Inflation might not be coming after all

Although banks sit in oceans of excess reserves, it is highly probable that they will remain where they are.

Currently, there is a dam in place preventing excess reserves from finding their way into the financial system, creating money, creating debt, creating inflation.

Obviously it is a matter of time before such reserves start to leak out.

In my opinion what is holding them in place is that there is virtually "noone to lend to". Both Corporations & individuals are already drowning in a ocean of debt. No wonder banks are in the speculation business vs. the lending business.

We know the evil of banking is FRL and this is a excellent time to increase the reserve % in order to hold excess reserves in the short and long run. But obviously, the Fed has not intend to carry on such matter.

As always we are going to witness inflation, but I highly doubt it will be as bad as many fear.

Interesting point, but one I think that will be proven ultimately wrong.  While there do seem to be a hell of a lot of people and companies who would not take on more debt even if offerred at knock down prices, someone is probably going to take it and use it.  The question is who, when, and why?  And don't rule out simple, honest stupidity as the answer to the last one.

LOL... There's no one to lend money to....

>>The question is who, when, and why?

Is the US gov't running a deficit or not?  It was a couple trillion per year last I checked.  Where do you think that money is coming from?  People's savings?  More like banks. 

It will take longer for the new money to make its way into the economy... but it will make it here.  The problem is that in the process, the new money will first flow through the coffers of gov't.  That means larger more powerful government.  That which will choke off and kill our freedoms and economic prosperity in the future.

Govt spending does not add to inflation as bank lending does to the private sector.

FRL works at best when money is lend to corporations and individuals.

you are missing two points:

1) There is already an huge amount of excess reserves.

2) Debt is at is peak for everyone. Most are unable to absorb new debt.

True: Govt can keep up the spending and add to inflation & debt (which will happen anyway). But we wont see high inflation due to the two points above which are working like dam.

"Govt spending does not add to inflation as bank lending does to the private sector."

Yes, it does. Because what does government spend its money on? Exactly, they pay the private sectors to do stuff for them or give it to their federal employees who will then spend it on products of the private sector. The U.S. "borrows" through the federal reserve, transfers it to the private sector for services that increase its influence/power (like war, health "care", etc) and that money enters thereby the market. And the faster the money loses value while interest rates do not go up, the more are people willing to spend/go into debt and the less they are willing to save/pay debt. Because if you have high inflation in the first place, debt matters less. (Thought experiment: Would it not be very smart to go into huge debt before a hyperinflation, buy lots of commodities and then when hyperinflation hits, you can easily pay off your debt by selling only a tiny amount of the commodities you acquired? With lower inflation the advantage gained will be lower, but it's like a vicious circle in that the more debt is created through this process, the more it is worth to take debt)

Agreed with OP. I don't forsee consumers and businesses taking on more debt, because they are already oversaturated with it. If record low interest rates can't entice them to take on new debt, the only way is to get rid of old debt. That pretty much would lead to deflation. Contrary to what people think, the bubble didn't start 10 years ago with the real estate boom, it started right after the Great Depression.

"Is the US gov't running a deficit or not?  It was a couple trillion per year last I checked.  Where do you think that money is coming from?  People's savings?  More like banks." - bearing01

That was my point, that people/organizations will borrow money, the only questions being who, where, and why they decide to do so...

What about the sovereign debt of the US? I mean we can obviously default, but would the US govt ever do that? 

al gore the idiot:

Contrary to what people think, the bubble didn't start 10 years ago with the real estate boom, it started right after the Great Depression.

Exactly, the bubble started when the gold standard was abandoned; the "real" value of paper money is zero(of course you can't say that definitely since value is subjective, but you get the point). When the paper money bubble bursts, there will not be deflation, but almost infinitely high inflation as people realize that fiat money is not real money.

And as said before, even if consumers and businesses won't take any more debt, the government will. Because if consumers and businesses suddenly stopped spending, their great "consumption" numbers will go down which in their views will mean that a giant crises is happening. To "stimulate" spending, government will either dramatically increase its budget or just pay for large amounts of private debt - probably both.

are savings that you mention dollars that are not already in banks????

 

@OP: You're forgetting quantitative easing (QE). Yes, the tidal wave of money sitting on deposit at the Federal Reserve will not become inflationary unless consumer confidence returns. If people forget about the economy's near death experience and resume their borrow-and-spend lifestyle, that money will burst through the "dam" you have described like a tidal wave and prices will begin rising rapidly. But if consumers do not buy Bernanke's "green shoots" bullshit and continue increasing their demand for cash balances, the Fed will simply expand its QE activities. QE is not "pushing on a string", it's outright money printing, pure and simple.

Clayton -

"Govt spending does not add to inflation as bank lending does to the private sector." 

Yes, it does. Because what does government spend its money on? Exactly, they pay the private sectors to do stuff for them or give it to their federal employees who will then spend it on products of the private sector. The U.S. "borrows" through the federal reserve, transfers it to the private sector for services that increase its influence/power (like war, health "care", etc) and that money enters thereby the market. And the faster the money loses value while interest rates do not go up, the more are people willing to spend/go into debt and the less they are willing to save/pay debt. Because if you have high inflation in the first place, debt matters less. (Thought experiment: Would it not be very smart to go into huge debt before a hyperinflation, buy lots of commodities and then when hyperinflation hits, you can easily pay off your debt by selling only a tiny amount of the commodities you acquired? With lower inflation the advantage gained will be lower, but it's like a vicious circle in that the more debt is created through this process, the more it is worth to take debt)

Brilliant response. Wish these boards had a reputation system.

Clayton -

"It is impossible to know and reliably predict future economic scenarios with any degree of accuracy"

What of those who have actually predicted things? Were they just lucky guesses?

Would banks make risky loans from their pools of excess reserves at 4%, or get paid by the government to hold on to those reserves?

The only way I see out of this is for the fed to actually increase the reserve requirements.

 

Just because you know what's going to happen in general doesn't mean you know exactly when it's going to happen and how it's going to play out. 

Timing is everything in investing.  

@ Clayton

@OP: You're forgetting quantitative easing (QE). Yes, the tidal wave of money sitting on deposit at the Federal Reserve will not become inflationary unless consumer confidence returns. If people forget about the economy's near death experience and resume their borrow-and-spend lifestyle, that money will burst through the "dam" you have described like a tidal wave and prices will begin rising rapidly. But if consumers do not buy Bernanke's "green shoots" bullshit and continue increasing their demand for cash balances, the Fed will simply expand its QE activities. QE is not "pushing on a string", it's outright money printing, pure and simple.

 

"Consumer confidence is irrelevant to the topic here"

My point is exactly that consumers & corporations can't return to their borrow/spending way of life. The key to the analysis is to know this.

@ Giant_Joe

Would banks make risky loans from their pools of excess reserves at 4%, or get paid by the government to hold on to those reserves?

The only way I see out of this is for the fed to actually increase the reserve requirements.

 

 

If they increase the reserve requirement they will effectively curve the excess reserve in the short run and they will at the same time make the banking industry safer in the long run.

Don't forget that the lower the reserve requirement the higher the damage on FRL and vice versa.

@ bloomj31

Just because you know what's going to happen in general doesn't mean you know exactly when it's going to happen and how it's going to play out. 

Timing is everything in investing.

 

True: But what do you think about the topic being discussed.??

"Consumer confidence" is more or less a chimera.