An Inflation Threat?

We should be so lucky. In any event, the Fed pumped a trillion dollars into the economy yesterday (yes a trillion):

The Federal Reserve sharply stepped up its efforts to bolster the economy on Wednesday, announcing that it would pump an extra $1 trillion into the financial system by purchasing Treasury bonds and mortgage securities. . . . [T]o the surprise of investors and analysts, the [Fed Open Market] committee said it had decided to purchase an additional $750 billion worth of government-guaranteed mortgage-backed securities on top of the $500 billion that the Fed is already in the process of buying. In addition, the Fed said it would buy up to $300 billion worth of longer-term Treasury securities over the next six months. That would tend to push down longer-term interest rates on all types of loans.

This is known as quantitative easing, increasing the money supply and, hopefully spurring economic activity. But the general view is quantitative easing is not especially efficient. Krugman wrote in September 2008:

You still see people saying, in effect, “never mind the zero interest rate, why not just print more money?” Actually, the Bank of Japan tried that, under the name “quantitative easing;” basically, the money just piled up in bank vaults. To see why, think of it this way: once T-bills have a near-zero interest rate, cash becomes a competitive store of value, even if it doesn’t have any other advantages. As a result, monetary base and T-bills — the two sides of the Fed’s balance sheet — become perfect substitutes. In that case, if the Fed expands its balance sheet, it’s basically taking away with one hand what it’s giving with the other: more monetary base is out there, but less short-term debt, and since these things are perfect substitutes, there’s no market impact. That’s why the liquidity trap makes conventional monetary policy impotent.

Here, the Fed will also be buying Fannie and Freddie mortgage backed securities as well as long term government securities. Krugman considered this avenue as well:

But why not purchase stuff other than T-bills? This can be thought of as changing the composition of the Fed’s balance sheet, rather than enlarging it; and Ben Bernanke, in happier days, thought that might be an effective policy in a liquidity trap.

There are, however, three reasons to be doubtful about this stuff:

. . . 3. The reason T-bills are an imperfect substitute for, say, corporate bonds — to the extent they are — is risk. Therefore, the reason changing the composition of the Fed’s balance sheet can move prices, to the extent it can, is because the Fed is taking on risk. This isn’t a role the central bank is meant to play; you’re sliding over into fiscal policy.

Nonetheless, I guess the Fed had to try the “Bernanke twist.” And it did — the old Fed balance sheet, in which T-bills were the vast bulk of assets, is no more. But the effects have been disappointing, especially weighed against the risk, which I know is making Fed officials very nervous.

The situation is different now because the Fannie and Freddie mortgage backed securities are already fully backed explicitly by the federal government. There is no additional risk in the Fed purchasing government backed mortgage securities.

However, the efficacy of this move as a stimulus is not so clear. At least directly, the purchase of mortgage backed securities could merely be an artificial prop for housing prices and perhaps a spur to housing activity. In theory, money that was tied up in mortgage backed securities will not be pushed to other sectors of the economy. Will it actually work that way? I guess we'll find out.

Speaking for me only

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    I hope they know what they are doing (5.00 / 5) (#1)
    by Saul on Thu Mar 19, 2009 at 07:44:52 AM EST
    Lately from what I've seen my confidence is slowing diminishing.  

    Now I hear that all this brouhaha over AIG was just a charade by all those complaining.  Now we hear that Sen Dodd was the one that had put a section in the bailout bill when in conference not to give the bonuses  but now admits he was pressured by the treasury dept and the Obama administration to take it out and he did.  

    Was Liddy really the guy that should have been on the hot seat?

    Like I said in a prior post I think Obama is in trouble over this.

    In the immortal words of Jimi Hendrix... (5.00 / 1) (#37)
    by lambert on Thu Mar 19, 2009 at 11:10:26 AM EST
    ... you just can't believe everything you see and hear, can you?

    See Digby on Dodd.


    The Dodd story (5.00 / 1) (#43)
    by DXP on Thu Mar 19, 2009 at 12:24:05 PM EST
    is being disputed. Here

    Greenwald on Dodd (5.00 / 1) (#45)
    by Amiss on Thu Mar 19, 2009 at 01:29:35 PM EST
    Love it: (5.00 / 1) (#46)
    by oculus on Thu Mar 19, 2009 at 01:37:09 PM EST
    It was the Treasury Department -- at least according to a Treasury official granted anonymity for the extremely compelling reason that he "asked not to be named"
     [Italics added.]

    Who will Obama throw under the bus? (none / 0) (#47)
    by BrassTacks on Thu Mar 19, 2009 at 03:16:59 PM EST
    I'm betting that Obama will claim that Geithner failed to tell him about the bonuses, and about all the companies that
    got money while owing back taxes.  Then he'll will accept Geithner's resignation while saying he's a great guy, blah, blah, blah.  

    Geithner's toast.  


    Anyone got Peanut Butter? (5.00 / 1) (#3)
    by SOS on Thu Mar 19, 2009 at 08:29:46 AM EST
    Must be safe. Will pay good price.

    What really needs to happen (5.00 / 3) (#4)
    by jbindc on Thu Mar 19, 2009 at 08:43:43 AM EST
    since they pumped a trillion dollars in the economy, is that money needs to be seen on the Main Street economy - not the Wall Street one.  Is this extra money going to make banks more eager to grant loans to Jane and John Doe?  Probably not, so this is really an exercise (in futility, I think). Jane and John would use that money to make purchases, which as we know, is what will get the economy flowing again. It does no one any good for that extra cash to be sitting in a vault.

    It delays (5.00 / 1) (#5)
    by SOS on Thu Mar 19, 2009 at 09:02:28 AM EST
    the collapse of the United States Economy.

    We'll see what kind of inflation kicks in this year as shortages of common goods become more and more.

    Basically, we're insane.


    Wall St v Main St (5.00 / 1) (#7)
    by Inspector Gadget on Thu Mar 19, 2009 at 09:10:27 AM EST
    They are coming at this from so many directions, the average citizen can't help but be so confused they either think it's over their head and should be handled by these "experts", or so cynical they are certain these guys are playing fast and loose and grabbing the real money from real people before we know what hit us.

    Is all this money going only to the big banks and AIG? Are there Main St community banks getting money from us? Do they even need it? We had a pretty decent economy before Citigroup, B of A, etc. became giants. I've moved my life back to Main St, and think this is a sham.

    As long as our tax money is deeply infused into these major companies, what happens when they finally do fail? They aren't learning a darn thing from this, so how can they continue long beyond the debt being thrust onto the taxpayers?


    Could they send me ... (5.00 / 2) (#6)
    by Robot Porter on Thu Mar 19, 2009 at 09:04:54 AM EST
    a suitcase full of those crisp new bills?

    I'll put it into the economy.  


    I can help you (5.00 / 2) (#15)
    by Jlvngstn on Thu Mar 19, 2009 at 09:52:38 AM EST
    if you get that suitcase.  I am going to city hall this morning and officially changing my name to A.I.G.

    I wonder how long until someone does that?  Where is Joe the Plumber?  

    "Hi, my name is AIG and I am here for my check"  wouldn't that be grand


    Hilarious! (5.00 / 1) (#21)
    by Robot Porter on Thu Mar 19, 2009 at 10:07:30 AM EST
    And, may I say, I think that's a trillion dollar idea!



    A.I.G..... (5.00 / 1) (#32)
    by kdog on Thu Mar 19, 2009 at 10:36:05 AM EST
    I hope you're gonna make it stand for American International Gangster for the sake of accuracy:)

    Too bad there is no recent button to go back to Fall '08 and redo this thing from square one...10 large for every American citizen.  Call it a retention bonus to retain us to our hometowns and keep us off the White House lawn with our pitchforks.


    Will this trickle down (none / 0) (#48)
    by BrassTacks on Thu Mar 19, 2009 at 03:21:33 PM EST
    To jobs?  

    Would you mind using the money to hire my sons?  They need jobs!  



    I'm going to Costco today! (5.00 / 1) (#8)
    by TeresaInSnow2 on Thu Mar 19, 2009 at 09:15:21 AM EST
    I'd rather fill my cart with groceries now, than with money later.

    New Year's Eve 2000 (5.00 / 1) (#27)
    by Militarytracy on Thu Mar 19, 2009 at 10:26:28 AM EST
    wasn't the time to be getting silly........but this is different and I'm going today too just to cover a few bases.  I'm not going to freak out but there are some things it can't hurt to have a stockpile of.

    Good thought. There is room (5.00 / 1) (#31)
    by Cream City on Thu Mar 19, 2009 at 10:35:13 AM EST
    in our freezer (one of the best things we did to stock up when prices dip -- there is always a post-Thanksgiving turkey grab here) and on the shelves of our cellar larder (a quick home project here that also has paid off in being able to store bulk-rate paper products, etc.) It has been a while since we did a Costco trek, a bit of a distance for us, but we just could not continue to give our business to Sam (Walton's) Club.:-)

    You guys are late to the party... (none / 0) (#34)
    by kdog on Thu Mar 19, 2009 at 10:38:54 AM EST
    you should see the cache of Chef Boyardee I've got stockpiled...I'm covered for at least a couple months when bread hits 20 bucks a loaf.

    Ugh. My backup is those boxes (5.00 / 1) (#41)
    by Cream City on Thu Mar 19, 2009 at 11:54:00 AM EST
    of Ronis -- pasta-roni, rice-a-roni -- when they go on sale for ten boxes at a time.  Add some veggies, maybe some chicken strips, and I can stay on my diet better than with those sugary Boyardees.  My kids just loved 'em when they were little, until they tasted real Italian tomato sauces. :-)

    Rice-A-Roni.... (5.00 / 1) (#44)
    by kdog on Thu Mar 19, 2009 at 12:30:50 PM EST
    they have the 10 for 10 sale by you too?

    Hopefully we're lucky enough to have chicken to add:)


    I'm counting on it (none / 0) (#38)
    by Militarytracy on Thu Mar 19, 2009 at 11:12:09 AM EST
    I'm with you (none / 0) (#40)
    by TeresaInSnow2 on Thu Mar 19, 2009 at 11:49:12 AM EST
    When authorities recommended that we keep 3 days worth of food handy for a "disaster" I misheard and thought they said "3 years".

    And I just keep buying.


    No kidding! (none / 0) (#9)
    by SOS on Thu Mar 19, 2009 at 09:16:44 AM EST
    You get it.

    Elizabeth Warren appeared this a.m. (5.00 / 3) (#13)
    by BackFromOhio on Thu Mar 19, 2009 at 09:33:13 AM EST
    on Morning Joe to discuss AIG, etc. She is a professor of economics at Harvard, and now chair of the Congressional Oversight Committee on the bank bailout (TARP).  She seems to be a true progressive, who indicated that much better controls should be imposed on bailout money recipients. When asked by Joe how to balance need for regulation with a pro-business climate, she pointed out that after passage of FDIC deposit insurance & Glass-Steagall, U.S. had 50 years of crisis free economy; since regs have been relaxed we've had one crisis after another. She is such a good communicator that Joe and all others agreed with her points! She seems to have a better handle on what's needed to improve our economy than all the White House appointed gurus combined. She's someone to watch. I hope Congress listens to her, rolls up their sleeves, does real homework, and abandons the 'reaction du jour' tactic of dealing with economic issues.

    You can't spur housing activity that (5.00 / 2) (#16)
    by Militarytracy on Thu Mar 19, 2009 at 09:54:09 AM EST
    makes any sort of attempt to prop up past bubblish prices without SOLID MIDDLE CLASS jobs. We fricken don't have any of those.  I'm giving myself a headache.

    People can spew ... (5.00 / 3) (#23)
    by Robot Porter on Thu Mar 19, 2009 at 10:15:09 AM EST
    out their fancy financial jargon all day.

    But it really is that simple.  Solid working and middle class employment is the only true engine of growth.

    The financial services industry, and the tech boom, hid that for a few decades.  But it was always a shell game.


    The inflationists were right. (none / 0) (#2)
    by SOS on Thu Mar 19, 2009 at 08:21:04 AM EST
    The Fed will print. The Fed faced the choice of "print or die". It has chosen "print".

    Check this idiocy out (none / 0) (#10)
    by SOS on Thu Mar 19, 2009 at 09:18:23 AM EST
    Large Nurseries are stuck with trees they can't sell, so they are bulldozing the inventory and burning it.

    Uhhh, can anyone explain this logic? This poverty of imagination?

    it gets to a point (5.00 / 1) (#19)
    by jeffinalabama on Thu Mar 19, 2009 at 10:03:56 AM EST
    where the large trees can't be easily or efficiently transplanted.

    If they're bulldozing them, then they are probably field-grown, instead of container grown.

    At a certain size, even using equipment to cut the largest root ball possible, the tree won't survive transplant. Not enough roots left.


    About a 6 or 7 inch calipur (5.00 / 1) (#28)
    by cal1942 on Thu Mar 19, 2009 at 10:27:16 AM EST
    is about as big as can be successfully transplanted, at least in this area.  A fair sized tree.  

    I've put in 4 trees this way and can testify that it still takes an effort to insure that the transplant is successful.  


    That's about the max (none / 0) (#35)
    by jeffinalabama on Thu Mar 19, 2009 at 11:02:59 AM EST
    unless extremely expensive and difficult methods are used.

    Even those are no guarantee. For a nursery, easier to get rid of it.


    Ah, anyone having Grapes of Wrath (5.00 / 1) (#25)
    by Militarytracy on Thu Mar 19, 2009 at 10:21:18 AM EST
    flashback?  Too many trees, so if you limit the supply you may be able to retain some of the wealth the trees supposedly held........if you  start giving them away though they become worthless.  And of course the lazy and greedy never seem to be able to come to terms with things like "donating" to a great cause building towards our better futures or "bartering".

    A good thought (5.00 / 1) (#33)
    by cal1942 on Thu Mar 19, 2009 at 10:38:29 AM EST
    The actual transplant expense would have to be recovered, but, in some species that would be a fraction of the cost and would be very helpful in many areas.

    Fire sale prices plus expenses might get some action.  I know I'd consider a couple more big trees.

    Pity to waste all those years of growth, pity to waste a tree period.


    When I think about putting people to work (5.00 / 1) (#39)
    by Militarytracy on Thu Mar 19, 2009 at 11:14:12 AM EST
    this is sort of shovel ready job isn't it?  How many parks did FDR build?  They can't get top dollar for the trees but they could have been part of a community solution.

    We (5.00 / 1) (#49)
    by cal1942 on Thu Mar 19, 2009 at 04:58:07 PM EST
    meaning them.  Don't have the practical community mindset that was a part of thinking all those years ago.

    The TVA modernized a significant, neglected region of the nation. Today, why not at least the design of a comprehensive national electric grid.


    I've been saying it for weeks (none / 0) (#11)
    by Slado on Thu Mar 19, 2009 at 09:20:06 AM EST
    Inflation is coming.  And this move by Obama and the treasury all but garuntees it.   We are in this mess because of too much debt.  I posted in a nother forum that total debt (gov't, buisness and consumer) is 370% of GDP.  It's never, ever been this high.   The economy is trying to force us to stop borrowing and start producing more and spending less.   Our government and the financial industry has not faced this reality.  They are ignoring this reality and trying to get everybody back into borrowing mode so we can keep enjoying the false economy we've been working in for the last 25years.  

    I don't really blame Obama.  He inherited this but that's this is the job he inherited and right now he's feeding the beast (debt) instead of leveling with the American people about the need to lower our standard of living and stop spending so much money that we don't have.    

    My advice is get ready to protect yourself.  Buy gold, stocks in emerging markets etc... because the US dollar is going to tank.  It wont' be Zimbabwe inflation but it will be early 70's inflation or worse.   We can't borrow our way out of a borrowing problem.  Simply won't work.

    You assume (5.00 / 6) (#14)
    by Steve M on Thu Mar 19, 2009 at 09:52:08 AM EST
    that we live in a vacuum where the rest of the world is doing just fine.  The dollar can only tank relative to something else.

    further (5.00 / 2) (#26)
    by wystler on Thu Mar 19, 2009 at 10:26:08 AM EST
    The trad-med folk prefer to report on inflation. It's a condition they've lived through before, and they're pretty sure they understand how it should be dealt with.

    Deflation, otoh, scares the scat out of 'em. Very few folk who are still working recall life in a deflationary period. More still, a couple months back, some of 'em (iirc) were downright excited, in a happy way, to report a plummet in the PPI.

    Must be cautious in evaluating our filters' bias. Inflation is definitely not the problem here. In fact, "printing $$$" is part of the solution.


    What about his post? (none / 0) (#20)
    by Samuel on Thu Mar 19, 2009 at 10:05:04 AM EST
    Relies on this assumption (that he never made)?

    The assertion is that maintaining savings in dollars is a mistake compared to investing in gold because the quantity of dollars will rise while the demand for dollars will fall.

    Since the dollar is the world reserve currency, the collapse of the dollar will result in a much greater lowering of demand for the dollar relative to the fates of other world currencies.  


    Well (5.00 / 5) (#24)
    by Steve M on Thu Mar 19, 2009 at 10:15:47 AM EST
    Empirically, I don't think demand for dollars is dropping at all.  In fact, the current crisis seems to have made people more inclined to hold dollars rather than less.

    Because investors are attempting to salvage (5.00 / 1) (#22)
    by Militarytracy on Thu Mar 19, 2009 at 10:07:50 AM EST
    something by putting what they have left into commodities, that may also help spur on hyperinflation, but it will only be short lived.  Once again you can't get blood from turnips and trying to hide out in commodities can have its own darkside when and if that reality hits.  If hyperinflation does happen that's when we will find out who really is a Christian because it is literally going to come down to who has the goods to share with others.  My greatgrandfather the bootlegger worked as many people on the ranch as he could at that time.  They were running one hell of an operation then I was told. There wasn't a chore not done because there was a hand for everything, and you got three squares, warm place to sleep and aid of different sorts by whoever could give it, and a mug of my greatgrandmother's homemade beer with lunch and dinner if you wanted it.  It was served German warm and you dipped it out of a huge wood barrel behind the woodstove.

    Depression stories (5.00 / 1) (#30)
    by gyrfalcon on Thu Mar 19, 2009 at 10:32:15 AM EST
    Cool great-grandfather!  My grandparents were both rural physicians during the Depression, and although they didn't have as large an operation as your ggf, they also had many more "hired hands" than they needed, whom they housed and fed but could not pay.

    Their patients couldn't afford medicines, so they bought them themselves and doled them out for free. Their patients couldn't afford to pay them, either, so they often gave them a nice heifer or horse or a pig or two instead.  My grandfather was said to never be able to resist a nice heifer, so they ended up with many more animals than they could really afford.

    The sad end to all this was that since they had no more cash than their patients, the g*dd**n bank foreclosed on them.  My GF died of a heart attack, my GM became an itinerant physician for the federal public health service, my mother and her siblings had to drop out of college and fend for themselves, etc.

    I don't know what happened to the bank, but I hope it went out of business.  The idea of foreclosing on the only two physicians serving your community, and doing it essentially for free, just boggles the mind.


    My greatgrandfather (5.00 / 1) (#36)
    by Militarytracy on Thu Mar 19, 2009 at 11:08:29 AM EST
    was able to pay off the ranch with bootlegging profits but he was just a tad noticeable and he ended doing time in Canyon City for bootlegging further on down the road.  It's terrible that even the very best got raked over the coals by the banks.  God I hope we are better to each other this time.  Please let us have learned something.  At least we are better connected to each others stories when things start to get really rough.  I think the lack of the public's ability to organize during the Great Depression allowed too many horrors to happen before any sort of relief came along.  And I still really can't believe that someone like my greatgrandfather ended up doing penitentiary time for making certain he could pay his bills.  He didn't even really drink........but my greatgrandmother, that was a different story :)

    Early '70s-level inflation (5.00 / 1) (#42)
    by Cream City on Thu Mar 19, 2009 at 11:58:47 AM EST
    will shock a lot of younger Americans.  I well recall it, as I was just starting my career.  What looked like a wonderful wage, after my starving student years, would disappear so fast.  Saving for the 20% down needed for a home then was so hard, and the spouse and I finally were able to buy only because of a helpful family member's private loan.

    And the mortgage rate?  It was 11%-plus.  So the tight-cash-flow years continued until we finally could refinance.  But good jobs were not hard to find then (although I had to head into a different career than planned, when the jobs weren't there for the one in which I got my degree).  Now is a different story.  


    What good is gold (none / 0) (#12)
    by SOS on Thu Mar 19, 2009 at 09:22:24 AM EST
    when a loaf of bread costs an ounce? And what emerging markets? Twitter?

    Gold quantity is fixed more or less. (none / 0) (#17)
    by Samuel on Thu Mar 19, 2009 at 09:57:47 AM EST
    An ounce for a loaf of bread would only occur if the gold supply was increased many fold or the real cost of bread production rose dramatically.  

    but it's price ... (none / 0) (#29)
    by wystler on Thu Mar 19, 2009 at 10:28:24 AM EST
    ... depends on aggregate demand. It's no more or less valuable than anything else when money supply is insufficient to support prices (demand).

    None of that made sense. (none / 0) (#52)
    by Samuel on Wed Apr 08, 2009 at 11:38:37 AM EST
    Money supply size is irrelevant.  The value of each unit adjusts in turn with total MS adjustments - total wealth never changes via money creation.  

    Gold (none / 0) (#51)
    by MrConservative on Thu Mar 19, 2009 at 09:56:18 PM EST
    I know a guy who sold his pension, which was at the lowest point it had been in decade, and bought all gold, which was at the highest price its been in decades.  Completely stupid decision.  People aren't thinking straight, he has nowhere to go but massive loss.

    you can borrow your way out of a borrowing problem (none / 0) (#18)
    by Jlvngstn on Thu Mar 19, 2009 at 10:03:32 AM EST
    assuming that your economy will be on the uptick in short order.  A strong economy that is producing and creating employment increases spending and tax base.  Unfortunately, the outlook for production globally is dismal at best, employment is still a year away from net positive and tax bases are shrinking at too high a clip.  

    We have excess inventory of autos (nearly 2 years worth if we didn't produce another auto), massive housing inventory as well as steel copper etc.

    You could put the 30 year fixed note at 2% right now and you will not clear out the inventory because americans have not saved enough and are maintaining too much debt.  We lived exactly like our gov't, buy now pay later.   Later has come and our people and gov't is asking for another later.  

    Jobs always trail the recovery but this recession is different because no one can afford to hire and we cannot afford not to be hired.  Our debt ratio as a people is unprecedented and why msm is not talking about that is beyond me.  

    In October we will hear again, "how could anyone have seen this coming?"



    I'm sorry, what's your expertise? (none / 0) (#50)
    by MrConservative on Thu Mar 19, 2009 at 09:54:45 PM EST
    "The economy is trying to force us to stop borrowing and start producing more and spending less. "

    Oh, that magic hand again!

    You are making some pretty grandiose claims there without posting any evidence or any of your credibility to back it up.

    Nobel-prize winning economist Paul Krugman disagrees and has provided plenty of evidence to back himself up.  Guess who I'm going to side with?