Monday, August 6, 2012

When will inflation strike?

Adam Creighton sounds a warning in a recent piece on the policies of the Federal Reserve, the Bank of England and the European Central Bank. Money creation would normally lead to inflation, but inflation has not yet kicked in.

'Actual inflation appears dormant for now, and big lenders appear content to buy bonds at very low interest rates. But bond holders were very wrong about future inflation in the 1970s, and as [Milton] Friedman wrote, "monetary policy action takes a longer time to affect the price level than to affect the monetary totals."

'The amount of money has risen by almost 40 per cent in the US since early 2008, while consumer prices have risen only 6 per cent. More money chasing the same amount of goods and services should ultimately prompt inflation.'

Creighton argues that money creation programs have taken the pressure off politicians to implement necessary changes; and cheap money has protected highly leveraged private banks and dulled incentives to clean up balance sheets.

What makes this particularly disturbing is that it is occurring in a context of extremely high levels of government debt.

And yet liberals routinely fail to be disturbed by the situation. They are generally critical of bank bailouts, of course, but they see government borrowing for fine and noble causes (such as welfare programs, hospitals, schools and infrastructure) as a fine and noble thing, no matter the budgetary position.


  1. I like the way you pose the question: when will inflation strike? Economists tell us something's got to give eventually. The interesting question to me is why inflation has not set in yet. The answer seems to be partly that we have been printing money, keeping the monster at bay (while it eats and grows larger) and the bond market seems unconcerned about that, for the moment. If either factor changes (and they are interrelated, so one will affect the other), we're off to the races. A loaf of bread will be 10 bucks.

    I was opining to everybody two years ago that by this point (election 2012) "getting inflation under control" would be the top issue of the day. I was assuming a fairly normal recovery; three years in, employment back to normal (which is 5% or less) and new investment initiatives competing for loans, etc. Instead, unemployment is still sky high, so there is no "consumer recovery." And until that happens, prices will be soft. There's no inflation because demand is low. One suspects that in the backrooms of power (both gov and biz), unemployment is not a priority problem (except in rhetoric). To solve that would unleash the monster.

    Remember you heard it here first. LOL.

    1. Thinking on it, perhaps this "slow recovery" in employment is, in a sense, a good thing because it keeps inflation down and the effect of a gradual recovery might be not to shock the system -- a slow recovery might be a more sustainable recovery. Nonetheless, rising government debt (which is printing money) will catch up with us. The only way out without a major crash might be to discover gold three inches below Kansas. (Fracking natural gas in large amounts for the next 50 years might do the same thing, you know.)

    2. I see on Bloomberg that the latest sale of 10 year Treasury notes drew the weakest demand since 2009. Maybe rates will soon start to move up significantly.

      But I suspect fears about Europe and the euro have been helping to keep bond yields low and that situation is far from resolved.

      On the long-term debt and deficit problems of the US I am not optimistic, though a new President may get things moving. Can't see Romney doing for the US what Thatcher did for Britain however. (And even that didn't last - look at Britain now.)

  2. We're now experiencing inflation. Government policies like monetary policy has continually weakening the economy’s ability to produce wealth.

    Ed Butowsky presented in his article,"Obama Chose Monetary Policy - And You're Feeling It", posted in Fox Business News about the impact of monetary policy.