Inflation Myth and Reality

[2centsworth]

It there's one article you should read about inflation this is it. Dated 1/2010, but still current and relevant.


John P. Hussman, Ph.D.][/I]
January 19, 2010 Inflation Myth and Reality
John P. Hussman, Ph.D.
All rights reserved and actively enforced.
Reprint Policy (http://www.hussmanfunds.com/html/reprints.htm)
The past two years have seen an enormous issuance of new government liabilities. During the two years ended September 30, 2009, the amount of U.S Treasury debt held by the public (outside of agencies such as the Social Security Administration and the Federal Reserve) surged by more than 50%, from $5.05 trillion to $7.55 trillion. During that time, the Fed's holdings of U.S. Treasuries actually shrank by about $10 billion, yet the Fed has explosively increased U.S. monetary base from $850 billion to $2.02 trillion, fueled by massive purchases of Fannie Mae and Freddie Mac's mortgage-backed securities. On Christmas eve, the Treasury quietly announced that it would be providing unlimited bailout funding for Fannie and Freddie over the next three years, since the underlying cash flows received by Fannie and Freddie on these mortgages are not sufficient to keep the agencies solvent.
In total, the quantity of U.S. government liabilities forced into the hands of the public has soared by $3.62 trillion - an increase of 61% since the third quarter of 2007. Keep this figure in mind as various pittances are reported to be returned from TARP funds provided to various financial institutions. Likewise, remember that any interest "earned" by the Federal Reserve on the assets it holds is interest that is either implicitly or explicitly paid by the Treasury, and is returned thereto. Of course, this figure will get progressively larger as government revenues fall substantially short of outlays, and can be expected to do so for years to come.

continued.... (http://www.hussmanfunds.com/wmc/wmc100119.htm)

[Winehole23]

In total, the quantity of U.S. government liabilities forced into the hands of the public has soared by $3.62 trillion - an increase of 61% since the third quarter of 2007. Keep this figure in mind as various pittances are reported to be returned from TARP funds provided to various financial institutions. This leapt out at me.

[Winehole23]

The myth:


Quite simply, the view of the Phillips Curve as a relationship between unemployment and general price inflation wasn't even part of Phillips work, nor is it consistent with the data.

[Winehole23]

The putative reality:


What we observe in the data is strikingly opposite to the standard (mis)interpretation of the Phillips Curve. Indeed, higher unemployment is generally associated with higher, not lower general price inflation.

[RandomGuy]

This leapt out at me.


Suppose that given the economy-wide supply of ice cream, the marginal utility of ice cream is six smiley faces, and the marginal utility of a pencil is two smiley faces. Given that, the price of an ice cream cone, in terms of pencils, will be just the ratio of the marginal utilities, so an ice cream cone will cost you 3 pencils.

This leapt out at me, just because its seemed much more in a light tone than the rest of the article, and slightly amusing.

That said, the guy is simply talking about the budget deficit in the last 3 years. Pretty hefty.

The rest of the article was a good read. Not quite sure I agree 100% with his conclusions.

I think there is enough rumblings out there about inflation that one should keep an eye out for it, but I don't see runaway inflation happening. So much of our spending is discretionary that high prices simply mean a pullback in demand, as people put off buying the next tech widget.

[RandomGuy]

As it happens, faster economic growth is correlated with lower, not higher inflation. Inflation does tend to become a problem in the later stage of economic booms, but not because the economy is growing too fast. Rather, inflation accelerates because the economy begins to hit capacity constraints and is therefore not able to grow fast enough.

Think about the current inflation seen in China. There is some evidence that they have begun to hit their "capacity restraints". The endless supply of cheap labor has begun to dry up.

[2centsworth]

Think about the current inflation seen in China. There is some evidence that they have begun to hit their "capacity restraints". The endless supply of cheap labor has begun to dry up.

It's currency related. They need to let the yuan float and appreciate.