Hyperinflation or Deflation?
Interesting piece from Counterpunch from a couple of days ago:
Is Hyper-Inflation Around the Corner?
By MIKE WHITNEY | Counterpunch | June 9, 2009
The Republicans are convinced that hyperinflation is just around the corner, but don’t believe it. The real enemy is deflation, which is why Fed chief Bernanke has taken such extraordinary steps to pump liquidity into the system. The economy is flat on its back and hemorrhaging a half a million jobs per month. The housing market is crashing, retail sales are in a funk, manufacturing is down, exports are falling, and consumers have started saving for the first time in decades. There’s excess capacity everywhere and aggregate demand has dropped off a cliff. If it wasn’t for the Fed’s monetary stimulus and myriad lending facilities, the economy would be stretched out on a marble slab right now. So, where’s the inflation? Here’s Paul Krugman with part of the answer:
“It’s important to realize that there’s no hint of inflationary pressures in the economy right now. Consumer prices are lower now than they were a year ago, and wage increases have stalled in the face of high unemployment. Deflation, not inflation, is the clear and present danger….
“Is there a risk that we’ll have inflation after the economy recovers? That’s the claim of those who look at projections that federal debt may rise to more than 100 percent of G.D.P. and say that America will eventually have to inflate away that debt—that is, drive up prices so that the real value of the debt is reduced….Such things have happened in the past….
“Some economists have argued for moderate inflation as a deliberate policy, as a way to encourage lending and reduce private debt burdens (but)… there’s no sign it’s getting traction with U.S. policy makers now.”
Krugman believes that conservatives have conjured up the inflation hobgoblin for political purposes to knock Obama’s recovery plan off-course. But even if he’s mistaken, there’s little chance that inflation will flare up anytime soon because the economy is still contracting, albeit at a slower pace than before. A good chunk of the Fed’s liquidity is sitting idle in bank vaults instead of churning through the system. According to Econbrowser, excess bank reserves have bolted from $96.5 billion in August 2008 to $949.6 billion by April 2009. Bernanke hoped the extra reserves would help jump-start the economy, but he was wrong. The people who need credit, can’t get it; while the people who qualify, don’t want it. It’s just more proof that the slowdown is spreading.
That doesn’t mean that the dollar won’t tumble in the next year or so when the trillion dollar deficits begin to pile up. It probably will. Foreign investors have already scaled back on their dollar-based investments, and central banks are limiting themselves to short-term notes, mostly 3 month Treasuries. If Bernanke steps up his quantitative easing and continues to monetize the debt, there’s a good chance that central bankers will jettison their T-Bills and head for the exits. That means that if he keeps printing money like he has been, there’s going to be a run on the dollar.
Now that the stock market is showing signs of life again, investors are moving out of risk-free Treasuries and into equities. That’s pushing up yields on long-term notes which could potentially short-circuit Bernanke’s plans for reviving the economy. Mortgage rates are set off the 10 year Treasury, which shot up to 3.90 per cent by market’s close last Friday. The bottom line is that if rates keep rising, housing prices will plummet and the economy will tank. This week’s auctions will be a good test of how much interest there really is in US debt.
Read the rest of the article.