Inflation or Deflation -- Which is it?

[Tech_Esq]

Ok, I understand the argument for inflation

A nearly $800 billion economic stimulus plan and the Federal Reserve's ballooning balance sheet are among the reasons for growing concern that the government's efforts to jumpstart lending will spark high inflation.

To be sure, inflation has been pushed to the side with investors worrying about the opposite situation -- deflation -- infecting the economy.

However, with the government seemingly ready to print money to combat the financial crisis, some see inflation as inevitable once economic conditions finally improve. Flooding the system with money diminishes the future purchasing power of U.S. dollars.

as explained in the above from Marketwatch.

But what is the argument that we are headed into a period of deflation? It seems counter intuitive to me.

 

[Iriemon]

The concern for inflation is real, and the Fed has flooded the money supply, but whether it materializes into real inflation depends upon whether the Fed constricts the supply once money starts moving thru the economy again. The fact that the money supply has expanded does not make inflation a foregone concluson if it is temporary.

The period of deflation is caused by falling price, a function of investors pulling money out of investments (in this case real estate) and into cash or savings that are not being lent out; and be a recession where there is falling demand for products and services.

The "multiplier effect" expands the money supply by multiples of the original supply if banks lend their money out. If on the other hand they sit on it and loans are repaid without loaning new money, the supply contracts, and again by multiples.

 

[Paulie]

The actual money supply itself has not yet been significantly increased, only the monetary base, which is at an unprecedented level. The point at which banks start lending and investing those reserves is the point when the money supply will start to siginificantly increase. This is something I see a lot of people get confused about, and I was one of those people not very long ago.

The threat of inflation is certainly on the horizon, and I'm not quite sure how the Fed can really do anything to stop it at this point. They loaded up the banks for a REASON, and that was to recapitalize them and strengthen their balance sheets so they could lend again. Either they never lend it and the economy never really recovers, or they lend it and we see inflation like most of us have probably never experienced.

If the Fed were to eventually extinguish some of that money, we'd most likely enter into a period of stagflation, because if they took it ALL away, we'd simply be back where we started, and the price increases certainly wouldn't subside for quite some time. Once the market has gotten to a point of bearing a price, it tends to stay that way for a while.

The Fed is a dangerous entity, and anyone who thinks they do ANYTHING for the benefit of the common folk is an idiot.

 

[Iriemon]

The actual money supply itself has not yet been significantly increased, only the monetary base, which is at an unprecedented level. The point at which banks start lending and investing those reserves is the point when the money supply will start to siginificantly increase. This is something I see a lot of people get confused about, and I was one of those people not very long ago.

The threat of inflation is certainly on the horizon, and I'm not quite sure how the Fed can really do anything to stop it at this point. They loaded up the banks for a REASON, and that was to recapitalize them and strengthen their balance sheets so they could lend again. Either they never lend it and the economy never really recovers, or they lend it and we see inflation like most of us have probably never experienced.

The Fed can contract the money base.

If the Fed were to eventually extinguish some of that money, we'd most likely enter into a period of stagflation, because if they took it ALL away, we'd simply be back where we started, and the price increases certainly wouldn't subside for quite some time. Once the market has gotten to a point of bearing a price, it tends to stay that way for a while.

That is the balancing act, sure.

The Fed is a dangerous entity, and anyone who thinks they do ANYTHING for the benefit of the common folk is an idiot.

Who should do it instead of the Fed? Instead of the Fed doing this tough job of balancing the money supply or base the yahoos in Congress should? Or just don't do it at all and let the supply be dictated by the amount of some metal we dig up?

Sure its a dangerous job and a tough one. That is exactly why Congress shouldn't do it and why we shouldn't base supply upon some metal.

If there is a better way than the Fed to control the money supply, I haven't heard it yet.

 

[Paulie]

Iriemon, before even considering the Fed for the task, one must cite the authority in the constitution for its mere existance in the first place.

And no, I would never consider handing the task over to Congress. I'd much rather the people exclusively decide interest rates via supply and demand of money, and replace the Fed with nothing. Gold discoveries typically grow the supply at a rate of around ~2% per year. That's plenty of inflation, or growth if you will, to sustain a prosperous working economy. Milton Friedman suggested increasing the money supply at a steady 2% per year for adequate growth. I'm at a loss for understanding why, with this basic example, a gold standard would be so horrible.

 

[Iriemon]

Iriemon, before even considering the Fed for the task, one must cite the authority in the constitution for its mere existance in the first place.

I'm fine with the constitutionality. IMO the constitution give Congress the right to create the Fed. I'm not really interested in debating the subject, which is essentially moot at this point.

And no, I would never consider handing the task over to Congress. I'd much rather the people exclusively decide interest rates via supply and demand of money, and replace the Fed with nothing. Gold discoveries typically grow the supply at a rate of around ~2% per year. That's plenty of inflation, or growth if you will, to sustain a prosperous working economy. Milton Friedman suggested increasing the money supply at a steady 2% per year for adequate growth. I'm at a loss for understanding why, with this basic example, a gold standard would be so horrible.

My position on why I think going back to the gold standard would be a big mistake as been set forth a number of times. If you or someone else wants to see it again I'll re post.

 

[wimpy77]

paulie is a staunch supporter of ron paul who wants to ban the fed. i have come to agree with ron paul on some things but this is not one of them. i can respect paulie's position though.

 

[Paulie]

I'm not really sure how the point of constitutionality of the Fed is moot. Whether something is constitutional or not is pretty much the most politically important thing in this country.

And wimpy, I think you accept the Fed because you're just so used to it that you can't imagine such a drastic change that would take place if it were to be abolished. I'm not always that open to big changes myself in many ways, but this is one where I'm all for it. Elite big wigs decide our monetary policy, and thereby our personal financial lives. We as the people have ZERO say in the matter, and that is simply NOT what this country was founded upon.