Playing Chicken With China, why huge increases in the money supply didn't increase inflation

Fox News ^ | November 26, 2010 | John R. Lott Jr.

[JohnRLott]

The Federal Reserve has already injected hundreds of billions of new dollars into the economy since the recession started. Normally, when the government prints up more money, dollars are worth less and that is what we call inflation. But inflation has been surprisingly low.

One measure of the money supply, M1, which includes currency as well as checking accounts, soared by 26 percent between August 2008 and September this year. The amount of currency more than doubled. But prices barely changed.

As Fed Chairman Ben Bernanke goes forward with plans to print up another $880 billion, someone has to ask why the past increases didn't produce the inflation that everyone thought they would.

So where did all that new money go? Many blame businesses for hoarding cash. Obama recently said: “corporate profits are doing just fine. [But] they're holding onto a whole bunch of cash -- they're kind of sitting on it.” . . .

[BenLurkin]

Huge increases in the money supply didn't increase inflation...yet!

[DWar]

Great, easy to understand, article for the non-economically astute.

Thanks, John

[Erik Latranyi]

I posted the article regarding China and Russia this morning on FR. You can find it here:

China, Russia Quit Dollar

[HangnJudge]

But the M1 Multiplier is still in the toilet...
The velocity of money has virtually stopped

[mjp]

They don’t have to get into a war with Taiwan. They can just buy it.

[vanilla swirl]

Ok, I was all scared that China would just stop buying our bonds (cash). Now you’re saying that not only will they stop buying but they will dump the dollars they do have. That’s like a double whammy isn’t it?

Zimbabwe?
Wiemar Germany?

[pierrem15]

I suspect that's because Americans are paying back debt and banks aren't lending to consumers, so the net effect is that the 'Keynesian multiplier' turns into a 'Keynesian divisor' that takes money out of circulation.

Banks continue to be profitable on reduced loan portfolios because the get money at 0% interest from the Fed and loan it back at 3.25% for prime and 5%-15% for consumer loans.

And a solid proportion of new money put into circulation immediately blleds out of the US to China and the oil producers.

The Fed's actions are the equivalent of a blood transfusion for a patient with a severed artery: it only prolongs the agony. Until the current-account artery is sewn up, the zombie banks euthanized, and the voracious regulatory and spending appetite of the government curbed none of he Fed's liquidity actions will really help.

[1010RD]

John,

The Chinese cannot dump our dollars as they’ll suffer even worse losses than they’ve already suffered subsidizing our consumption of Chinese goods. We’ve been exporting our inflation for some time now.

The only way the Chinese will accede to a weak dollar is when their own domestic demand can absorb Chinese denominated goods. That won’t happen within the next decade.

As you well know it is the Chinese that are playing a dangerous game of beggar-thy-neighbor. The Fed can tighten and tamp down inflation, but the Chinese are still stuck with all those dollars.

I’m not a fan of needless printing, but given the current occupants of the WH and recent of the House and Senate it’s the only card they have.

[Mariner]

So, in addition to buying treasuries they have been buying up plain 'ol dollars....by the trillions.

Spooky.

They could destroy our economy with a dump of $3tril...all they'd have to do is buy anything that's for sale, anywhere in the world. And buy a lot of it.

The inflation would be very, very steep.

[screaminsunshine]

There is a difference between Cash Supply and Money Supply. Does anyone think that if we all went to the bank we could all get cash on demand? There is not that much cash out there. I have gotten rid of all paper based assets and gone to real cash. It is invested at mattress savings and loan. They want to eliminate cash.

[1010RD]

The current account is a canard. It only matters in as much as, for the United States, it reflects the regulatory, legal and tax environment entrepreneurs face. In this case we’ve stifled domestic manufacturing and energy exploration and development with a toxic business environment.

Your second and third points are spot on and helped generate the trade deficit to a large degree. Killing off bad banks won’t cause a panic, keeping the walking dead alive does.

Returning the power to regulate to Congress and out of the hands of the alphabet soup of federal regulators will go a long way toward curbing these abuses. I like a proposal I heard of recently where any regulatory finding/rule that affects over X dollars of GDP must be voted upon by our representatives. That would also help to tangle up the red-tapers.

[HangnJudge]

the net effect is that the ‘Keynesian multiplier’
turns into a ‘Keynesian divisor’
that takes money out of circulation

Good analogy!
In an expanding economy, using money makes money
In a contracting economy, the reverse is true

My daddy gave me sage advice about how to
stay alive in a business climate such as this...

Your job is your lifeline, do anything to keep working
Get out of debt, whatever it takes,
Sell everything if necessary
Debt will eat you alive

I miss him...

[BenKenobi]

Again it’s the classic dilemma. Owe a thousand, it’s your problem. Owe a million, it’s the bank’s problem.

China is stuck.

[FromLori]

hmm odd..

The Biggest Holder Of US Debt Is Ben Bernanke

Well, folks, it’s official - mark November 22, 2010 in your calendars - today is the day the Ponzi starts in earnest. With today’s $8.3 billion POMO monetization, the Fed’s official holdings of US Treasury securities now amount to $891.3 billion, which is higher than the second largest holder of US debt: China, which as of September 30 held $884 billion, and Japan, with $864 billion. The purists will claim that the TIC data is as of September 30, and that as the weekly custodial account shows UST buying continues the data is likely not correct. They will be wrong: with the Fed now buying about $30 billion per week, or about $120 billion per month, for the foreseeable future and beyond, it would mean that China would need to buy a comparable amount to be in the standing. It won’t. In other words, the Ponzi operation is now complete, and the Fed’s monetization of US debt has made it not only the largest holder of such debt, but made external funding checks and balances in the guise of indirect auction bidding, irrelevant. For what tends to happen next in comparable case studies, please read the Dying of Money. And congratulations to China for finally not being the one having the most to lose on a DV01 basis on that day when the inevitable surge in interest rates finally happens. That honor is now strictly reserved for America’s taxpayers.

Chart here

http://www.zerohedge.com/article/today-biggest-holder-us-debt-united-states-america

[April Lexington]

This M1 multiplier graph suggests that velocity is psychological.

[HangnJudge]

This M1 multiplier graph suggests that velocity is psychological.

I would agree
It represents a belief in the utility in investing money
That belief has been robust over many decades
In the face of increasing resistance from debt expensing

That fact alone tells you that our
current state of disarray is structurally different
from prior recessions

[WilliamofCarmichael]

[A] more valuable dollar means that it is relatively cheap for Americans to buy Chinese products – and that helps Chinese manufacturers’ sales.

.. and that means that tens of millions more Chinese do not join the tens of millions of unemployed (Red China's "floating population," et al) and that means a revolution is less likely.

[Toddsterpatriot]

Banks continue to be profitable on reduced loan portfolios because the get money at 0% interest from the Fed

Banks cannot borrow from the Fed at 0%.

[April Lexington]

How does the Austrian concept of debt pay down factor in? If people use any extra cash to pay off debt rather than to buy goods, I suspect velocity will fall. Banks will sit on cash rather than lend and velocity should decline. I'm inclined to believe Austrian theory of debt repayment as economy cruncher in this instance.