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| Yes | 76% | 65 votes | Total: 85 votes | |
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Add to FavoritesTo put a bit of qualifier on the response, the Federal Reserve is "attempting" to "recreate" an inflationary bubble. While they will not admit as much they are determined to re inflate asset values to their recent peak or higher if possible in order to restore solvency to the financial sector.
To truly understand inflation one must forget most everything that you hear from Government statistics and the Federal Reserve itself. What we have most recently experienced, peaking in 2006-07 was pure and simple inflation, both monetary and actual price inflation.
Monetary inflation is described as an "increase" in the money supply and this occurs in our economy almost daily, as the Fed continues to "add" more money to the system. The primary method used to accomplish this is the "purchasing" of Securities from its most "trusted" clients, huge money firms that form the cartel that steers our financial system. The trick is when the Securities are purchased, the Fed simply electronically "adds" the amount of purchase to the client's account and in exchange accepts the Security and stores it in its vaults as one of the Fed's assets. The client now has "money" to spend and loan, even though no greenbacks have ever been exchanged and the Fed hasn't spent a penny. Money has been "created"!
Price inflation is simply that; prices of the same products rise. Monetary inflation will most certainly cause price inflation unless a similar quantity of goods and services are produced by the economy to make up for the extra money in circulation. If this does not occur, the money will eventually be applied to the same number of products, causing a higher price level.
There is an exception to this rule; it is possible for the new money to not circulate. People can decide that they would rather "hold" the money instead of spending it. It is actually banks that make this decision rather than people. For an individual to "hold" money, it almost has to be under their mattress. Due to dishonest but accepted practices, banks do not "store" a depositor's money but instead invest it as they see fit and profit on it. So, banks can decide to "hold" rather than invest money. One way to accomplish this is to purchase and service government debt. This in effect removes the funds from the economy as the "debt" is payment for long ago government projects. This is a good part of what is happening at present.
It is not always consumer products that experience the price fluctuation. In fact, what is known as "paper" assets often act as a sponge and absorb this influx of new funds. This is exactly what occurred during the recent housing bubble. Although houses were experiencing great appreciation and price increases, their underlying "value" was not changing. The value of the "paper" behind the house was increasing ex potentially. The "paper" was absorbing the inflationary increase in money supply. The artificially low interest rates of the time only multiplied and increased the speed of this effect.
During this period, the "paper" behind all assets, whether houses, commercial building or land itself, grew to such a height that it became unsustainable. The cost of doing business, which is based on the cost and availability of assets, became so high that any return was negated by the initial costs. A correction had and did occur.
This correction hit the financial sector like a lead brick. Financial firms had been having a heyday, and their asset values had skyrocketed. They had "taken advantage" of this fact and "leveraged" or borrowed as heavily as possible against these higher asset values producing mountains of debt that at the time were turning good profits. They had created the "Credit Default Swap" which was nothing other than an "artificial" form of insurance that reimbursed a firm when one of their investments defaulted. This only added to the "leveraging" as they used these "policies" to "doctor" their balance sheets even further, creating greater debt.
The entire system was built on inflated asset values and once the values deflated in response to the real value of underlying assets asserting itself, nothing made sense. The high returns caused by the surplus of money at low rates and the false "security" of the Credit Default Swap had driven these firms to the edge of an economic cliff. Balance sheets no longer balanced and credit, once as loose as a contortionists body, suddenly froze as fear replaced bravado.
The normal correction that occurs during a period like this is deflationary, and indeed we have had signs of this in the energy sector, commodities and of course, housing. But this is not an option for the Federal Reserve. Contrary to their public statements about "monitoring inflation", the Fed is dead set on re inflating the economy to pre bust levels or beyond. This is the only possible way to re balance the bottom lines of the financial sector. Concern for the individual, for the consumer or the taxpayer, has been thrown aside to satisfy the needs of the banking industry. This is nothing new, the Federal Reserve was created in 1913 not to "control" the banking industry but to centralize and increase the banking industries hold on the overall economy.
All the bailout funds and stimulus funds are dedicated not to helping return to a sound and healthy economy but to infuse such a quantity of new money into the system that the only option will be "up, up and away". The Fed and our Government are hoping confidence will be restored and new spending will replenish asset values and enable these firms to survive their self inflicted predicament. They are not concerned whether the true values of assets come into line somewhat with their costs but rather that the numbers on the right side and left side of the balance sheets of these financial giants match up. This can only be done through a heavy dose of inflation.
The debate is on whether they will accomplish this goal or not. This "fiat" system is built entirely on faith, there is no solid backing for the dollar or any currency. If people are re inspired to believe and accept the trying conditions inflation brings with it, then we will be in for another big bounce. If not, then we may be on an uncharted course.
Learn more about this author, Gene Denardo.
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No
Wait a minute! We are in the midst of a deflationary threat, a downward spiral like that of the 1930's and the one which hit Japan
in the 90's. The velocity of money is shrinking toward zero, because banks are unwilling to lend and people are unwilling to spend, all due to fear and uncertainty. Even when given billions of dollars, banks have chosen to hold most of it in reserve against an unknown future where things could get even worse. Money is not circulating. The victim barely has a pulse and some people are afraid he's going to jump up and hurt himself.
Look, we need to revive the moribund economy, get it breathing and functioning again. The worst thing we could do is what Hoover
and his Treasury Secretary Andrew Mellon did back in the 30's, which was to tighten credit and balance the budget, resulting in higher interest rates, deflation, and the Great Depression. Right now we are on track to equal or exceed the human misery of the thirty's. Despite all the romantic stories, it was an ugly and desperate time. We must do everything we can to avoid the mistakes that exacerbated that suffering.
Already we are seeing unemployment. approaching 10 percent, and showing no signs of stopping. Everytime a company reports a loss, they placate the hounds of Wall Street by laying off thousands of workers. Those workers have to cut spending, leading to more losses and more layoffs. This downward spiral can only be interrupted by financial intervention, both monetarily and fiscally by the Fed and Congress, respectively. When the private sector fails, the public sector must assume responsibilty to alleviate the problem.
There seems to be a widespread belief that the Fed or Congress, or both, merely "prints money" to solve the problem. This may be true in Zimbabwe
or other third world countries where inflation has spiraled out of control in the midst of wanton poverty, but developed countries must balance the books by selling debt. Every dollar our government spends over the revenue it takes in must be financed by the issuance of treasury bills and bonds. This is not funny money. In fact, our debt is in such demand that short term treasury notes were yielding 0% at the height of the crisis. This means that people were willing to lend Uncle Sam money at zero interest just to be sure it was there when they needed it - the 21st Century version of money in the mattress.
Furthermore , the yield on 10 year bonds is below 3%, showing a healthy demand for longer term debt. Compare that with 15% yields during the inflationary spiral of the 70's and 80's. This was known as stagflation - inflation in the face of stagnant growth. There was a loss of faith in the dollar, but today the dollar is increasingly strong . In fact, it has once again become the currency of choice. Gold is soaring, but this is the fear factor at work. Survivalists are taking physical delivery of the metal as the ultimate barter tool for end times. I wonder what value a shiny mineral will have in the primitive barbarian world they are imagining. The American Indians shunned the White Man's yellow metal, calling it "death that in darkness comes smiling."
Today's concern is not inflation, but its more deadly twin, deflation. Once that spiral takes hold, we all go down the drain. Controlling inflation is tomorrow's problem. As the economists view it, inflation can be readily controlled by reining in the horses - increasing interest rates, decreasing money supply, tightening the budget - before they run away. Right now, the horses don't want to run. The stimulus - like a whip to their backsides, and loosened reins in the form of lowered interest rates has been supplemented by dangling the carrot of money in front of them. If they don't run now, Heaven help us all.
Learn more about this author, Larry Mason.
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