The Three Faces of Inflation – When is Real – Real?

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3FACESn of Inflation


Hi Marty,

Will future rate hikes from the Fed cause banks to move more money out of the Fed and into the commercial banking system, creating inflation?

Thanks Jack

Fed Excess ReservesANSWER: No. Future inflation will not be demand driven, but asset driven. Retail participation, both in the States and from Europe, in the US share market is at historic lows. This is why the market cannot crash. Where’s the bubble? As long as the Fed continues this crazy policy of accommodating the bankers by paying for excess reserve deposits, banks will continue to hoard. The rate was 0.25% and the Fed raised the rate to 0.5%. This is really stupid. It is why there has been no inflation from Quantitative Easing.

All of these gurus assumed that the Fed’s balance sheet would cause huge inflation because they just read headlines and do not comprehend how the system really works. Their assumption was that all this money would spark inflation, which they only see, and the 1970s demand inflation into 1980. The money never made it to the people. The bankers were paid to HOARD that cash, which shows that the Fed is really insane.

If the Fed honestly wants to “stimulate,” it should eliminate paying interest on excess reserves. Then the banks will take that money and have to earn something the good old fashion way – by lending it out. That is the only way you can see “demand” inflation. Otherwise, we are looking at asset inflation to protect money value instead of inflation spiraling out of consumer demand.

Currency inflation is when the currency declines so the assets rise in proportion. This is not actually a gain in real terms; rather it is how tangible assets act as a hedge against government. You will often hear gold will soar to $10,000. The question would be that type of rally would be profitless. Your monthly rent on a condo would probably be $10,000. Everything is relative.