Is inflation inevitable?

Monty Pelerin
The debate continues over whether inflation or deflation is our fate. I believe that we will ultimately end up in a massive inflation, possibly hyperinflation. My reasoning has always been based on how I anticipate politicians to react to the soon-to-be recognized Depression that we are in and will remain in for a long time to come.

The excerpt below is from the Daily Bell quoting the UK Telegraph. It is illustrative of the pressures that will only increase as the economy continues to deteriorate. 

US Double Dip Depression

Ben Bernanke needs fresh monetary blitz as US recovery falters ... Federal Reserve chairman Ben Bernanke is waging an epochal battle behind the scenes for control of US monetary policy, struggling to overcome resistance from regional Fed hawks for further possible stimulus to prevent a deflationary spiral. ... Fed watchers say Mr. Bernanke and his close allies at the Board in Washington are worried by signs that the US recovery is running out of steam. The ECRI leading indicator published by the Economic Cycle Research Institute has collapsed to a 45-week low of -5.7 in the most precipitous slide for half a century. Such a reading typically portends contraction within three months or so. Key members of the five-man Board are quietly mulling a fresh burst of asset purchases, if necessary by pushing the Fed's balance sheet from $2.4 trillion (£1.6 trillion) to uncharted levels of $5 trillion. But they are certain to face intense scepticism from regional hardliners. The dispute has echoes of the early 1930s when the Chicago Fed stymied rescue efforts. - UK Telegraph
The Telegraph speculates that the Fed may increase its balance sheet from $2.4 to $5 Trillion! That in and of itself suggests inflation in excess of 100%. Let's not forget that the Fed's balance sheet was only $800 billion just two years ago. To date, the Fed has increased its balance sheet by three-fold. On that basis, we could be looking at 300% inflation without any additional moves or 600% based on the UK Telegraph's speculation.

It should be noted that people, markets and prices do not operate in linear fashion. That is why my speculation above should not be taken literally as a forecast. Yet, that is the potential impact of what the Fed has already done or may be proposing to do.

The Daily Bell has their own interesting interpretation contained in the referenced article. They are not very flattering of central banking and what is going on. They expect deleveraging and deflationary forces to continue for some time, after which inflation or hyperinflation takes over.

A comment regarding the Telegraph quote is in order. The Telegraph analysis leads one to believe that the Fed has a policy option to either expand or not. What is being discussed in the quote is the notion of another stimulus package. The reality is that the Fed has no choice regarding expansion.

The Fed must expand regardless of whether there is another stimulus. The Federal Government is running $2 Trillion deficits as far as the eye can see. The rest of the world is also running huge deficits. There is not enough money to keep governments going unless it is created. Unless the Fed intends to shut the government down, it will be creating massive amounts of new money to just fund what taxes and debt cannot.  

Once the slowdown becomes apparent to Washington (or they can no longer fool the people regarding a recovery), talk will turn to new and bigger stimuli. Neither today's deficits nor the increased spending that is likely to soon be proposed can be funded by taxes or borrowing. The Fed works for the political establishment despite their claims of "independence." Bernanke does not want to go down in history as presiding over the Greatest Depression (although he ultimately will, regardless of his policy choices). 

Brace yourselves for liquidity injections never before seen or imagined. Inflation is inevitable.


Monty Pelerin blogs at www.economicnoise.com
The debate continues over whether inflation or deflation is our fate. I believe that we will ultimately end up in a massive inflation, possibly hyperinflation. My reasoning has always been based on how I anticipate politicians to react to the soon-to-be recognized Depression that we are in and will remain in for a long time to come.

The excerpt below is from the Daily Bell quoting the UK Telegraph. It is illustrative of the pressures that will only increase as the economy continues to deteriorate. 

US Double Dip Depression

Ben Bernanke needs fresh monetary blitz as US recovery falters ... Federal Reserve chairman Ben Bernanke is waging an epochal battle behind the scenes for control of US monetary policy, struggling to overcome resistance from regional Fed hawks for further possible stimulus to prevent a deflationary spiral. ... Fed watchers say Mr. Bernanke and his close allies at the Board in Washington are worried by signs that the US recovery is running out of steam. The ECRI leading indicator published by the Economic Cycle Research Institute has collapsed to a 45-week low of -5.7 in the most precipitous slide for half a century. Such a reading typically portends contraction within three months or so. Key members of the five-man Board are quietly mulling a fresh burst of asset purchases, if necessary by pushing the Fed's balance sheet from $2.4 trillion (£1.6 trillion) to uncharted levels of $5 trillion. But they are certain to face intense scepticism from regional hardliners. The dispute has echoes of the early 1930s when the Chicago Fed stymied rescue efforts. - UK Telegraph
The Telegraph speculates that the Fed may increase its balance sheet from $2.4 to $5 Trillion! That in and of itself suggests inflation in excess of 100%. Let's not forget that the Fed's balance sheet was only $800 billion just two years ago. To date, the Fed has increased its balance sheet by three-fold. On that basis, we could be looking at 300% inflation without any additional moves or 600% based on the UK Telegraph's speculation.

It should be noted that people, markets and prices do not operate in linear fashion. That is why my speculation above should not be taken literally as a forecast. Yet, that is the potential impact of what the Fed has already done or may be proposing to do.

The Daily Bell has their own interesting interpretation contained in the referenced article. They are not very flattering of central banking and what is going on. They expect deleveraging and deflationary forces to continue for some time, after which inflation or hyperinflation takes over.

A comment regarding the Telegraph quote is in order. The Telegraph analysis leads one to believe that the Fed has a policy option to either expand or not. What is being discussed in the quote is the notion of another stimulus package. The reality is that the Fed has no choice regarding expansion.

The Fed must expand regardless of whether there is another stimulus. The Federal Government is running $2 Trillion deficits as far as the eye can see. The rest of the world is also running huge deficits. There is not enough money to keep governments going unless it is created. Unless the Fed intends to shut the government down, it will be creating massive amounts of new money to just fund what taxes and debt cannot.  

Once the slowdown becomes apparent to Washington (or they can no longer fool the people regarding a recovery), talk will turn to new and bigger stimuli. Neither today's deficits nor the increased spending that is likely to soon be proposed can be funded by taxes or borrowing. The Fed works for the political establishment despite their claims of "independence." Bernanke does not want to go down in history as presiding over the Greatest Depression (although he ultimately will, regardless of his policy choices). 

Brace yourselves for liquidity injections never before seen or imagined. Inflation is inevitable.


Monty Pelerin blogs at www.economicnoise.com