An economics, investment, trading and policy blog with a focus on Modern Monetary Theory (MMT). We seek the truth, avoid the mainstream and are virulently anti-neoliberalism.
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Friday, February 3, 2012
Why the Fed's actions are not inflationary
Here's why QE and other Fed actions are not inflationary.
Mike, housing has already had it's inflation, and has been exploited in order to blow another credit bubble after the Tech/Market Bubble burst in 2000/2001. It allowed the banks to make loans, buy ratings and securitize everything leaving them with no skin in the game while betting against the products they were selling to clients by way of CDS.
It caused the deflation we see today by pulling demand forward and allowing massive amounts of the misallocation of capital into homes and malls ect. that should never have been built.
Rents are a temporary problem. The market is tight right now, but shadow inventory is huge in housing, and many of these houses will be rentals in the future.
Mike, my general thoughts on inflation/deflation are that, as an example, during the 1970s we had inflation in the CPI, but also in the wages people were paid. You at least kept up, or we had equilibrium if you prefer.
What we have suffered for the last30 years is asset inflation without corrosponding wage inflation. People were bamboozled into believing debt was an asset with money to be extracted from one's always appreciating house as an example for whatever you wanted to buy. You didn't need to worry about wage increases/inflation, as you could always hit the CCs or house line of credit for the latest and greatest goodies.
Basically, I believe they were able to completely change our perception of what wealth really is for individuals as well as nations.
Also, I would say that looking at the price for WTI as an example shows how the FED'S actions are quite inflationary but only to a point which I will explain.
We went from $147 down to the $30 range where we got QE1 followed by QE2 which took us back to $125 before topping out with the end of QE2. If memory serves me right, we went down to $80 before the recent SWAPS with the EU and rolling the proceeds from short term paper to long term paper were announced which I call QE3 Lite, and it's taken us back to the $100 range.
Each injection of juice/smack has a reduced effect on the price of WTI, as best as I can tell. It makes sense to me because when a dollar of debt yields something less than a dollar in GDP, you have hit the wall. My caveat to this thought is war. War with Iran would create a chit storm with unknown outcomes.
Mike, there is inflation in everything we need to survive, and deflation in things we formally WANTED.
ReplyDeleteWhat about housing? That's deflating. (Though perhaps not rents.)
ReplyDeleteMike, housing has already had it's inflation, and has been exploited in order to blow another credit bubble after the Tech/Market Bubble burst in 2000/2001. It allowed the banks to make loans, buy ratings and securitize everything leaving them with no skin in the game while betting against the products they were selling to clients by way of CDS.
ReplyDeleteIt caused the deflation we see today by pulling demand forward and allowing massive amounts of the misallocation of capital into homes and malls ect. that should never have been built.
Rents are a temporary problem. The market is tight right now, but shadow inventory is huge in housing, and many of these houses will be rentals in the future.
Mike, my general thoughts on inflation/deflation are that, as an example, during the 1970s we had inflation in the CPI, but also in the wages people were paid. You at least kept up, or we had equilibrium if you prefer.
ReplyDeleteWhat we have suffered for the last30 years is asset inflation without corrosponding wage inflation. People were bamboozled into believing debt was an asset with money to be extracted from one's always appreciating house as an example for whatever you wanted to buy. You didn't need to worry about wage increases/inflation, as you could always hit the CCs or house line of credit for the latest and greatest goodies.
Basically, I believe they were able to completely change our perception of what wealth really is for individuals as well as nations.
What say you?
Also, I would say that looking at the price for WTI as an example shows how the FED'S actions are quite inflationary but only to a point which I will explain.
ReplyDeleteWe went from $147 down to the $30 range where we got QE1 followed by QE2 which took us back to $125 before topping out with the end of QE2. If memory serves me right, we went down to $80 before the recent SWAPS with the EU and rolling the proceeds from short term paper to long term paper were announced which I call QE3 Lite, and it's taken us back to the $100 range.
Each injection of juice/smack has a reduced effect on the price of WTI, as best as I can tell. It makes sense to me because when a dollar of debt yields something less than a dollar in GDP, you have hit the wall. My caveat to this thought is war. War with Iran would create a chit storm with unknown outcomes.