Does "Printing Money" Lead to Inflation?

Lucky for us, someone has the 411.

Fundamental Theorem of Monetary Inflation

The October 2009 U.S. federal budget deficit numbers are in. Americans are apparently clamoring for austerity. People on Wall Street and Main Street are soiling their underwear over the prospect of inflation. Leave it to Woody Brock to explain it, once again:
Listen to the Podcast
The slide mentioned contains the following:
A set of jointly necessary and sufficient conditions for a monetary inflation:

  1. A large increase in the monetary base (typically, bank reserves) due to central bank financing of a very large fiscal deficit
  2. Banks able to extend lots of new credit
  3. Banks wishing to do so
  4. Customers able to assume more debt
  5. Customers willing to do so
  6. A Central bank that is not aggressive in sterilizing money creation

MORE: Inflation, Deflation & The Exit Strategy
MORE: Monetary Inflation and Shadow Money, a Primer
MORE: Adventures in Macroeconomics


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  1. I’m not sure if his sarcastic comment “Americans are Reprobates”.. Holds water! I mean… have you seen us… buying all the guns and Drooling about Nazi’s.
    I love the end. “Ok! you are really stupid, you think all of these will happen.”
    He is that Nerdy Funny, where you don’t know you should laugh!
    So if I added a Sarcastic Comment “buy Gold” with a LOL!… it would probably just confuse people right?

        • Forgive me my snarkiness, Man. I just keep it stacked up under my matress. I’ve also started growin, distillin and loadin my own, but tell no one.

          • Funny, what a bunch of Snarkers we all are…. This fish must stink from the head.
            We ‘all are’, the most Flawless Contrary Indicators. Seems like it’s all about keeping it at arms legnth.
            Except T. she is perfect!

  2. Teresa –
    Woody does such a great job of laying out the economic arrows here! Is it possible to hear more of his analytical musings? The ones that you previously provided us are always very insightful.

  3. OK, the FED bought existing bonds and bills so treasury could sell more, and printed bank reserves to pay for it, doubling its balance sheet.
    The FED bought a year. But, what about next year, and beyond? Can this trick be pulled again and again until the real economy starts sustained growth?

    • My impression was they purchased across the Curve 5Year 10year and 30’s, I imagine they can hold to Maturity.
      I had a note from one of the money managers that everyone is so Scared of the Long yields, that it is forcing the Short end of the yield Curve even Further down. Which means the Curve is even more beneficial to the banks.
      Right… Money Manages hold Cash, but usually put it in the short end of the bond market so they are getting “something” out of their cash.

  4. Mr. Brock gives an excellent explanation of monetary inflation, very easy to understand. It makes me wonder, with all the “sufficient necessities” involved, how did we get so much killer inflation on the 70’s? Was the Fed asleep at the switch under Chief Miller?
    I was a wee lad, but I remember lunkhead Gerry Ford wearing his Whip Inflation Now (WIN) button for a year or more while the country foundered with inflation. Then, of course, Mr. Volcker came in and took the punch bowl away. Did we just not know as much about monetary manipulation back then or was Miller afraid?
    As for the snark, it’s pretty high quality stuff here. Wiinky (always funny) calls Eric a “contrary indicator”. Ouch, them’s fightin’ words! Watch out, “CI” might stick as a pseudonym.

    • I believe woody says the 70’s were in part due to the 60’s where Unions were able to get big COLA’s in contracts. This ultimately sent wages and thus prices way up. Carter did nothing but talk about a malaise and get screwed by Iran. Early 80’s fed guy sent prime interest up to 20% and killed the inflation. Regan cut taxes and the rest is history, 20 pretty good years.

  5. Teresa, thanks for post the podcast with Dr. Brock.
    Anthony, Mr. Volcker played a hand in the decision to end the gold standard under the Nixon Administration. From 1969 to 1974 Mr. Volcker served as under-secretary of the Treasury for international monetary affairs. He played an important role in the decisions surrounding the U.S. decision to suspend gold convertibility in 1971, which resulted in the collapse of the Bretton Woods system. In general he acted as a moderating influence on policy, advocating the pursuit of an international solution to monetary problems. After leaving the U.S. Treasury, he became president of the Federal Reserve Bank of New York from 1975 to 1979, leaving to take up the chairmanship of the Federal Reserve in August 1979.
    The radical change in the monetary base combined with the Oil Embargo fed into a weak economy and stoked stagflation. Mr. Volcker did have the courage of his conviction and implemented policy with a strong hand and saw it through. Too bad no one in DC is listening to him any more.

  6. My impression is, that Post WW2 Or pre WW2 much of the world’s gold reserves were moved to the United states for Safety. Post WW2, since the U.S. was the only remaining Industrial base, that hadn’t been Bombed to Smithereens. The U.S. had a huge advantage, and as Europe Rebuilt the United States became the Default Monetary Unit. But as the late 60’s and 70’s happened, and Europe had been rebuilt. The gold reserves started shifting and Bretton Woods was became unsustainable.
    It seems obvious that during WWII there would have been a global shortage of Dollars, Being the only standing Allied nation, and for that dollar shortage to persevere for a few Decades, which then becomes an issue. But that is certainly Supposition.
    Some suggest that one of the take aways was that Fixed Value currencies are impossible to maintain.
    Which, I would suggest is something that the Chinese are soon to learn.(is soon? anytime in the next 20 years.)

  7. Think we can get a SPY chart that has more than just peaks and vallys. Wouldn’t it be interesting if next week it took off to the up side instead of going down to form a new swing low for dip buyers. If it did that we could have a top nobody was ready for.

    • If the market keeps going up, do we credit Reagan or Obama? That’s the big dilemma.

      • If it weren’t going up globally I guess we could give credit to the US. But it looks like we have to give credit to at least the G20 on this one. I wonder what one of T’s charts that compares a number of sectors would look like if it plots say 8 countries like SPY, FXI, EEM, etc. It might look like the currancy plot with US and gold Dead last. I guess I could go to Stock charts and make one.

        • Post hoc ergo propter hoc.
          Make sure when you do the chart that you show that the FXI is was down 90% before bouncing 50%, recapturing no where near the 50% the U.S. has.
          But only the hair dresser knows!
          Of course the didactics of Anthony’s statement were largely if not entirely missed.

          • Post Hoc? Well I didn’t definitely assign cause to any given country or president for today’s rally but the rally is a divergence from the past hills and valleys we have seen over the last months. That’s interesting.
            What would I do without you guys on rainy day like today when I can’t go out and play.

          • I guess.
            It would be a terrible idea to spend the day reading about correlation and causation.
            Or build the chart that somehow shows how up 100% from down 90%, is better than up 60% from down 50%.
            But be sure to toss any data points that don’t prove your thesis.
            Maybe we can just hope that someone will do the work for us! Many people always hate story problems.

          • Teacher, teacher they are picking on me… Come on Eric the only country I could find doing worse than SPY in the last year was Japan EWJ. Id’ have to go back to at least 07 and assume I bought at the top of FXI to make it look bad vs SPY. Thanks for making me go draw this chart.

          • did you plot the last week… how about the last hour… how about the last Month…
            so, since the cyclical high, the fxi and spx have retraced 50% of their losses. Which would give you relative index performance in this cycle.
            EEM has retrace 80%
            and gold has doubled, and honestly outperformed, just about everything, except maybe treasuries.. but I’m not looking that up.
            so say you have a Thesis that ” I wonder what one of T’s charts that compares a number of sectors would look like if it plots say 8 countries like SPY, FXI, EEM, etc. It might look like the currency plot with US and gold Dead last. I guess I could go to Stock charts and make one.”
            So when you say that “It might look like the currancy plot with US and gold Dead last.”
            of course you would be missing the point that “The things that fall the furthest, tend to have the highest bounces”
            It’s Like saying Citigroup and AIG… which have gone up 500%, are the best companies in the market… I bet I can find some nice pink sheet penny stocks that are doing much better than that.
            So the thesis that; the best countries are the ones that have bounced the most. Is a mistake, and relative to the cycle gold has outperformed just about everything.

          • If it rains today, your homework is a book report on Cost inflation and Demand inflation.
            For fear of motivating a discussion on 20th Century Economics, instead of 17th Century, After finding and defining the difference, maybe meditating on the difference between the two, and how One or Both, may or May not apply to the 1960’s and 1970’s, and Now!
            If you can at least contemplate possible variations. You will be smarter than the 80% of the people on Fast money!
            I’ll spare you the “Let me Google that for you”

          • The problem with DEFLATION.
            Yes, good topic, or more to the point: the idea of “good” deflation (increased productivity) versus “bad” deflation (decreased demand).
            If inflation is too many dollars chasing too few goods, and deflation is the opposite, then we can have various causes of deflation (which is the current problem and harder to control than inflation.)
            Colin Asher, an economist at Nomura Securities, told Radio Free Europe that the problem with deflation is that “in deflation [there’s] a declining spiral. Businesses make less profits so they cut back [on] employment. People feel less like spending money. Businesses then don’t make any profits and everything works itself into a declining spiral.” Deflation also has a psychological element as it “becomes rooted in peoples’ psychologies and becomes self-perpetuating. Consumers are discouraged from buying expensive items like automobiles or homes because they know those things will be cheaper in the future.”

          • Yep, that’s why they call it a deflationary spiral. The other thing is that “too many dollars chasing too few goods” is only a part of the story, as Woody so eloquently described it.

          • More Deflation
            Another item. Pfizer is letting thousands of research scientists go as they merge with Wyeth. I know one guy who is a PhD organic chemist and he says this is the perfect storm for his profession. Most of the work is now off-shored to chemists in Asia at 1/3 the cost. Deflation.

        • Well, on days like this I just thank Baby Jesus we elected Ronnie back in 1980 because he saved us all from the perils of Communism.
          Tomorrow when we pull back 5 points on the SPX, then I go back to cursing Obama and hoping we can send him back to Kenya.

  8. I was reflecting on the idea that some people talk “Price push VS Demand Pull.”
    It seems like you can get Both!

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