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  • September 16, 2006 at 7:30 PM #7528
    admin
    Keymaster

    [img_assist|nid=1591|title=Growth in M3 and CPI vs. Net Foreign Purchases of U.S. Treasury Notes, Bills, and Bonds |desc=|link=node|align=left|width=400|height=219]

    Historically, big growth in M2/M3 (pink) (mid 60s, early 70s, mid 70s) has led to big inflation 2-3 years later (blue) (late 60s, mid 70s, late/early 80s).

    We’ve had huge growth in M2/M3 (pink) in the mid 90s/00s. The only reason that we’ve not had huge inflation is because of huge growth in purchases of U.S. Treasuries (white) in the mid 90s/00s.

    As soon as that stops, as those dollars are repatriated, boom! When will it stop? As soon as the Chinese, Arabs, and Japanese lose confidence in the U.S. consumer and Federal government. I think that day of reckoning is not too far off.

    September 17, 2006 at 6:15 PM #35611
    Anonymous
    Guest

    In a single variable vacuum, your analysis would be beyond reproach. I think one key variable that is missing in your analysis is the dramatic increase in productivity in the last 15 years. Increased productivity allows for significantly higher wages without a corresponding rise in inflation. Another factor is the Fed’s increasing skill in managing the money supply. I am not convinced that we are headed in to a inflationary environment. I know many smart people who are actually predicting a somewhat more deflationary trend. Either way, how do you explain for productivity and the Fed in your analysis?

    September 17, 2006 at 7:01 PM #35616
    Anonymous
    Guest

    [img_assist|nid=1601|title=
    Fed Funds Rate vs. Inflation|desc=|link=node|align=left|width=400|height=219]

    M, to me, it appears that the Fed does a lousy job fighting inflation: the Fed funds rate correlates with CPI, instead of squashing CPI; the Fed only raises short term rates after the cat is out of the bag. Since 1990, only foreign purchases of U.S. Treasuries has saved us from big time inflation.

    M, I think the Fed has done a horrible job managing the money supply; the huge growth in M2/M3 is way beyond growth in population plus productivity. In my opinion, the Fed’s mismanagement of the money supply and credit is why we have the housing bubble.

    After I saw my plot of Fed funds vs. CPI, I told my wife the battle against inflation is lost, that inflation is inevitable, that we better get into gold big time.

    September 18, 2006 at 4:58 AM #35649
    technovelist
    Participant

    There never was any “battle against inflation”; that is government/Fed BS of the highest order, because the Fed can end inflation any time it wants by two simple steps:

    1. Stop buying assets with newly created “money”.
    2. Require 100% reserves for lending.

    Of course, the question is why they don’t do this. The answer is also simple: that would require the government to live within the means of the taxpayers (taxes rather than inflation and borrowing). This would be very unpopular because most people haven’t the faintest idea of how this all works, but they do know they don’t like to pay more taxes, and the government likes to spend money.

    September 18, 2006 at 6:19 AM #35651
    powayseller
    Participant

    Another great project by jg!

    Inflation is fought by lowering the money supply. Raising interest rates has a weaker effect on squashing inflation that lowering the money supply.

    If the Fed truly wanted to reduce inflation, they would reduce the money supply.

    All this “we are raising interest rates to reduce inflation expectations” is just talk: they are using a weak method to reduce inflation, because they hope they can control it by changing the *expectation* of inflation. That is my theory at least. I think they hope to pull the wool over peoples’ eyes in this way.

    So if they are serious, they should also require higher reserve lending.

    They are clowns. Fleck is right.

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