Quote from jem:
Please elaborate... I did not track with you all the way on this.
Is there no longer a money multiplier issue because we are currently pushing on a string... and banks don't want to lend because they realize many assets are propped up by the feds actions.
Are you saying we won't see inflation many classes of assets need to reprice form the previous cheap capital costs and return to typical capital costs. In other words we need to come off the juice and right now low interest rates are methadone.
Finally are we not going to see inflation in food and energy costs.
I imagine the biggest (or one of the biggest) pathway of this base money into the economy right now is through the Fed's MBS buying program:
Fed -> MBS/Agency debt -> Fannie Mae/Freddie/etc -> Bank/Lender -> Borrower (not really...) -> House seller.
I believe this is probably the most effective form of easing in that it actually ends up in seller's hands and increases real money supply out there. Problem (or not?) is it ends there, as the seller of the home then pays down debt (destroys money), puts money in bank (money goes nowhere as bank does not re-lend enough, evidenced by excess reserves. look at JPM for example), saves/invests/spends it (no multiplier, just 1x increase in aggregate money).
Banking is the only way to multiply $$. If the Fed keeps paying interest on reserves, asserting more direct control over rates and money, they really can do a better job in controlling aggregate money than every before. That means less leverage in banking, and less pronounced booms and busts. What happens in this 'new normal' is the banking system shrinks and the Fed's balance sheet increases to offset. All the Fed has to do is keep calibrating the rate of easing against money destruction to keep the price level the same. Kind of brilliant I think, and amazing the public isn't giving more credit to the Fed/Bernanke for keeping prices so stable given the turmoil we've seen.
The natural pressure without the Fed's action right now would be towards deflation. My angle is that the investing public has their eye on the wrong ball: taper and decreasing of easing is deflationary, thus lower rates are in our future.
The only way to reverse this is force more $$$ in the public's hands in a dramatic way. That's what fiscal stimulus is for (combined with what the Fed is doing), and we clearly have no appetite for more of that. So what do we have left? We'd have to reverse the trend towards over-regulation of financing/banking, as well as get rid of interest on reserves receipts from the Fed to give banks more incentive to take risk... None of this is on the horizon. Financial crisis is still in the rear-view mirror.
I think we can still see higher prices on food and energy, but for supply/demand reasons, not monetary reasons, in the face of all of this. Look at natural gas versus oil, or corn, etc for examples of low prices being very possible in the face of all this new money. All because in aggregate, money is pretty stable (amazing, isn't it, in the face of $85B per mo).
