Inflation is a function of money supply. More supply of dollars means less demand.
Money supply, in normal times, is largely controlled by central banks. Selling treasury securities raises cash for governments to distribute. Buying them eliminates that case from the money supply. Those actions increase and decrease the money supply, respectively.
But right now, deposits are way up. People - individuals - are throwing their cash into FDIC-insured accounts. The Fed is cutting rates, international banks are cutting rates, but people aren't putting cash into circulation. As that money leaves the marketplace, prices for goods and services fall. Individuals are winning the battle against central banks over money supply.
Don't let anyone confuse you with talk of 10 dollar bread. This is really simple.
What happens when confidence comes back and people put the cash back into circulation? A huge zoom of inflation. The Fed will have to watch carefully for the recovery and put the screws on fast to prevent inflation from spiraling next. The very instant we identify a return of consumer spending and business activity, interest rates need to go way up and tamp down the flood tide of fresh cash from banks into - likely - stocks and the housing markets.
3 comments:
Deposits may be up, but what about the 700 (or is it 850 now, I forget) billion dollars that we just magically created?
The borrowing will have an inflationary effect, but it's easily counteracted by the massive decrease in consumer money supply and the lending that backs it.
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