Wednesday, October 3, 2007

Why inflation is already an issue much bigger than you read about

Except here of course. I've long been touting that inflation is bad. I'd wager it's as bad as it was during1979-1981. Of course, it's not reported as such. Nor are the interest rates indicating as much. But remember that inflation was only 3% lower than interest rates in 1981. Guess what? Same as today.

Here's an article. H/T to Mohican at Financial Planning/Personal Sanity... who has a great rant today by the way...

Take this key paragraph:
This is the precise point of entry for the new money that the Fed creates out of thin air. To repeat: When the Fed buys (say) $1 million in bonds from Bank XYZ, Bank XYZ surrenders ownership of the bonds but sees that its deposits of reserves at the Fed go up by $1 million. But the Fed didn't transfer this money from some other account. No, it simply increased the electronic entry representing Bank XYZ's total reserves on deposit. There is no offsetting debit anywhere in the banking system. Bank XYZ now has $1 million more in reserves, while no other bank has less. Bank XYZ is now free to go out and loan more reserves to other banks, or to make loans to its own customers. (In fact, due to the fractional-reserve system, the bank could make up to $10 million in new loans to customers.) The money supply has increased, putting upward pressure on prices measured in dollars.
If you think this problem is isolated to the US, think again. Over the last few weeks, and quietly over the last few days, the Bank of Canada has been doing much the same thing in Canada. Billions, I say that again, Billions of dollars have been DUMPED into the overnight financial system in order to defend the key overnight interest rate. What does this mean? If the BoC had not printed money, it would of either triggered a catastrophic financial event that would send the markets reeling or it would have had to lower the interest rate and increase inflation.

This underhanded move--quietly dumping cash into the system to keep lenders liquid--has the same effect, without the psychological ramifications of an interest rate drop. Look out. The BoC using the CPI has turned steak into hamburger, lobster into prawns, SUV's into sub-compacts, and chicken into tofu. This has had the effect of artificially driving inflation rates down. Inflation is high. Much higher than you and I would like to admit. This has huge economic ramifications. Do your homework. And then teach the rest of us here at HHV.

4 comments:

Anonymous said...

Mish over at global economic analysis likes to point out that this new liquidity is not money per se, but credit. That is, we have to distinguish what central banks are doing from "printing money". He shows how the US Fed has actually been quite tight with money over the past few years. But there is still an excess of credit, and the central banks are trying to keep it inflated.

vg said...

HHV,
There's no doubt inflation is way higher,take this as a sign. I just found out if we moved out of our "average" (at best) 2 bedroom apartment which rents for $1000 per month would be rented to a new tennant at $1400 !! thats a 40% hike in 3 years ! we are talking average apartment here with below average fixtures,cupboards etc all from the 70's with odd colored sinks and countertops,mismatching fridge and stove,dips in the floor,etc. Now that is disgusting.

For that much cash you can get something much better. Goes to show they are gouging every where and when the crash comes these guys are going to have alot of empty apartments sitting there.

vg said...

Here's a good comment on the proposed Alberta oil tax and the 88% poll approval from the public :


"one oilpatch CEO put it to us this way: “The democratic view will change when capital gets reallocated and they lose there jobs, house and wife. Rephrase the question/poll with these variables inserted and you will find a dramatic change in public sentiment. Alternatively, I want to read this same poll one year from now outlining the electoral revisionist view of the royalty change and the view of the Stelmack government.”

olives said...

My uneducated opinion:

The loan capacity at Banks may be increasing, but the cost of loans and the tightening has increased due to the increased (perceived?) risk. If Lenders are not lending so easily and borrowers cannot or will not borrow, then it doesn't matter how much credit is available.

The actual money supply is contracting and there is some sort of panic going on whereby the powers that be (Central Banks) seem to be desperately trying to increase the money and credit supply to prevent both from contracting/deflating, and keep the whole credit system. Otherwise it is game over.

The "inflated" credit/debt/asset prices, etc. conditions are the usual occurrence prior to the "bust" (or start of the deflation). It is not inflation in the monetary sense, as it was in the 1970s.