Where's the Inflation?

Where's the Inflation?

I just finished reading, Code Red: How to Protect Your Savings from the Coming Crisis by John Mauldin and Jonathan Tepper. This book explains in layman’s terms what’s really going on in the economy. It’s very readable. I would highly encourage you to take the time to read the book.

The authors discuss, among other things, “Why hasn't the massive expansion of the money supply by the Federal Reserve caused runaway inflation?” Under normal circumstances that’s exactly what should happen but it hasn't, at least not yet. Based on the latest CPI, inflation for 2013 was 1.5 percent. Not what you can describe as runaway inflation is it?

The reason is fairly simple to understand. Yes, the Federal Reserve has dramatically expanded its balance sheet through QE (quantitative easing) and LSAPs (large-scale asset purchases). This is what the authors describe as “potential money,” not money that any of us can spend immediately. But the expansion of the monetary base has no affect until commercial banks lend it out. And that’s the rub.

The Fed can’t force banks to lend it out and they can’t force consumers and businesses to borrow more than they are willing to borrow. Despite the massive increase in the Federal Reserve’s balance sheet, lending has not remotely kept pace with the underlying growth in the monetary base.

So the Fed created money, and very little happened with it. It did not circulate as an infusion of liquidity with the potential of causing inflation. Instead it sat frozen in excess reserves. The velocity at which money circulates, i.e., the speed at which banks lend, has actually slowed. When the velocity of money falls and banks don’t lend, it is difficult to get money into consumers’ hands in order to stimulate the economy.

Economists describe our present situation as a liquidity trap. That occurs when central banks cut nominal interest rates to zero and are still unable to adequately stimulate the economy. When this occurs the usual rules of economics don’t apply. Large budget deficits don’t drive up interest rates; printing money isn’t inflationary; and cutting government spending has an exaggerated adverse impact on the economy. Economic solutions that worked in the past don’t work in the present.

So inflation has been kept in check despite the huge increase in the money supply. But will inflation remain anemic? The answer to that question is not quite so simple. It all depends on how the Fed unwinds quantitative easing. If it does a superb job in drawing down the money supply inflation should stay modest. But personally I don’t believe they have the ability to put the genie back in the bottle without a few hiccups along the way. And here’s why:

The Federal Reserve is in uncharted waters. Quantitative easing has never before been tried. They have no track record to fall back on.
The Federal Reserve’s track record for forecasting is dismal. They've missed predicting every single recession for the past thirty years. Why should they suddenly get it right this time?
The Federal Reserve is still depending on models that completely failed to predict the previous recession. They prefer to use lagging economic indicators to predict what’s going to happen going forward. That’s like driving by looking through the rear-view mirror.
What I think will happen is that the world’s central banks will tighten too late because: 1) their forecasting models will not accurately assess the situation; and 2) they are afraid that they will kill off the recovery if they act too soon. If that happens then a dramatic increase in inflation is inevitable, perhaps hyperinflation. But what do I know? I’m just a lowly commercial mortgage broker.Doug Marshall, CCIM

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Great article

I have a brother who is a commercial loan officer at Wells Fargo. He tells me the biggest challenge is not that the banks don't want to lend, the FDIC is hovering over them like a hawk causing the banks to keep their lending criteria extremely tight, for fear they will be audited, which happens quite frequently, and be shut down. Because of this pressure they basically aren't allowing the banks to lend. Unless the borrower qualifications far exceed the conventional lending criteria, no one wants to sign off on the funding of the loan.
With Dodd/Franks kicking into gear, it is getting even harder for residential loan borrowers to qualify for a mortgage as well.


Coach your creating a realestate mogule

Watch me shine brite like diamonds.
God bless you coach
Your great
Like frosted flakes.

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IM a Diamond in the rough looking for partners I would like to be apart of dean's elite team in the very near future my goal is 100 properties a year

P.S.
god bless all the members may we all shine bright like diamonds.

P.H.G.


The FED made funds available

The FED made funds available to banks so they could increase their reserves and offset the losses they took on real estate. For all intents and purposes, the majority of our banking system was insolvent by all traditional definitions. They rewrote Generally Accepted Accounting Principles and loaned the banks funds for their reserves so they wouldn't have to close them down. While the created money that the banks have has not gone into consumer hands, money has been disbursed into the system thru the government, hence our record levels of debt and constantly increasing debt ceiling. Don't think the money is not in the system. It entered the system through food stamps, welfare, unemployment benefits and other govt spending. Nothing was produced in this scenario. People were given money for doing nothing. No wealth or prosperity was created. There is nothing to show for the money. It's not a question of "where is the inflation", it's a question of "when will the reckoning come". There is no free lunch.
Google "Richard Koo balanace sheet recession" click on the youtube link for an enlightening 10 minute video.


Koo says no country has

Koo says no country has injected so much liquidity “and lived to tell about it.” All nations that did something similar have experienced hyperinflation and a serious currency re-deonomination, he noted, but said he thinks a continued QE “trap” is a more likely fate for the U.S. economy.haw7t