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

Jim:

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.