Money Printing and Inflation

I am lost on this problem… Given that inflation is wholely and soley a monetary phenomenon (according to Friedman anyway), the logical conclusion to the Fed printing money would be runaway inflation at some point. Now the question is, why was there deflation in Japan during the lost decade when the BOJ effectively embarked on a policy of quantitative easing. I find it almost illogical that that with that much money printing, people are still touting deflation in the US but the experience of Japan seems to suggest that this may be possible? Please enlighten me and clear up my thoughts… My thought is maybe the velocity of money did not sufficiently pick up in Japan to cause inflation, which effectively meant increase in the money supply did not translate to higher prices?

What happens during economic contractions? Eventually we’ll see catastrophic inflation but initially the deflationary pressure will counter ol’ Ben’s printing press.

I can’t answer your main question, but if half the world’s oil wells go dry tomorrow, you’d have inflation without any monetary cause.

It took forever for Japan to have a real recover, so they never really got an inflation shock. However, the U.S. does risk massive inflation when the trillions in MMA come off the sidelines. However, the dollar may be helped the the massive printing/issuances of other countries…so it might not be so bad.

Hate to harp on this chart, but it speaks volume: http://3.bp.blogspot.com/_WxQ_r3_IH0U/SXs2DE8NuiI/AAAAAAAAA54/T3a6YZ67bmk/s1600-h/debttoGDP.png Debt can be retired by 3 ways: 1. Full Payment 2. Write down 3. Default With Debt at $40+ trillion dollars, it will take MASSSSIVVVEEEEEE (unreal) amounts of money printing before we get to inflation. Much of the dollar strength is due to the requirement to pay back debt. I know it’s trendy to call hyperinflation at the end of this mess, but IMHO, this debt contraction/deflation might not end for yearS (capital S).

Its not about the amount of old issuances, but the demand for new ones.

When money goes into to buying houses and stocks and things, and suddenly - poof - they are worth 50% of what they were worth before, that money effectively disappears from the system. This brings about deflation. So the system can absorb quite a bit of “printing” before hyperinflation kicks in. The challenge is that some things that maybe haven’t fallen in value - like food - may inflate while other things deflate. It’s also difficult to see when to stop printing before things go into overdrive. In Japan, the problem was that Japanese businesses were uncompetitive vs. other investment opportunities, so people took the Japanese government’s cheap money and went and invested it elsewhere for higher returns, leading to the Yen carry trade. The result was that the money didn’t make it to Japanese businesses. In our situation, we are “lucky” that the rest of the world is in crisis too, so it means that there is less likely to be a dollar carry trade in the short term. However, once some countries return to growth, this could change.

Bchadwick, what you are saying is that he yen carry trade was preventing inflation domestically. So if you take it to its logical conclusion, if there is a lack of a US$ trade, then inflationary pressures will be felt in the US… This is really a mind boggling issue…

I disagree with the premise that there was deflation in Japan. The Yen hit its high (or low depending how you look at it) back in the early 1990s and went steadily down from there.

There is no question that excessive money printing leads to massive inflation, and so the question which was answered by the original poster is that there is no massive money printing (yet).

People equate inflation = too many dollars, when that is too simplistic of a viewpoint. Velocity, demand, amount, all feed into “inflation”. That isn’t even including wages and wealth generated by them (or transferred) declines in a recession (people get fired or take pay cuts), reducing demand for goods, reducing prices, causing deflation. Commodities feed into inflation. Changes in economic or environmental policy feed into inflation (ethanol to corn to flour to milk to cheese…etc). 1. Inflation in the last 5 years has been primarily driven by commodities inflation and credit expansion. 2. Commodities have bust, leading to deflation in that sector. Credit has massively contracted. Additionally, assets that were once worth more than $20TR (houses) are now worth 25% of that. RMBS that were worth 14TR are now worth 10TR. Stocks that were worth XTR are now worth 50% of that. Assets, in general, are in a massive decline. All of that feeds deflation. For every dollar of “printing” somebody says the Fed is doing, there’s probably 2-3 dollars of deflation happening. 3. Japan did have deflation. You saw it in RE, household goods, consumer goods, electronics, durable goods, everywhere. Why do you think that it would show up completely in the currency maintaining it’s value? What if there IS deflation but the currency was over-valued in its demand to begin with? What happens when the velocity of the currency changes dramatically? What happens when the savings rate changes dramatically? What are we experiencing now with a savings rate increasing 1.1% per month? Where is the money going? Checking accounts? Matresses? If it goes under a matress does that equate to increasing demand for money or a contracting supply? If it is a contracting supply, is that not deflation? Has the Fed not increased money supply before in the face of declining supply? 2001 they increased it then destroyed it. Every other modern economy has done the same over the past 80 some years. Why can’t you create, then destroy? Why does it mean that no matter what, once it is created, you cannot prevent increased inflation? It doesn’t. I laugh when people jump up and down, frothing at this “printing” notion without considering the full aspect of the situation. What’s even funnier is that you have supposed CFA candidates doing that. If this is the best the CFAI has to work with, then the brand value of my Charter is certainly being inflated away.

TA05 Wrote: ------------------------------------------------------- > I disagree with the premise that there was > deflation in Japan. The Yen hit its high (or low > depending how you look at it) back in the early > 1990s and went steadily down from there. Have you ever looked at historical Japanese CPI? There was deflation.

I think the fact that there is ~4T of US treasuries outstanding, and that with 2009’s planned programs requiring the issuance of ~7T more, it is safe to say there will be an inflationary effect. Who will buy these issues you ask…well the Fed of course. Treasury prints it, Fed buys it, monetizing the debt, hello inflation

tvPM Wrote: ------------------------------------------------------- > I think the fact that there is ~4T of US > treasuries outstanding, and that with 2009’s > planned programs requiring the issuance of ~7T > more, it is safe to say there will be an > inflationary effect. Who will buy these issues you > ask…well the Fed of course. Treasury prints it, > Fed buys it, monetizing the debt, hello inflation china will continue to buy. they have nowhere else to put the money.

MattLikesAnalysis Wrote: ------------------------------------------------------- > tvPM Wrote: > -------------------------------------------------- > ----- > > I think the fact that there is ~4T of US > > treasuries outstanding, and that with 2009’s > > planned programs requiring the issuance of ~7T > > more, it is safe to say there will be an > > inflationary effect. Who will buy these issues > you > > ask…well the Fed of course. Treasury prints > it, > > Fed buys it, monetizing the debt, hello > inflation > > > china will continue to buy. they have nowhere else > to put the money. China has no where to invest its money than to buy US treasuries … you believe that, I don’t? Quote Warren Buffet “2008 will be remembered as the year of the treasury bubble”

MattLikesAnalysis Wrote: ------------------------------------------------------- > tvPM Wrote: > -------------------------------------------------- > ----- > > I think the fact that there is ~4T of US > > treasuries outstanding, and that with 2009’s > > planned programs requiring the issuance of ~7T > > more, it is safe to say there will be an > > inflationary effect. Who will buy these issues > you > > ask…well the Fed of course. Treasury prints > it, > > Fed buys it, monetizing the debt, hello > inflation > > > china will continue to buy. they have nowhere else > to put the money. Even the Chinese has no stomach to buy 7T of Treasury bonds. They only have 1T of foreign reserve accumulated up to this point. There is no way they can buy another 7T.

Why would China buy any Treasuries? Inflation + already over valuation + interest hike when economy recovers will kill investments in treasuries.

China still has an interest in keeping the Yuan low relative to the dollar. They have to buy something with the dollars they get from exports in order to do that. For now, that’s treasuries, but maybe they will be a source of capital for US companies - if the Congress let’s them. We may go through a period like Mexico in the 80s and 90s where we are all afraid of foreigners having majority shares in US name businesses, but basically need it for maintaining employment and competitiveness.