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106 comments on DrumBeat: June 2, 2006

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tate423 on June 2, 2006 - 2:03pm Permalink | Subthread | Parent | Comments top
I don't think the Fed WANTS inflation, but it will be totally unavoidable due to them just ignoring the problem and helping to sweep the details under the rug.

As a private bank how does inflation help you?  Your assets (debts other people owe you) become worth less each and every year, so why would I really want that?  I must be missing something.

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BrianT on June 2, 2006 - 2:59pm Permalink | Subthread | Parent | Comments top
There is too much debt in the US economy (it is at a record level). Because the level of debt to GDP is so high, a deflationary collapse is always a threat and would actually occur should the Fed follow a stable monetary regime. The rate of monetary growth needs to continually be raised as the debt grows in relation to the size of the economy which will service the debt. The trick is to keep expanding the money supply (which is inflationary) while keeping the dollar from collapsing. Very tricky. But you make a good point: it is not impossible that the Fed could decide to raise rates and let the chips fall where they may (but unlikely).  
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tate423 on June 2, 2006 - 3:15pm Permalink | Subthread | Parent | Comments top
All this is true.  However there lies a bigger problem.  We are literally in a game where the point is to print more money to pay for old debts.  You think they won't raise rates?

Inflationary monetary policy works in a classroom, it generally stops there.  The fed can't control inflation.  They try and alter it, but they can't pick what it should be.  Inflation has decimated the real returns on Wall Street.  It's great to say it's avg historical return is above 10%.  That's great, but once you factor in inflation, the money made is eaten by it.  

There is little the Fed can do now to stop inflation.  It's nearing 10% annually.  So they should stop raising rates and just let it get worse?  I highly doubt they will really let that happen.  If they Fed follows public policy (which is to control inflation) then they will be raising FF rates.  Please convince me otherwise.

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BrianT on June 2, 2006 - 3:53pm Permalink | Subthread | Parent | Comments top
You might be right about the rates going up. It is hard to be confident one way or the other.
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tate423 on June 2, 2006 - 4:18pm Permalink | Subthread | Parent | Comments top
You're right, but when financial plans have to be made you have to decide what you think they will do.  I just can't see them suddenly turning their back on inflation especially when that's all they talk about most times.

Secretly they may not mind either way because as a private bank they will make plenty of money regardless.

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106 comments on DrumBeat: June 2, 2006

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