"the question of timing, from deflation to inflation, is unknown"
Right! But it's the source of much disagreement.
The preconditions for inflation are here: most understand that, few dispute it.
The velocity of money is a key consideration.
In fact, the velocity of money tends to fall in crises like this. Examples, charts and data are numerous.
We will not see inflation until the banking system stabilizes, and the US economy normalizes. Estimates for that go as far out as 10 years from now.
"A technically superior and more complete method of capturing the concept of excess labor and capacity is the Aggregate Supply and Demand Curve (Chart 2). Inflation will not commence until the Aggregate Demand (AD) Curve shifts outward sufficiently to reach the part of the Aggregate Supply (AS) curve that is upward sloping. The AS curve is perfectly elastic or horizontal when substantial excess capacity exists. Excess capacity causes firms to cut staff, wages and other costs. Since wage and benefit costs comprise about 70% of the cost of production, the AS curve will shift outward, meaning that prices will be lower at every level of AD. Therefore, multiple outward shifts in the Aggregate Demand curve will be required before the economy encounters an upward sloping Aggregate Supply Curve thus creating higher price levels. In our opinion such a process will take well over a decade."
hoisingtonmgt.com
That's an extreme estimate; most say less.
However, making estimates of when inflation will hit without intervention are pointless: because the Fed has stated, on the record and unequivocally, that it will intervene. It will start withdrawing money from the economy. Even though we may see inflation - as soon as it begins, they'll begin withdrawing liquidity from the economy.
Will it work? Nobody knows. However it's obvious that the Fed is acutely aware of the potential for hyperinflation.
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Will these steps provoke a run on the USD? Again, nobody knows. But a run on USD is a different issue: that's a question of confidence, not monetary policy.
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Velocity of money is dropping. Saving rates have changed from ~ 0% to almost 10% - and they're still climbing. Assets are depreciating. Capacity utilization is dropping like a rock:
Banks aren't lending: money isn't getting into the economy. Money is being saved, or used to pay down debt. People aren't spending.
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Bernanke believes that massive injections of liquidity can stabilize the velocity of money. It's a question of degree: it might not stabilize, but should mitigate.
Here's the next point: there will be more money printed. Lots more. We're only at the beginning of monetary intervention.
Regardless of the outcome, this is history in the making. It's a tsunami, and what will emerge is unpredictable. But damage is certain, and slow rebuilding will follow.
We'll see commodity shortages and inflation pockets, but in my opinion, inflation is not imminent: not unless there's a run on the USD, or unchecked collapse of other economies.
It's an extremely unpopular view on this thread, but IMO conventional thinking is dangerous.
Jim |
