And This Is Going to Lead to High Inflation?

I struggle and struggle to understand the fear of near-term, rapid inflation that is being stoked by the likes of commentators noted here and here. This struggle becomes even more profound when I examine actual data.



Below I plot the series that are purportedly of most concern, namely measures of the money stock: the standard M1 and M2 series, plus the M3 series that the Fed discontinued, all divided by real GDP.

Figure 1: M1 (green), M2 (red) and M3 (blue), seasonally adjusted, divided by GDP in Ch.2005$. NBER defined recession dates shaded gray. Source: BEA, 2010Q3 GDP second release, and for M1 and M2, and M3 up to 2005Q4 from Federal Reserve Board via FRED, and for M3 from 2006Q1, from A World of Possible Futures, and NBER.

From Tautology to Theory


The logic that some individuals seem to be using is that greater money creation must induce greater price increases. Even by this model (so to speak), it hardly seems like high inflation is around the bend.


To formalize the argument I think various commentators are using, start with the tautology:


(1) MV ≡ PY


The Quantity Theory requires that V = PY/M be stable. Then:


(2) P = μ(M/Y)


Where μ is V held constant. (M/Y) is the variable plotted in Figure 1. Take logs:


(3) p = m + log(μ) – y


Take the time differential:


(4) π = Δm + Δ log(μ) – Δ y


π is inflation. If μ is constant, then Δ log(ν) drops out. Note that the monetarist logic that greater money supply necessarily leads one-for-one to higher prices also requires that Y be also constant, which would be true in a Classical model. Suppose for the sake of argument that Y (real GDP) grows at an exogenous rate. Then inflation is the money growth rate minus trend real GDP growth. By this measure, high inflation hardly seems likely.


Incredible Assumptions?


Now let’s examine the underlying assumptions. First, is velocity constant? I’ll let the reader decide:

Figure 2: M1 (green), M2 (red) divided by nominal GDP. NBER defined recession dates shaded gray. Source: BEA, 2010Q3 GDP second release, and for M1 and M2, and M3 up to 2005Q4 from Federal Reserve Board via FRED, and for M3 from 2006Q1, from A World of Possible Futures, and NBER.

Figure 2 clearly demonstrates that velocity is not constant; nor does it even trend in a stable fashion. Hence, a critical piece of the monetarist worldview is missing. (Actually, it’s much worse than mere instability; all three velocity series fail to reject the unit root null using the UMPI DF-GLS test of Elliott, Rothenberg and Stock. At the same time they all reject the trend stationary null of the Kwiatkowski, Phillips, Schmidt and Shin test. Of course, anybody with a shred of acquaintance with statistical techniques would not be surprised by this finding.)


Now, none of the foregoing is controversial, or even new. In fact, the instability of velocity is one of the basic tenets of monetary analysis I teach in intermediate macroeconomics. So why does this worldview hold such sway? One interpretation is sheer innumeracy. An alternative is sheer demagoguery. I do not have sufficient information (nor inclination) to make a judgment for each particular commentator.


A second point is that we have a suspicion that GDP is not exogenous with respect to money, at least at the short to medium run. One might argue that (4) holds in the long run; but that I think is not what critics of QE2 are propounding.


More Data


Is there even a correlation in growth rates? Consider four quarter inflation and four quarter changes in the log M2 to GDP ratio.


Figure 3: 4 quarter change in log GDP deflator against 4 quarter change in log M2 to real GDP ratio, 1986Q1-2010Q3. Source: BEA, 2010Q3 GDP second release, Federal Reserve Board via FRED, and author’s calculations. [Corrected/updated 8am Pacific – mdc]

The slope is 0.015 -0.026, and not statistically significant at anywhere near the conventional levels.


Does a Credit View Give More Cause for Inflation Anxiety?


Some observers (including some adherents to M3) argue that broader measures of monetary aggregates, or ones that are more credit-like, are better linked to inflation. Figure 1 suggests that inflationary pressures are then, if anything, decreasing, as M3 to real GDP has been decreasing since the end of the recession. As of September, M3 growth has been -5.1% over the previous 12 months.


Concluding Thought


So the quantity theory (which, just to remind readers, refers to money and not money base) suggests little prospect of rapid inflation, given the recent evolution of money aggregates. With the 2010 output gap between 3.4 to over 6 percentage points of GDP [0], a Phillips curve analysis seems to point to muted inflation if not disinflation.


One plausible inflation scenario is the one wherein the Fed is not able, politically, to prevent reserves from leaking into expanded money supply in the future (or course, if one wanted to politically insulate the Fed, one wouldn’t be signing letters like this, as Brad Delong observed. Perhaps those individuals are thinking of the aphorism, “in order to save the village, we had to destroy it.”) But if there are fears of increase money base feeding into money supply, they haven’t shown up in market based measures of expected inflation. [1]


Other worries (which I find more plausible), highlighted by Jim here.
Another concern is that the Fed loses control over interest rates (e.g., here).


By the way, Econbrowser reader W.C. Varones asks:

Does anyone have an example of a central bank actually shrinking its balance sheet significantly ever in history?

And the answer is, “yes”. For edification, all he has to do is read this article.

43 thoughts on “And This Is Going to Lead to High Inflation?

  1. ppcm

    This is the outcome of a decade long collusion, between Greenspan and the financial industry,between Greenspan and its Central banks counterparts.
    A web that did control under the same modus operanti, financial markets ( long term interest rates,supervision bodies,loans disbursements,sovereign risks assessment)
    A decade long of scruffy risks assessment,a decade long enough to have made the whole financial industry brainless,as it was operating on a no risk (liquidity,credit risk).
    Econbrowser posts on the subject are prolific enough,for not recalling them without overwhelming any reader.
    The unwinding of the existing distortions,prices,assets,leverage,is as slow as it wishes to be painless. Throughout the last years Minsky moment was the leit motiv,Schumpeter the absentee.

  2. Ricardo

    Is your definition of inflation an increase in prices, or is it a decline in the value of the currency?
    Guess what? In a world where barter replaces money, prices approach zero. In a world where the currency loses its value barter replaced exchanges made with currency (can you say Continental). In a world where government policy creates massive malinvestment, such as Fannie and Freddie (government) stimulated over-production of housing, once the boom is over and the bust hits, prices decline, no matter how much currency is pumped into the system.
    It is often faulty definitions that lead to faulty analysis.

  3. Menzie Chinn

    Ricardo: Let me get this straight. You are asserting there is so much barter going on right now that the GDP deflator is approaching zero. This conclusion regarding the value of the GDP deflator is factually incorrect.

  4. Andre

    I have a very plausible explanation of what is going on. ( A lot of my thinking/understanding came from reading THE GREAT REFLATION by former BCA chief Tony Boeckh.)
    Long story short:
    (1) we have and will continue to have asset INFLATION where there is a global market for goods and services. i.e. Wheat, Copper, Crude, Potash, Steel, Zinc and so on… the increases since the 2008 bottom are staggering!
    (2) We have asset DEFLATION where we have domestic oversupply
    (3) On a monetary basis (alone) there is little to no evidence of inflation. Agreed M3, Velocity and other contributors to the supply of money shows weak money growth and that shouldn’t be inflationary. The concern from many is that if/when the economy turns, and assuming a Q/E world with a cheaper dollar (whereby we “import” inflation via higher goods prices, we will begin to rapidly uptick.
    …other gents like Williams @ shadowstats believe using CPI as a method of tracking inflation is inherently flawed (Via adjustments and heuristics (whereby the power of computing doubles in 5 yrs so a $2000 laptop is considered $1000 over that 5 yrs)). I believe there is massive truth here — I see my expenses increasing but nowhere is there positive CPI?! very curious…
    Personally, I do not see “monetary” inflation over the medium term, but I do see commodity inflation everywhere. I expect this to continue and I expect there to be more slack in the economy, personally. The result in my view is that we are underweighting the probability of a 1970’s like stag-flationary environment.
    As for the inflation/deflation debate — the answer is clear: Both.

  5. Raskolnikov

    Professor, If inflation is not an immediate threat, (And I do not think it is) than could there be other threats to the dollar that we don’t normally consider?
    For example, if GOP lawmakers are able to block a second round of fiscal stimulus, then US consumers may not generate as much demand as they have in the past. This would make US markets less attractive to export-dependent countries.
    In other words, less demand would mean that other countries would be less inclined to use the dollar. (posing a risk that the dollar would lose “reserve currency” status)
    Is this too far fetched to be an issue?

  6. Anonymous

    There is a behavior required of reserve currency countries. They have to produce enough (nominally) high-quality financial assets to provide reserves for the central banks of those countries which trade in dollars. That typically means some sort of debt instrument or other.
    Now, central banks need not hold the large amount for foreign (mostly US) debt instruments that they have recently piled up, so the US doesn’t need to produce the amount of debt it produces. However, as long as China and Japan and Russia and a number of other countries continue piling up reserves, the US – or somebody – will continue to pile up debt to provide reserve fodder.
    Less demand, period, would not necessarily hurt the dollar’s reserve position. However, unless foreign central banks decide to hold fewer FX reserves, the dollar will lose some of its reserve currency position if it fails to produce sufficient financial assets. That is to say, if currency manipulating countries continue to rely on the dollar as a reserve currency, then the US needs to keep borrowing. That generally means, keep spending.

  7. Johannes

    “Then the crisis has passed, the balance
    sheet should be unwound promptly.”
    Haha, good joke ! Menzie, I am sure you are going to say : “Of course – the unwinding will be done by Sahara Palin !”. haha, you made my day.

  8. Get Rid of the Fed

    “So the quantity theory (which, just to remind readers, refers to money and not money base) suggests little prospect of rapid inflation, given the recent evolution of money aggregates.”

    Would you like to tell that to Scott Sumner? If I’m remembering correctly, that is not what he told me.

    Plus, by “money” do you mean currency plus all demand deposits (emphasizing all including shadow banking)?

  9. flow5

    The rate of growth in the money stock exploded c. 2 years ago. That injection’s impact is now waning. I.e, money flows are lagged. Aggregate monetary purchasing power is, just now, rapidly declining (hence the need for QE2).
    But MV equals PY only if you use the transactions velocity of money (bank debits), not the income velocity money variable (income velocity is a contrived figure).

  10. Jonathan

    You want to believe there is a rational, reasonable argument about looming inflation and, being a rational, reasonable man, you have trouble accepting that their arguments are irrational and unreasonable. Accept the reality: some of them are religious nutcases and many of the rest pander to the zealots and their ridiculous beliefs.
    Consider the essence of the argument in the word actually being used to denigrate a policy designed to boost our export economy: weaken. They say this “weakens” the dollar. Take that at face, not with some reasonable, rational economist’s perspective but for what it is: a statement that they fear “weakness” and the dollar is to them the standard bearer of America in the world, sort of like our flag and thus when you “weaken” the dollar, you “weaken” America’s flag and thus America.
    I know this makes no sense but attend a meeting, listen to the radio, read their words on their websites and this is actually what they believe. They have a holy belief in the US and that means a holy belief in the dollar. You’re lucky they haven’t started calling you Satan’s pawn because that’s essentially what they think.

  11. flow5

    By Leland Pritchard (Ph.D, economics, Chicago, 1933):
    The transactions concept of money velocity (Vt) has its roots in Irving Fischer’s equation of exchange (PT = MV), where (1) M equals the volume of means-of-payment money; (2) Vt, the transactions rate of turnover of this money; (3) T, the volume of transactions units; and (4) P, the average price of all transactions units.
    The “econometric” people don’t like the equation because it is impossible to calculate P and T. Presumably therefore the equation lacks validity. Actually the equation is a truism – to sell 100 bushels of wheat (T) at $4 a bushel (P) requires the exchange of $400 (M) once (V), or $200 twice, etc.
    The real impact of monetary demand on the prices of goods and serves requires the analysis of “monetary flows”, and the only valid velocity figure in calculating monetary flows is Vt. Milton Friedman’s Income velocity (Vi) is a contrived figure (Vi = Nominal GDP/M). The product of MVI is obviously nominal GDP.
    So where does that leave us? In an economic sea without a rudder or an anchor. A rise in nominal GDP can be the result of (1) an increased rate of monetary flows (MVt) (which by definition the Keynesians have excluded from their analysis), (2) an increase in real GDP, (3) an increasing number of housewives selling their labor in the marketplace, etc. The income velocity approach obviously provides no tool by which we can dissect and explain the inflation process.
    To the Keynesians, aggregate monetary demand is nominal GDP, the demand for services (human) and final goods. This concept excludes the common sense conclusion that the inflation process begins at the beginning (with raw material prices and processing costs at all stages of production) and continues through to the end.
    Admittedly the data for Vt are flowed. So are nearly all economic statistics, but that does not preclude us from using them. An educated estimate is better than no estimate at all. For example, we know that the international balance of payments balances – debits equal credits, payments equal receipts, etc. The Department of Commerce statistics do not prove this, so in order to make their statistics balance, they put in an “errors and omission “balance figure. This is the triumph of good theory over inadequate facts.
    …This was the best that could be done to eliminate the influence on prices of purely financial and speculative transactions. Obviously funds used for short selling do not contribute to a rise in prices.
    In calculating the flow of funds (MVt), I am assuming that the Vt figure calculated by the Fed is not only representative all commercial banks in the United States, but that the velocity of currency is the same as for demand deposits. Is this valid? Probably not. But nobody knows.
    But we do know that to ignore the aggregate effect of money flows on prices is to ignore the inflation process. And to dismiss the concept of Vt by saying it is meaningless (that people can only spend their income once) is to ignore the fact that Vt is a function of three factors: (1) the number of transactions; (2) the prices of goods and services; (3) the volume of M.
    Inflation analysis cannot be limited to the volume of wages and salaries spent. To do so is to overlook the principal “engine” of inflation – which is of course, the volume of credit (new money) created by the Reserve and the commercial banks, plus the expenditure rate (velocity) of these funds. Also overlooked is the effect of the expenditure of the savings of the non-bank public on prices. The (MVt) figure encompasses the total effect of all these monetary flows (MVt).
    Analysis is not based upon absolute figures but by 2 separate rates-of-change.

  12. Nemesis

    “Money” (debt-money with an effective compounding interest cost at infinite term) is lent into existence by private banks, whereas an incremental share is borrowed into existence by gov’t and indirectly monetized by the central bank via primary dealers. We have no growth of “money” without a corresponding increase in debt (debt-money).
    The classical definition of “inflation” is the increase in the supply of money (debt in our case), irrespective of price effects. Today’s “inflation”, i.e., increase in prices, is a function of deficit spending, oil imports and the price of oil, and domestic capacity utilization.
    Commodities price inflation is a result of Peak Oil, China’s runaway growth, and resource hoarding (similar to pre-war hoarding) and long-forward speculation and producers and intermediaries attempting to lock in prices.
    Bank lending growth is non-existent, thereby debt-money inflation is quiescent. Gov’t deficit spending in excess of loss of receipts so far is not resulting in net debt-money inflation (gov’t spending less bank charge-offs).
    If one adjusts the money multiplier and M2 or M3 velocity by removing gov’t spending from GDP, the multiplier and velocity are plunging, reflecting the deteriorating private debt-deflationary (deleveraging) regime now underway.
    Moreover, adjust real final sales for gov’t purchases, and the yoy rate of adjusted final sales only barely turned positive (effectively 0%) in Q3. Real private final sales are at levels of four years ago; are down 4.2% from the ’08 peak; and have averaged less than 0.7%/yr. since ’00.
    For private final sales to return to the long-term 3.3% real trend rate to ’00 at the trend deflator of 2.2% since ’00, private final sales would have to average 16%/yr. for three years, 12%/yr. for five years, and 9% for ten years.
    The more likely scenario is for the post-’00 trend rate of real private final sales of 0.6-0.7% to persist at the post-’08 deflator of 0.7% or lower, implying a secular debt-deflationary private final sales trend rate of no more than ~1.5% and a real rate for final sales and private GDP around 0%.
    Headline nominal and real GDP data, including cyclical inventories and ongoing gov’t borrowing and spending of 7-10% of total nominal GDP (14-15% of private GDP!!!), will mask the underlying secular debt-deflationary weakness of the private sector, allowing e-CON-omists, politicians, and Wall St. shills, at least for a while, to ignore the realities of the deteriorating real economy and report “growth”.
    However, all the while the post-’00 trend real GDP and final sales will continue to decelerate from the 3.3% secular peak in ’00 to and around 0% by the mid- to late ’10s, reducing trend real growth by 35-40% (~45-50% per capita) from what would have otherwise occurred had growth continued at trend from ’99-’00.
    Needless to say, the implied trend real growth of private final sales means little or no net incremental increase in payrolls or civilian employment hereafter; little or no top line US firms’ revenue growth; ongoing cost cutting and capacity consolidation across industry sectors and gov’ts; and much lower stock prices, P/E, and gov’t interest rates in the years ahead.

  13. don

    “But if there are fears of increase money base feeding into money supply, they haven’t shown up in market based measures of expected inflation.”
    So, your only counter to the most well-founded fears of the inflationary consequences of the Fed’s policies comes down to pointing out that Mr. Market does not fear this result at present? I would be somewhat leery of this view, seeing that Mr. Market has demonstrated a clear case of disastrous myopia of late. Inflationary fears could become uncontrollably self-reinforcing if banks suddenly preceived a huge cost to holding excess reserves (say, 5% inflation). Could the Fed soak up the excess reserves fast enough or pay enough interest to persuade the banks to hold them (the latter strategy could force them to go to Congress for an appropriation)?
    How reasonable is it to fear that the Fed could lose control of inflation or of the money supply? Well, right now the Fed may be in exactly such a situation, being unable to generate the desired amount of bank loans and money supply needed to effectively combat deflationary pressures.
    The analogy is to a car trying to gain traction on an icy road and spinning its wheels. Unless care is taken, sudden traction can also mean sudden catastrophe, as insufficient speed is suddenly replaced with excess speed and an undesired meeting with another vehicle or a trip off the side of the road.

  14. Get Rid of the Fed

    Menzie Chinn said: “I think nominal GDP targetting is something worth considering.”

    How about considering whether NGDP targeting and price inflation targeting both suffer the same flaw? That would be when an increase in the amount of medium of exchange is needed both rely on demand deposits created from debt (loans) and not on an increase in the amount of currency.

  15. aaron

    What about commentors that say relative price distortions will have a negative effect on consumption, savings, and investment in the broader population, resulting in disinflation or deflation?

  16. ComradeAnon

    What Jonathan said. It’s not just economics. It’s absolutely everything. Proof? Look at most of the people who think they are qualified to run for President. Reality has taken a holiday.

  17. Silas Barta

    I have this image of people like James_Hamilton and Menzie_Chinn going about their lives having bigger and bigger shopping bills and grocery bills and having to deal with lower and lower quality of goods, as every day they insist that, well, the offical stats tell us there’s no inflation, so I’ve gotta tow the government line and insist my quality of life isn’t shrinking.
    No sir, no inflation here, the government stats say so, and that’s more reliable than the potato I can barely stand to eat or the beef jerky I can’t afford anymore.

  18. Steven Kopits

    “A cental bank’s promise to reverse a large-scale balance sheet increase in a timely fashion lacks credibility if the central bank is not sufficiently independent of the political process.” Doubling your Monetary Base and Surviving…”, p 3.
    Bernanke is not Volcker, and I would guess this is WC’s concern.
    Also, Figure 3, top left graph, suggests that inflation expectations have not been a good guide for actual inflation in the US during this last crisis. One might ask whether expectations will be a better guide in the bounce-back from the crisis.
    Still, I take your point. The chart’s don’t support the view that some inflationary spike is immiment.
    However, as I think we all broadly agree, the constraint on the economy is not the cost of capital (a flow), but rather the degree of leverage on the balance sheet (a stock). Therefore, it would seem that a direct repair of the balance sheet would appear a better approach to stimulating the economy.
    I’d be curious if you could run an analogous analysis for, say, $5,000 of new money to each household. Would this lead to inflation, or to a paying down of debt, and if so, could it be useful to stimulate the economy? Would the soft expropriation of creditors in this fashion be worth it?

  19. lilnev

    I think of inflation in terms of aggregate demand and supply. Inflation occurs when the quantity demanded at prevailing prices is greater than the quantity suppliers can profitably produce at those prices, i.e. aggregate demand exceeds the supply constraints. This view is based on an aggregate supply curve that is steeply inflected at some point that’s the “capacity” of the economy. Deficient aggregate demand, as now, leads to significantly lower output with only a minor decrease in prices. Excessive aggregate demand would lead to little increased output, mostly just a bidding war for the limited supplies. Changes in money supply only produce inflation indirectly, by changing aggregate demand (changing the relative desirability of saving vs. spending).
    As for the wsj article, I don’t think the Fed can ever lose control of the Fed Funds rate. They have to drain all the excess reserves first, which might involve taking a one-off loss on their QE purchases, but that’s not a fundamental problem– the Fed is inherently profitable, it’s carrying unrealized gains on its gold reserves, and Treasury could backstop any losses anyway.
    A more interesting question is what long-term rates will do. There might be a period where the Fed is still unwinding, so short rates haven’t risen yet but there’s upward pressure on long rates, plus the bond markets are anticipating higher inflation and/or short rates, making long bonds unattractive. We could have a historically steep yield curve for a while.

  20. Mark A. Sadowski

    Get Rid of the Fed wrote:
    “Would you like to tell that to Scott Sumner? If I’m remembering correctly, that is not what he told me.”
    Do you mean the same Scott Sumner that wrote this?
    “I am a product of the 1970s, with a visceral distaste for inflation. Yet despite the massive budget deficits and doubling of the monetary base, I am for some strange reason worried about excessively low inflation, rather than high inflation. Why?”
    You must have been talking to Scott’s goatee wearing evil twin.

  21. aaron

    He should be concerned with what’s causing the low inflation instead of thinking all things stimulus will always increase rather than decrease inflation.

  22. The Rage

    Considering that inflationista’s can’t come to grips that the “FED” really isn’t doing anything than play magic tricks to make you “believe” they are pursuing inflationary policy. All the FED wants is for businesses to stop hoarding literally. It is a plea. Bernanke would probably dress up in a dress and makeup prancing around the Jefferson Monument just to make it happen lol.
    They stop hoarding, we generate a little inflation and job growth. But they are fighting a large fleet shorthanded. The final deflationary stage means anarchy and the rerise of anti-capitalism as the deflation destroys more and more savings and disinvestment to the point, anti-capitalism becomes desirable.
    Silas, if you are so worried about food prices, tell Asia to cut its bs out. Food prices are a global affair and have been for awhile.
    As I said a few weeks back:
    1.America inflate
    2.Asia deflate
    3.Europe? I don’t care lol
    In the long run, we would all be better off.

  23. Zeek

    Wow, there’s some major fail economics going on here by the anti-government types.
    The increase in money supply is a mirage since the velocity of that money is decreasing. There is no inflation.

  24. Ekim

    Electronically printing $600 billion necessarily confiscates $600 billion in purchasing power from consumers (especially fixed income retirees). Maybe soon, maybe later, but it happens. Printers routinely proclaim that they have a “new” exit strategy that will work this time, but none of them ever did.

  25. Ted K

    Menzie says,
    “One interpretation is sheer innumeracy. An alternative is sheer demagoguery. I do not have sufficient information (nor inclination) to make a judgment for each particular commentator.”
    Uuuuuuh, like any chance these folks are selling their own “book” in Gold (have a large percentage of their personal investment account in gold)???? Or themselves are gold dealers/shysters???
    See here:,0,725223.column
    And the ever popular Glenn Beck, here

  26. Ricardo

    Menzie wrote:
    Ricardo: Let me get this straight. You are asserting there is so much barter going on right now that the GDP deflator is approaching zero. This conclusion regarding the value of the GDP deflator is factually incorrect.
    No, Menzie. Sorry for not being more clear. Let me restate my post in a more directive way. Your definition of inflation as being increases in price is a faulty definition.

  27. Menzie Chinn

    don: In 2001, as senior economist for international finance on the Council of Economic Advisers, I was following Japan’s attempts to fight deflation; some observers in Japan (usually, not economists) feared quantitative easing would cause hyperinflation. No analyst in the USG, the Fed, or the investment banks saw hyperinflation as a likelihood. Ten years on, I’m still waiting for that hyperinflation. So, exactly how well founded are those fears you spoke of.

    Steve Kopits: Bernanke is not Volcker is undeniable. Volcker, appointed by the previous President (Carter), pursued a tight monetary policy during the Reagan Administration. Bernanke, appointed by the previous President (Bush), after having served as Bush’s CEA Chair, has pursued an expansionary monetary policy that is in line (perhaps even a bit more conservative than) than what is implied by his academic writings. And so we are to take from this that Bernanke is more susceptible to pressure from the White House. I don’t see the logic.

    Silas Barta: Well, you’re free to do analysis by anecdote. I’m willing to look at data, and not just government data. I’m waiting to see your preferred index or price series. Otherwise, you’re just pontificating.

    TedK: I was referring primarily to the signatories of the letter to the WSJ, which as I recall didn’t include Glenn Beck. I agree, however, that Mr. Beck could conceivably be “talking his book”, as could many others, primarily those with holdings in gold. But, I have no proof, so I’ll leave it to others to make the case.

    Ricardo: OK, so your response is to redefine inflation so inflation is occurring. And so suppose my definition of being wealthy is being at or above the poverty line. Et voila! Now we’re a rich society. When in doubt, redefine the variable of interest.

  28. flow5

    “Volker, appointed by the previous President (Carter), pursued a tight monetary policy during the Reagan Administration”
    You’ve always been analytical, not political. This myth is unsubstantiated:
    Paul Volcker’s version of monetarism (along with credit controls), was limited to Feb, Mar, & Apr of 1980. With the intro of the DIDMCA, total legal reserves increased at a 17% annual rate of change, & M1 exploded at a 20% annual rate (until 1980 year’s-end).
    Then came the “time bomb”, the widespread introduction of ATS, NOW, & MMMF accounts — which vastly accelerated the transactions velocity of money. This propelled nominal gNp to 19.2% in the 1st qtr 1981, the FFR to 22%, & AAA Corporates to 15.49%. Nothing “tight” about that.

  29. Barkley Rosser

    I accept that the data on inflation is correct; there is very little in final goods and services measured by the CPI, even if some people focus on certain goods that have gone up (my grocery bills! but I pay no attention to clothes or furniture). It is also clear, that even though the TIPS nominal rate has gone negative, the spread did not incrase much, meaning bottom line market expectations of inflation have only moved up slightly.
    However, when I talk to “average people,” what I hear is them focusing on primary goods that do not directly enter inflation, such as wheat and oil and gold and platinum silver and copper and so on, many of which have gone up for a variety of reasons. Then they hear about QEII and have this vague monetarist education that gets revved up by lots of commmentators. So, how is it that these primary commodities prices have gone up so much without leading to more final goods inflation?
    Of course, all the talk about this being a way to lower the value of the dollar has turned into a joke more recently, with the dollar rising strongly against many currencies, and the long term Treasury rates rising rather than falling.

  30. flow5

    Merijn Knibbe: Yes, your proposal improves upon the current scheme. But bank debits already incorporate your proposal. Aggregate monetary purchasing power (bank debits) are the GOSPEL.
    See 1931 Committee on Bank Reserves Proposal (by the Board’s Division of Research and Statistics), published Feb, 5, 1938, & declassified after 45 years on March 23, 1983.

  31. Don Millman

    The GDP for last quarter was at an annual rate of 2.3%. That is slightly above the official Fed goal for the rate of inflation.
    The question about QE2 is in regard to its long-term effects–not its immediate effects. QE2 has not even HAPPENED yet.

  32. Menzie Chinn

    flow5: Please correct me if I am wrong that the peak in the Fed Funds rate (19.1%, monthly average of daily data) in 1981M06 was during the Reagan administration.

    Don Millman: As a point of fact, the unofficial target inflation rate has typically been couched in terms of the core personal consumption expenditure deflator. And as of 2010M09, 3 month inflation that is running at 0.7% on an annualized basis.

    While it is true that QE2 is only now being implemented, and will run through mid-2011, it is not as if we haven’t seen something like it already implemented — in QE1. The consensus is that it had a small, but noticeable, effect on yields, and on GDP growth.

  33. Get Rid of the Fed

    Mark A. Sadowski, here is the quote from above:

    “So the quantity theory (which, just to remind readers, refers to money and not money base) suggests little prospect of rapid inflation, given the recent evolution of money aggregates.”


    7. October 2010 at 05:59

    “I consider the base to be money, and DDs as credit. Not everyone agrees with me. It’s a matter of cenvenience, not scientific fact.”

  34. Ricardo

    Menzie wrote:
    Ricardo: OK, so your response is to redefine inflation so inflation is occurring. And so suppose my definition of being wealthy is being at or above the poverty line. Et voila! Now we’re a rich society. When in doubt, redefine the variable of interest.
    So you confirm your definition of inflation is an increase in prices not a decline in the purchasing power of money. As I stated a faulty definition will lead to faulty analysis especially when it is combined with aggregate statistics. John Law here we come!! Mercantilism is alive and well.

  35. Mark A. Sadowski

    Get Rid of the Fed (aka Fed Up),
    Having read the entire thread at that particular post I think it’s fairly clear that Scott was talking about the monetary base (M0) by that point in the conversation. Scott may hold some unconventional views but I think it’s safe to say he agrees with the standard (Federal Reserve) definitions of the various monetary aggregates. This is trues if for no other reason than it makes it possible for monetary economists to have a common vocabulary.

  36. don

    “No analyst in the USG, the Fed, or the investment banks saw hyperinflation as a likelihood. Ten years on, I’m still waiting for that hyperinflation. So, exactly how well founded are those fears you spoke of.”[?]
    1) The U.S. is not Japan.
    2) This line of reasoning sounds an awful lot like similar arguments that were followed by claims of “whocoodanode?” But there are plenty of analysts today who are on record expressing fear that undesirably large inflation may result from the Fed’s policies (so maybe we have some proetection from the result actally occurring).
    Myself, I think that over the next few years deflation is more likely than high inflation for the U.S. But this does not mean the chance of inflation is negligible, or that the Fed could not get too aggressive.
    I like Taleb’s analogy to a person smacking a catsup bottle, hoping the right amount will come out. The result is invariably too little or too much, depending on the cautious nature of the individual.

  37. Menzie Chinn

    don: Tabulate the analysts, then try to follow their logic — if a causal chain of events is indeed laid out. Given extreme slack in the economy (if you believe in the Phillips Curve), or the empirical evidence that inflation (and growth) is typically quite muted after financial crises/recessions/housing busts (in one of the IMF WEO’s a couple issues back), I say the evidence is heavy against high and rapid inflation. You are right — we can’t rule it out. Just like we could not fully rule hyperinflation in Japan in 2001.

    Personally, I usually take a piece of clean silverware and dislodge the plug in the ketchup bottle and thereby obtain the desired amount of condiment.

  38. don

    “Personally, I usually take a piece of clean silverware and dislodge the plug in the ketchup bottle and thereby obtain the desired amount of condiment.”
    The only like policy I see available to the Fed is price targetting, but Ben has ruled that out (so far).
    I agree it is hard to construct a story for inflation in the face of excess capacity and high unemployment, and that most fears are probably based simply on the view that increases in the monetary base will be followed by increases in the money supply, denying a liquidity trap.
    But the whole game is expectations, and that is perhaps more tenuous now with the possibility of contagion from sovereign defaults in places like Portugal, Greece, Ireland, Spain, and Iceland. (In heavens name, when will policy officials recognize explicitly that these countries simply cannot pay their debts at face values?) The official stonewalling over recognizing bad debts is widespread and aggravating, including U.S. banks.

  39. tim kemper

    Leave it to economists to miss the facts in front of their face. The steep yield curve doesn’t lie. No different than the inverted yield curve predicted the impending recession. ignore at your own peril.

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