Important Things To Know About Inflation, Deflation And Economic ‘Stimulus’

Here are a few important things you should know about inflation, deflation and economic stimulus: 

1. There is no longer any correlation between bank reserves and the economy-wide money supply, meaning that the “money multiplier” taught in economics classes no longer applies.

2. In the US the government-Fed combination can increase the money supply to almost any extent independently of the private banks. That is, monetary inflation does not rely on the expansion of credit via the private banking industry.

3. The Fed is not constrained in any way by the need/desire to maintain a strong balance sheet.

4. The bulk of the central bank’s money creation involves the monetising of EXISTING assets, meaning that the central bank can increase the money supply without increasing the economy-wide quantity of debt. Furthermore, the central bank is capable of monetising almost anything.

5. A motivated central bank will always be able to increase the money supply, and growth in the money supply always leads to higher prices SOMEWHERE in the economy. For speculators and investors, the challenge is to figure out where.

Photo by Mathieu Stern on Unsplash

6. The bond and currency markets eventually could impose practical limits on government borrowing and monetary inflation, but the government will be free to borrow and the Fed will be free to inflate as long as the bond and currency markets remain cooperative.

7. A corollary of points 5 and 6 is that the probability of the US experiencing deflation will remain low until after the T-Bond and/or the US$ tank. Putting it another way, the probability of the US experiencing deflation will remain low until after inflation is widely perceived to be a major problem.

8. There are long and variable time delays between changes in the money supply and the appearance of the price-related effects of these changes. This leads to an inverse relationship between the rate of monetary inflation and the fear of inflation, because the average person’s fears/expectations are based on the effects of previous money-supply changes as opposed to what’s currently happening on the monetary front.

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