Hyper-Hype Over Hyperinflation

The government is running its printing presses 24/7, dramatically increasing the country’s money supply, a practice guaranteed to lead to hyperinflation.  I can’t be the only one that’s been hearing that this is what’s been going on at the Federal Reserve Bank, with Treasury’s support, of course.  When inflation hits, it’s going to be devastating, the thinking goes.  We better drive up the price of gold and fast.

Or not.

Yes… once again the media’s talking heads, a slew of television economists, and whoever else is involved in misleading the public… you know, the people who brought you Y2K… have delivered a steamy pile of pure crap.  As it turns out, Timmy and Benjamin have not been printing the money they’re using to shovel into banks to keep them afloat.  They came up with a better way to get the cash.

Look, there’s a lot I don’t like about these guys.  They communicate like farm animals, they lie when it suits them, and as far as transparency goes, they make Dick Cheney look like an open book.  But, clever?  Whoa boy… they certainly are clever.  Who knew?

According to the Fed’s published money supply data, M1 has actually declined since the middle of December, 2008.  And over the same period of time M2 has only risen by a little less than 3%.

What the heck am I talking about?  No problem… if you’re not an economics geek, here’s a simplified definition of M1, M2, and M3:

  • M1 is the amount of money that’s ready for spending in this country.  If you add up the currency outside the U.S. Treasury, Federal Reserve Banks, and bank vaults… including traveler’s checks of non-bank issuers… demand deposits at banks and credit unions, such as a whole variety of checking accounts… you get M1.
  • M2 is M1 plus savings accounts, time deposits under $100,000, and money market accounts for individuals.  M2 is money and “close substitutes” for money, so economists think of it as a broader measure of money than M1, and they use it as their key economic indicator when forecasting inflation.  M2, as of today is only up by 2.5%.

There’s one other “M” and it’s M3.  M3 equals M2 plus large time deposits, institutional money-markets, short-term repurchase agreements, along with other larger liquid assets.  But M3 is no longer published by the Central Bank because they said it’s irrelevant, and there’s no shortage of conspiracy theorists that find that thinking objectionable.  It is, however, estimated by the Shadow Government Statistics Website, and you can get also an idea of what M3 is, relative to M1 and M2 by looking at the Federal Reserve Flow of Funds Quarterly Report, and the bottom-line is… it’s not up all that much either.

So, if they didn’t print it, where did they get the money they needed to pump into the banks?  After all, the Fed’s balance sheet has, in point of fact, doubled over the last 10 months, and when I say doubled, I’m talking from $1 trillion to $2 trillion.

First Bernanke went to Congress and asked them to pass a law that no one would pay any attention to, let alone understand the implications of… a law allowing the Fed to pay interest on deposits.  Up until that was allowed, no one left funds on deposit with the Fed… but since then, things have changed.  Are you feeling it?  They didn’t need to print the money.  All they had to do was vacuum it up from financial institutions and individuals who were hoarding it… by paying interest on deposits held at the Federal Reserve.

Instead of printing new money, Bernanke simply got the banks to give him their “old money”.  And then he used that old money to buy the assets that would inflate the Fed’s balance sheet.  It’s a very technical change, and most people don’t read before they talk, so while everyone’s running around screaming: ”inflation is coming, inflation is coming,” it’s actually not.  In fact, we should be so lucky to find a little inflation coming.  Chief Green Shoots figured out a way to pull the banks out of their death spiral without printing the money he needed, which would have certainly led to hyperinflation.  He’s sneaky… yes.  But he’s no dummy, and he’s definitely got skills.

What I find most worth noticing is that this past week, the National Association for Business Economics reported that almost half the economists surveyed believed the Fed’s policy to be inflationary.  Yet the fact is, not only is the conventional wisdom on hyperinflation wrong, but the NABE-surveyed economists are wrong too.  Fascinating, I think.  Economists, pundits, journalists… none of them seem to be all that interested in looking at facts before rendering opinions.

In point of fact, if critics of the Fed were correct, then an increasing money supply would make hyperinflation in the future a certainty.  Inflation, however, today is in check and if the Fed maintains its current policy, there’s no reason for high rates of inflation to materialize in the foreseeable future.

So, yes… the Fed’s balance sheet has doubled, but it doesn’t mean we’re certain to have an inflation driven economic catastrophe on top of the deflationary spiral we’re already experiencing.  So, the good news is that we’ll just remain in the doldrums we keep sinking further into, if that brings you any comfort.

Unquestionably, most people didn’t realize it, but at the end of last year, it was “cash hoarding” that almost caused an economic calamity in this country.  By recycling the existing surplus of cash, the Federal Reserve prevented hoarding by financial institutions, and as a result pulled the U.S. out of its nosedive towards a full-scale 1930s style depression.  Bernanke kept the velocity of money moving, when it would have otherwise come to a screeching halt.

Annual GDP, you see, equals the amount of money multiplied by the number of times it turns over in a year, so when hoarding caused the velocity of money to slow to a crawl at the end of ’08, GDP immediately followed.  Bernanke and his brain trust knew that they couldn’t rely on banks to recycle excess cash going forward, so he had to figure out a way to stabilize GDP by forcing the velocity of dollars, first to stabilize, and ultimately to increase.  The answer, and a brilliant one by the way, was to suck up the excess cash and turn the Fed into an intermediary of money, a role that would normally be assumed by the commercial banking system in this country.

In the past, successful attempts to stabilize the velocity of money and stop panic hoarding involved massive deficit spending by central governments, but as many have pointed out, this course of action is known to result in the re-distribution of wealth, not to mention cause a variety of other problems.  Bernanke came up with a new prescription for addressing the problem, and my hat would be off to him, if I wore a hat, of course.

And for those who question whether Bernanke would reverse his course when things improved, as of the date of the last Fed report, the overall size of the Fed’s balance sheet was down between $100-$200 million from its zenith, and even AIG is receiving less credit from the Fed than at the height of the meltdown.  So, fair enough then.  Nice job Benjamin.

The Federal Reserve publishes a report every two weeks that shows clearly the Central Bank’s assets and liabilities.  It’s the kind of thing that talking heads, economists and journalists should really read before they start spouting off about Bernanke’s Federal Reserve.  There’s a lot not to like about the Fed chief’s policies and many inadequacies at which one might point.  But when it comes to thinking on his feet and coming up with new out-of-the-box solutions, the data shows he’s no slouch.

Now, with minds like this in charge of finance in Washington, would someone like to explain to me why they can’t seem to competently address the foreclosure crisis?  See what I mean… if they wanted to, they could.  But with the accounting rules now set to allow banks to delay write-downs of level three assets for an indefinite period of time, and plenty of government cash to keep things stable, foreclosures aren’t such a bad thing… for banks that is.  For regular people, maybe not so much.

Ah well, they can always eat cake, I suppose.

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