gonegolfin
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- #41
Simply dropping the "target for the federal funds rate" (not the federal funds rate) does not immediately induce long term inflation. Remember that temporary market operations are used to achieve the target rate. The Fed was also not monetizing debt at this time. A good portion of the inflation created in the last seven years has been by the banks (the explosion in the use of leverage in the credit derivatives market also plays a part in the growth of M3). It took a little time to get that lending rolling. Once the 10 year T-bond yield fell to where it really began to affect mortgage lending, you saw inflation accelerate and build momentum.Indeed it does, but where I'm in slight disagreement is, when you consider from '01 to '03 when the FF rate dropped 6 points down to 1%, the M3 trend upwards wasn't nearly as profound as it is now with a 3 point drop in slightly less than a year.
Money supply is now expanding in a different way. There is less lending taking place. But there is much more temporary money creation by the Fed.I'm sure you can explain that better than I can speculate it, but it appears to me that money supply expansion is greater now more than ever, with no signs of slowing down.
There are definite signs that the money supply could contract (I explained this earlier in the thread). This could happen despite the will of the Fed and the other Central Banks. The reasons why this could take place are at the heart of the Bear Stearns crisis (or LTCM for that matter). One thing that is interesting (and at the same time frightening) is that while a hyperinflation is a possibility, so is a massive deflation. This is due to the potentially toxic mixture of central banking, fiat currencies, and complex derivatives.
This said, could you make your case for why we WON'T see hyperinflation?
See above and my earlier post for an explanation as to why we might not see hyperinflation. My most likely outcome is a prolonged period of net no growth (or modest negative growth) with inflation (not hyperinflation). This would include a period of hard recession during this larger period of what some call stagflation. I think it will be painful as a lot of excesses need to be worked from the system. I think that for hyperinflation to happen, we would need to see a lot of nationalization moves by the Fed. For example, the nationalization of ...
- more than one major bank (maybe several)
- Fannie Mae, Freddie Mac, and Sallie Mae (which I think will happen)
- the mortgage market (the Fed rescues the housing market and lending industry by buying a significant number of worthless or near worthless MBSs)
A hyperinflation would require a significant number of Dollars being repatriated to our shores. I think you would need at minimum all of the above for that to happen. Thus far, foreign held US Dollars have helped in that they have been propping up the banks by providing them much needed cash (the result of this is another type of problem), reducing the amount of dollars being held in sovereign wealth funds.
I also think that many exaggerate the usage of the term hyperinflation. Bob Chapman is a prime example as he has stated that we are already in hyperinflation (which is ridiculous).
Brian