Fed ‘Loans’= Inflation? – Piggington's Econo-Almanac

This topic has 6 replies, 4 voices, and was last updated 17 years, 3 months ago by Sandi Egan.

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August 28, 2007 at 1:44 AM #10071

sogon
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With the FED loaning tons of money to institutions for long periods of time, doesn’t this cause a massive amount of inflation? I suppose if the loans are paid back then no? Since the M3 number no longer exists, how can we tell how much money there really is?
Does anyone know of a report of how much money the FED is actually lending to banks?

August 28, 2007 at 9:56 AM #82002

Anonymous
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http://www.shadowstats.com tries to make their own estimation of various gov’t stats, including continuing M3.

One thing to note is that debt does find its way into assets and increases their prices all the time – housing and the stock market are great examples. However, if there are tons of people that don’t pay back their debt, then it can vanish pretty quickly.

Mish, over at http://globaleconomicanalysis.blogspot.com/ makes a case for deflation because of this.

August 28, 2007 at 9:56 AM #82138

Anonymous
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http://www.shadowstats.com tries to make their own estimation of various gov’t stats, including continuing M3.

One thing to note is that debt does find its way into assets and increases their prices all the time – housing and the stock market are great examples. However, if there are tons of people that don’t pay back their debt, then it can vanish pretty quickly.

Mish, over at http://globaleconomicanalysis.blogspot.com/ makes a case for deflation because of this.

August 28, 2007 at 9:56 AM #82155

Anonymous
Guest

http://www.shadowstats.com tries to make their own estimation of various gov’t stats, including continuing M3.

One thing to note is that debt does find its way into assets and increases their prices all the time – housing and the stock market are great examples. However, if there are tons of people that don’t pay back their debt, then it can vanish pretty quickly.

Mish, over at http://globaleconomicanalysis.blogspot.com/ makes a case for deflation because of this.

August 28, 2007 at 11:34 PM #82357

sogon
Participant

If they pay back their debt, there is a chance it will flow back to the FED, but if they don’t its probably because they bought a Chinese made DVD player at Wallmart. Once that happens the money is in the economy, and if they default on their debt it is “permanantly” in the economy with no hope of deflation. Meaning every defaulted loan actual causes massive inflation.

I always like the explanation of inflation that goes like this:
Lets say there is $0 in the economy total.
Now lets say you borrow $100 from the FED at an interest rate of 1%.
It is not possible to pay back at all because you owe $101 but only $100 has ever been printed.
the FED must print more money and either spend it or loan it into the economy so that you can pay back $101.
If you spend the $100 on a DVD player and then don’t pay back the loan, they money still exists, someone else just has it.

August 28, 2007 at 11:56 PM #82358

bsrsharma
Participant

sogon: Good example. One problem: there is no inflation yet!

Let me extend the story some. After you buy your DVD player, your neighbor wants one too. But there aren’t enough DVD players around. So he offers to pay you $200 to get it. (He gets the $200 by borrowing from FED). You sell it to him for $200. (if you want, you then payback your $100 to FED).

Now that is inflation! $200 is chasing a DVD player that was $100 before due to excess demand over supply.

August 29, 2007 at 1:17 AM #82362

Sandi Egan
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Now that is inflation! $200 is chasing a DVD player that was $100 before due to excess demand over supply.
… and it is created by the FED, who loaned $200 to your neighbor. If the credit was not available to him, the price would have never risen.

Good example indeed.
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