that should never have happened. note: central bank notes = euros or federal reserve notes (US dollars) And there has been inflation! There is much controversy now about whether the petroleum is now actually more expensive, or whether it is the purchasing ability of the euro and US dollar that have actually decreased. A similar controversy exists with the huge increase in the cost of housing. But the central banks prefer to ignore petroleum and land prices, saying that these are exceptions! They simply do not want to admit that there has been a high rise in inflation!
As ususal you are confused about the relationship of money, monetary policy, banking, commodity prices, inflation and the economy. Central banks of the US and the EU do not simply order the printing of more money to expand the supply of money because printed currency is just a tiny portion of the money supply. Instead they do other things. As central reserve banks other banks are required to deposit a certain percentage of their money in them. If the reserve persentage is reduced the banks have more money to lend. The central banks can also buy securities from the banks and others, or loan them money on them, which will increase the supply of money in the economy. They can do all of this without printing a single note. What most people do not realize is that almost all the money in the economy is imaginary and has been for a very long time because the great majority of it is manufactured out of thin air not by the central banks but by all the other banks. What people need to understand about inflation is that there is more than one cause for it. One cause is demand that increases faster than supply. The increasing price of oil is caused most recently by growing demand and interruptions in supply due to social disruption. Food prices have climbed because the perpetual US grain surplus has been diverted to fuel production and droughts in other producer nations have resulted in a severe shortage of grain for international trade which has pushed up prices. Another cause is inflation of the money supply, monetary inflation. A limited amount of monetary inflation is not undesirable since it guarantees that enough money is available for economic expansion. The other choice, suppying just enough money for current economic need, would necessarily preclude the wherewhitall for economic growth. As such, central banks must tread the thin path between undue inflation and economic growth with tools that are less than precise. It is fairly easy to discern monetary inflation because both prices and wages increase. Since the US and EU have seen no wage increases inflationary pressures must not be due to monetary inflation. There is also price inflation generated by market speculators. There is a not unreasonable argument that most of the recent increases in the prices of oil and food are the result of a flood of speculative money into the commodity markets that has exagerated supply and demand shifts and pushed up prices to such an extent that end users are being priced out of the market and the economic stability of the entire world is endagered. In the developed nations it is not such a big deal when food prices double but in the undeveloped world it can lead to serious economic problems and social and political unrest. There is not a problem of too much money in the world so much as concentrations of money causing serial inflationary problems as it flits from nation to nation and market to market. The problem is that much of the money of the world is in the hands of people who are only interested in increasing their own personal wealth immediately and this takes precedence over everything else. They do not care that 4 million people lose their jobs when oil reaches $150 a barrel. They do not care that 500million will starve if wheat prices triple. All they care about is that they get more, now.
This is generally true, but not in this case. There have been several other outside factors that have been driving down wages (massive influx of immigration and high fertility rates amongst recent immigrants, globalization, concentration of wealth). So it would be difficult to observe any "increase" in wages that would be associated with inflation. Central bank money [paper currency] is fundamentally no different from the "imaginary" money banks hold in their accounts. Both are based on debt. The central bank (the federal reserve in the USA) can order the printing of more money, but it must increase its collateral assets by the same amount. Unfortunately, it can use debt as collateral. In other words, it can print money out of nothing to lend it to someone else. The value of this new dollar is only backed by the obligation of the borrower to pay it back. Another thing that most people do not realise is that as soon as the Treasury borrows money (to finance government spending deficits) it simultaneously causes inflation because the Treasury bonds act similar to new money being added into the economy. In fact, nearly half of the Federal Reserve's collateral "assets" are actually Treasury bonds. The federal reserve is authorising new money for the government in exchange for government debt. I cannot believe people do not see the problem with this! The Federal Reserve is trying to prevent deflation, and essentially the only way they can do this is to get the government and other institutions to take on more debt. From one perspective, this is just compensating for all those bad "sub-prime" mortgage debts that were written off. If everyone else refused to take on more debt, the central bank would not be able to expand the money supply. The central bank has been lending out at below-market interest rates, essentially giving away free money, to induce other banks and institutions to borrow, and thus create new debt obligations.
AH wrote The Federal Reserve is trying to prevent deflation, and essentially the only way they can do this is to get the government and other institutions to take on more debt. As the US appears to have been following a deliberate policy of devaluation ( it at least notionally reduces debt value) , I am not sure that you can tell us that the Fed is out of line with this basic assumption policy . As for the Fed's motives . Your words seem to me to be rather spurious --- they print more money to "pay" for things they cannot pay for by any normally accepted use of this term . Why over complicate?
Historically and by definition, general inflation is not possible without wages moving up to meet increasing prices. The Federal Reserve can buy debt to issue new money. In fact the Federal Reserve Bank of New York has a window where members can trade collateral for cash. Members can redeem this collateral by paying back the money they borrowed. The Fed can also require the redemption of collateral or sell it on the open market. The Treasury borrows by by publicly auctioning notes and bonds. The Fed is required to buy Treasuries on the open market just like everyone else. Your analysis is mostly right but you are missing an important component of the current problem. The Fed has a few methods of pumping money into the economy to prevent deflation but there is a reason why they are barely working. Usually when the Fed moves to increase liquidity through the banking sector by lowering interest rates, reducing reserve requirements and lending on collateral etc, banks increase retail and commercial lending and the economy recovers. This time around banks have not done that, instead they have concentrated their money in the markets, lending to hedge funds, financing derivatives trading, betting against the Euro, etc. In essence, the beneficiaries of Fed largess have used all the liquidity provided by the Fed since 2008 to double down on speculation. The result is even more volatile markets and a stagnant economy. The problem is not that there is too much borrowing but not enough in the right places to get the economy going again. Businesses are having an extremely hard time borrowing even for the short term to finance operations and expansion. Banks are extremely reluctant to lend until the economy begins to grow again. This is typical of a liquidity trap but this time there is plenty of liquidity but it is being siphoned away from where it needs to be. The Fed does not have the reach to do that and the government is unwilling due to political intransigence caused by an ideological misunderstanding of political economy.
I do not think our economies should be so reliant on debt. Policy makers need to stop seeing the problem as a lack of availibility of loans. That was one of the main causes of the problems to begin with! The economies of the world need to face their real problems, instead of deferring the problems into the future through more debt. More debt is not a real solution- it just covers up the problems while they grow worse. If people cannot qualify for a loan to buy a house it is because they do not have a steady income or are unable to earn enough- NOT because the bank will not lend them enough money. If they do not have an annual income of 20-25% of the price of the house, they just cannot afford it. Lending more money is not going to solve the underlying problem. If businesses do not have access to loans it is because of a lack of consumers able and willing to pay. It is like the governments just want to prop up the symptoms of the recession through more loans, without dealing with the underlying problems. The trade deficit with China is one such problem, but rather than discuss a solution, the government refuses to see it as a problem, and is intent on protecting it!
It should be downhill all the way from now on . The Super Crap Committee formally announces its failure today -- surprise , surprise . Europe settles lower in the waters as Spain rolls over and French Banks come under continued pressure . Just a matter of time before the Fed take over with some more lunacy and the Dow Jones should set off for around a 4000 drop before the bottom is reached .
I do not believe the problem rests solely with policy makers though there is much to blame them for. The real problem is that global mechanisms are in place that basically guarantee sovereign debt repayment regardless of the ability of the debtor nation to pay. Considering this, there is no restraint on lenders as would be normal in any other situation. The IMF is the primary player when nations near debt default. Its actions are entirely reactionary and geared towards maximizing debt repayment regardless of the economic fallout. This is a pernicious position. If the IMF was really the mechanism of economic stability as it is supposed to be it would not act as it does. In fact the IMF should be operating an almost directly opposite manner, reining in lenders by drawing a line in the sand over sovereign debt levels long before reckless lenders can put nations into untenable debt situations by pandering to perceptions of immediate political necessity. There are many reasonable conditions whereby a nation can take on some debt without creating problems for the future. For example borrowing to build infrastructure more often than not results in greater economic activity and tax revenues sufficient to repay borrowing over the term of the debt. The problem with government borrowing comes about almost always when governments borrow to pay operating expenses rather than raise taxes in times of economic prosperity. This is a severe problem of social psychology. In times of economic growth the politicians and the people believe that the growing economy will wipe out the deficits so tax increases are unnecessary. In fact economic growth often leads to tax cuts and marginally higher government deficits. The result, so apparent now, is that when the economy turns down, which it will inevitably do, the government and the economy falls into a fiscal trap. The government is already deeply in debt due to years of deficit spending. Tax revenues have declined precipitously and the need to borrow just to maintain spending increases dramatically. Lenders, already battered by the falling economy become reluctant to rollover old debt and loath to finance new debt. Financing government through borrowing becomes suddenly untenable. There are many on the right who blame Keynesian economics for the current plight of sovereign debt but Keynes never prescribed deficits in times of economic growth. In fact he prescribed raising taxes, running surpluses, and the paying down the national debt so the government would be in the position to quickly stimulate the economy with tax breaks and deficit spending when the economy met one of its inevitable downturns. It is unfortunate that right wing ideology took such a grip on fiscal policy over the past decade of prosperity that the national debt was doubled rather than payed off and the government is now approaching an untenable fiscal position due only to their incredible about face that deficits suddenly do matter but taxes cannot be increased, ever, no matter what. Fiscal responsibility is not a right wing position but fiscal crises is.
^^ excellent post, very much agreed Of course, the low interest rates and government bonds (especially treasury bond in the USA) should not be interrpreted that the market thinks a particular government will remain solvent, or that the inflation rate will not rise above the interest on the bond. Basically investors have fled from a plethora of other investments and do not have any good options to put their money (for example it is obvious that investors are fleeing into swiss franks and german bonds). Unfortunately, since nearly all governments will debase their currency before they default on their sovereign debt, there is more incentive to park euros or dollars into government bonds. There will be many investors that will mistake low interest rates as a sign that government debt is safe or that inflation will remain controlled. But when the government gets into so much debt that it becomes reliant on the market for continual recycling of loans, the government has actually forfeited quite a measure of its power.
The problem for private investors is that the markets are being manipulated by a few large investors who are capable of moving such significant amounts of money that their activities are extremely influential in market movements. These movements leverage other investors to move in directions to maintain their positions thus generating the perception that these movements are widespread reactions to natural market conditions when they are in fact entirely artificially created by those with the leverage to benefit from them. The attack on the Eurozone is indicative. You only need to look at who commands the financial resources to lead an attack EU sovereign debt and who will benefit from this crises to realize that there is a vast conspiracy afoot. The same investment banks that underwrote the massive sovereign debt are those that finance the hedge funds who bet against it. It is the same investment bankers who advised so many EU banks to take substantial positions in the derivatives market that brought huge annual revenues but exposed them to extreme liabilities in the case of default. The big investors bided their time and put up $Billions to maintain the lie and when the time was right they pulled out the rug out. When the big investors suddenly refused to roll over debt they had been financing for a decade or more the sovereign debt market collapsed into turmoil and panic. Private investors fled and took huge losses. Hedge funds financed by the big investors moved in and bought up debt at substantial discounts. EU bankers, caught up in huge derivative liabilities to investment banks and hedge funds faced sudden liquidity problems and became unable to unload their sovereign debt positions without triggering even bigger liabilities which would lead to insolvency. To prevent a collapse of the banking system significant action by EU governments was required, basically some sort of guarantee for sovereign debt repayment to save their own banks from derivative liabilities which would also bring huge profits to investment banks and the hedge funds they financed which bought up all the debt at a huge discount when the private investors fled. In other words, the current crises of the Eurozone is a deliberate manipulation of financial markets.
That doesn't fit the general definition of inflation. Given a fixed money supply, if the cost of some goods and services rise, people will forgo either some of those goods and services, or they will forgo other goods and services, causing demand to drop for those other things and pushing the costs down (or the suppliers out of business.) What does the quantity of money have to do with economic growth? Can you elaborate? Again, this is not inflation. There are many benefits to speculation. Much of the increase in food costs in the last year have been due to unusual weather patterns in much of the world, and speculators have helped a great deal in preventing shortages. Low prices signal abundance, of which there was very little this year. How much cash are these people sitting on, and, if they are sitting on so much, why aren't we seeing the purchasing power of all the other cash increase? Money is a commodity, after all, and is subject to supply and demand.
The money supply is not fixed but grows continuously. If it was fixed there would be deflation as the economic activity increased and inflation only when economic activity decreased. it is all about money chasing goods, when there is more money than goods prices inflate, when there is more goods than money prices deflate. If the supply of money is not equal to economic activity there will be deflation or inflation until the money supply equals the needs of the economy. In a situation where the economy is growing there is a perpetual need for more money to meet increasing economic demand, if it is not fulfilled the economy will stop growing, stagnate and possibly collapse until new money enters the economy. The history of the US in the 1900s is a vivid exposition on the relationship of money to the economy. There are also many detriments to speculation. A great portion of the rise in commodity food prices can be directly correlated to a vast increase in the flow of speculative money into the commodity markets to take advantage of natural calamities to push marginal prices far beyond market capacity and so gain immediate profits. It is extremely unfortunate that prices in commodity markets are now determined by the increasingly erratic flows of speculative money rather than actual supply and demand. I am not so sure that these short term speculators have any realization of the damage they have wreaked on the investments necessary for the long term viability of many market producers. Money is also a store of value and when there is no place to put it that will increase its value it is better to just sit on it. Just in the US corporations are sitting on over $2Trillion in retained profits, cash money that is doing nothing more than extremely short term overnight lending.
This is generally false which is typical of those who don't understand pricing mechanism. Inflation still occurs with or without wage increases. Things like COLA (cost of living adjustments) are decided before we know the inflation for the year. So a worker may get 4% increase but inflation is 6%. So the definition you bring is flat wrong as you still don't account for 2% of inflation. Which is why Historically we defined inflation based on money in circulation and by definition (today) all economist view inflation as the rise in the price level. But it gets even deeper then that. Short term inflation is viewed to because by supply and demand. Example: high employment = high wages, high unemployment = lower wages. On top of that Economist generally (there is that word again) that long term inflation is caused by money supply. Typically when this is done, we don't have 5 mega zombie banks with liabilities in the trillions either. Maybe that's a reason but I'll keep reading your opinion. But this is assumption, not fact as you have no clue what trades banks had or still have in the long term. Banks were leveraged 30 to 1 or even up to 80 to 1 in some cases. Just cause the Fed gives money to Banks doesn't mean their leverage ratio went down. BofA has $74 trillion in mortgage liabilities through Merrill Lynch still and the Fed has been trying to get the FDIC to accept the liabilities being moved to BofA Holding Company (depository arm) and probably already has illegally (but nevermind that). J.P. Morgan is doing the same thing with $80 trillion. So you understand what that means.. the Fed which gives discount window access and the FDIC which backs depositors money now is on the hook for $154 trillion in derivatives. It's not a question of if there is a failure of the zombie banks, but when. All that money put into the system got sucked up into paying off counter parties. The issue isn't a liquidity trap as lower interest rates have equated to higher general price levels. The issue is one of debt, Government and Private. If there is $600 trillion in derivatives sitting on the books at banks and their capital ratio never really came in line with a 10% even after the close to $5 trillion already flooded into the market by the Fed it only means one thing needs to happen. Downsizing has to happen and default needs to take place. It's the only way money will go to the right places. But god forbid anybody suggest failure be met with failure. So you know a good Business has to issue borrowing, it's the business with less then AA2 rating which are having problems borrowing and that's cause they have a large debt on their books.
So you mean like the Fed and the ECB in their currency swaps which artificially push down the dollar and keep the Euro above the 1.30 handle? That's in every type of situation, it's not unique. There is always a counter party. Too cute. I am sure you've never looked at any balance sheet company or country and see risk right?
This is not a given. It grows because those who mandate a fiat system derive a benefit from inflation. Again, if it's fixed, then there can be no inflation. As prices increase in some sectors, it must decrease in others as consumers forgo those things. Inflation is defined as a general increase in prices. The quantity of money has nothing to do with economic growth. It is a medium of exchange, and the quantity of it is meaningless to that function. Goods and services are not exchanged against money, they are exchanged against other goods and services. Increasing the quantity of money does not increase these goods and services, but what it does do is allow some people to take the purchasing power of others through inflationary means and spend it in ways they otherwise could not thereby withdrawing those things from the market with goods and services they did not justly acquire. Is it? In what way? Do you mean those huge periods of growth and the long deflationary period in which the industrial revolution took off? Or do you mean the finagling in the money supply that lead to booms and busts? And from where does all that money come? People, perhaps, who benefit from the early acquisition of money created from nothing? Yes, inflation does hurt those who do not immediately benefit from inflation, but those who get the money early are very interested in converting it to commodities and other forms of wealth before the purchasing power is lost. Yep. Blame the speculators. Get the government to prevent people from buying things and that will fix all of our problems. The question is, what will happen to all that new money? They'll want to put it somewhere that's safer than cash. Do you have evidence that it is sitting in "extremely short term overnight lending"? I know that is standard practice for payrolls, but I sincerely doubt that stock holders and boards are ignoring the fact that there is more to be gained than minuscule interests from such short term investments. And, since bankers pay for that short term overnight lending with interest, they must be using it elsewhere to fuel their businesses.
well central banks agreed today to help recapitalize europe's banks....this shall increase inflation a wee bit globally......this should be great news for gold and silver long term
