M
morganist
It will start off deflation then inflation. Because of the reasons I put below.
http://morganisteconomics.blogspot.co.uk/2012/10/is-way-central-banks-view-inflation.html
HYPERINFLATION VS DEFLATION
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It will start off deflation then inflation. Because of the reasons I put below.
http://morganisteconomics.blogspot.co.uk/2012/10/is-way-central-banks-view-inflation.html
Well, I agree with the above. It will take a scare on the downside for the Fed to go wild and the helicopters to fly 24x7.
However, and this is huge: inflation is not sustainable without commesurate wage increases. That was not mentioned in your article.
Otherwise, we go into an inflationary depression....a rare economic event.
It could happen...why ? Because...."this time it's different".
there is historical precedent. it was weimer germany in the 20's. the deflationary period was exceedingly short measured in months.
you didn't mention the velocity of money in your article.
the article doesn't make sense. paper money is like dry wood in a forest. the fire starts with one lit match and spreads rapidly because there is so much of it around.
M
morganist
It is not about paper money any more. Electronic money is the main medium.
The article explained the real consequence of QE is the effect it has on foreign exchange not the domestic economy. If the amount of money in the domestic economy increases the price of goods will react in relation to supply and demand. An increase in money supply does not necessarily mean a decrease in output. As long as output remains the same in the domestic economy an increase in the money supply will have no effect on the citizens as long as the increased money supply is distributed equally. The question is does an increase in money supply decrease domestic output or does it REALLY reduce the ability to purchase goods from abroad?
I think my argument is more accurate.
M
morganist
As long as output remains the same in the domestic economy money supply will have little effect as long as the increase in money supply is equally distributed. The problem with hyper inflation is it the consequence it creates for international product purchase.
Velocity of money is irrelvant in this scenario what will really impact peoples lives is the reduction in the ability to obtain goods, which will arise from the impact the currency debasement has on buying foreign goods. Unless domestic output decreases the scenario you suggest is irrelevant. My suggestion however argues the real impact of inflation is the effect it has on buying foreign goods and the knock on effect on producing goods that will in my opinion eventually reduce domestic output. It is the exchange rate effect that is key to creating the scenario you predict.
My suspicion is that the reaction to deflation will be further QE, which will create a reduction in the ability to purchase goods from abroad pushing prices up and increase the cost of domestic manufacturing. So the short term deflation will create long term inflation from the central banks actions.
So the fed previously bought a lot of stuff like MBS. They printed cash to buy those and remove the MBS from the market.
I think the Fed thinks that they can sell stuff of their balance sheet to buy the dollars back before inflation kicks in. So, they're probably waiting for the velocity of money to make a momentum shift upwards. Then, they'll sell their balance sheet to remove the cash.
What I think they don't get though is that their behavior effects the market. This is something that's obvious to a trader but not to academics. So, I think no one is going to want to buy the stuff the Fed is unloading off their balance sheet, if for no other reason than it's Fed's garbage.
The prices they think they'll get for their securities is probably much higher than they really will get. So, they won't be able to unload as much cash from the market as they think they will.
Then they sell all their shit and a lot of cash stays in the system. Velocity of money is still picking up. Inflation?
I think the Fed thinks that they can sell stuff of their balance sheet to buy the dollars back before inflation kicks in. So, they're probably waiting for the velocity of money to make a momentum shift upwards. Then, they'll sell their balance sheet to remove the cash.
What I think they don't get though is that their behavior effects the market. This is something that's obvious to a trader but not to academics. So, I think no one is going to want to buy the stuff the Fed is unloading off their balance sheet, if for no other reason than it's Fed's garbage.
The prices they think they'll get for their securities is probably much higher than they really will get. So, they won't be able to unload as much cash from the market as they think they will.
Then they sell all their shit and a lot of cash stays in the system. Velocity of money is still picking up. Inflation?
I don't think this is right. The money has to be introduced somewhere into the economy. Wherever it does, those prices go up first. That causes incorrect price discovery between assets that get the new money flowing into them first vs those that get it later. That causes malinvestment into those.. By the time the money supply is equally distributed, it's already been misallocated.
This is probably why money printing is so destructive. It doesn't allow creative destruction and even messes creative creation.
It does prevent short-term downswings by preventing creative descruction though..
What makes this really bad is that when the next money printing happens, you still have malinvestment from the last money printing. A base of 1 malinvestment morphs to 2 malinvestments. Since all prices are relative to each other, the next time the money printing happens, you get 1 malinvestment off of each of the previous ones.. 1 money printing now creates 2 malinvestments. the next time, it creates 4... this is exponentially destructive in the long-term.
This explains George Soros' observation of reflexitivity by the way
M
morganist
You're looking at it from a purely monetary perspective. Let's take Germany after the second world war for example. The assumption is the hyper inflation was created by money printing, which was true to an extent. However the ability to purchase goods was diminished due to the factories being destroyed in the war limiting domestic output. I think the most foolish part of the expectation that printing money in the country would lead to output was that there was no way output could have increased in those conditions due to the damage. The inflated increase in money supply would then make the situation worse by making it harder to buy foreign goods. No one wants a currency which they know will depreciate in value in the future so exchanging it would be near impossible damaging foreign trade.
You have to look outside of the domestic output and domestic money supply theory. This is really irrelavant in the modern world.
When even the largest economy produces just twenty five percent of output in the world the impact domestic output has on prices becomes irrelenvant. What is relevant is the ability obtain those goods. Exchange rates effect the price of the currency money supply will impact exchange rate, but so will other things. I also think the investment currency mechanism is a key factor in regards to inflation. Read about that below.
http://morganisteconomics.blogspot.co.uk/2012/01/investment-currency-mechanism-uk-and.html