Thursday, January 8, 2009

Exchange on Possible Hyper-Inflation Due to Bush, Bernanke and Obama


Tripling the money supply! Really?

How... what's the word here... "nice".

Mitchell, then kindly explain how this would not lead to really rapid and really massive price increases as the currency is devalued because it is 3x less scarce. Even gold will go down in value if suddenly huge hoards of it are suddenly found laying in the ground. This is what happened to the Spanish when they started import/stealing all the gold from the New World. Suddenly, it wasn't worth as much back in Europe.

My response:

A couple of points. The monetary base is not the same as the money supply. The Fed deposits cash in banks. The banks then can lend out a multiple of the reserves. The banks can lend out five or six times the deposits, but they haven't been lending out that much. The money stock is about 2-3 times the reserves. So a tripling of reserves can triple the money supply but it won't if the banks don't lend out a multiple of 3 times that amount. The question is, are the banks really in trouble or have they cried wolf?

If they are in trouble and need this large infusion of reserves, will the Fed remove the reserves once the trouble passes? If the answer is "No, the banks are not in trouble, they are just crying wolf," or "No, the Fed won't remove the reserves once the trouble (if any) passes" (and have you heard a clear description of the trouble--or have you just heard over and over that there is trouble but no one says clearly what it is?) then, yes, there could be a tripling of prices.

A better analogy than the Spanish is the Germans in the 1920s or the post-Revolutionary War Continentals, which ended up being worth 2 cents on the dollar. America, believe it or not, invented paper money inflation back in 1776. We can do it again, yes we can, yes we can.


MC Shalom said...

Sorry, Chairman Ben S. Bernanke, But Quantitative Easing Won't Work.

In a Liquidity Trap although Saving (S) is abnormally high investment (I) is next to 0.

Hence, the Keynesian paradigm I = S is not verified.

The purpose of Quantitative Easing being to lower the yield on long-term savings and increase liquidity it doesn't create $1 of investment.

In a Liquidity Trap the last thing the Market needs is liquidity.

Quantitative Easing does diminish the yield on long-term US Treasury debt but lowers marginally, if at all, the asked yield on long-term savings.

Those purchases maintain the demand for long-term asset in an unstable equilibrium.

When this desequilibrium resolves the Market turns chaotic.

This and other issues are explored in my tract:

A Specific Application of Employment, Interest and Money
Plea for a New World Economic Order


This tract makes a critical analysis of credit based, free market economy, Capitalism, and proves that its dysfunctions are the result of the existence of credit.

It shows that income / wealth disparity, cause and consequence of credit and of the level of long-term interest-rates, is the first order hidden variable, possibly the only one, of economic development.

It solves most of the puzzles of macro economy: among which Unemployment, Business Cycles, Under Development, Trade Deficits, International Division of Labour, Stagflation, Greenspan Conundrum, Deflation and Keynes' Liquidity Trap...

It shows that no fiscal or monetary policy, including the barbaric Quantitative Easing will get us out of depression.

A Credit Free, Free Market Economy will correct all of those dysfunctions.

The alternative would be, on the long run, to wait for the physical destruction (through war or rust) of most of our productive assets. It will be at a cost none of us can afford to pay.

In This Age of Turbulence People Want an Exit Strategy Out of Credit,

An Adventure in a New World Economic Order.

We Shalll Abolish Interest Bearing Credit and Cancel All Interest Bearing Debt.

A Specific Application of Employment, Interest and Money [For Economists].

Press release of my open letter to Chairman Ben S. Bernanke:

Sorry, Chairman Ben S. Bernanke, But Quantitative Easing Won't Work.

Yours Sincerely,

Shalom P. Hamou AKA 'MC Shalom'
Chief Economist - Master Conductor
1776 - Annuit Cœptis.

Dave said...

"America, believe it or not, invented paper money inflation back in 1776."

Not true.

The Chinese invented it well before the New World was discovered, and had problems with inflation.

First European usage:

Wikipedia "Banknotes"