When Will Inflation Begin

December 9, 2011

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It’s here. But when will very high or perhaps hyperinflation begin?
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Fed Historian and Carnegie Mellon Professor Allan Meltzer says to look for sustained bank lending or a large increase in Fed purchases of government debt as the catalyst for higher inflation.

“Once borrowing resumes, banks will increase loans and expand deposits. The current massive volume of excess reserves will melt into a greater money supply, and later higher inflation.”

The US will have both at some point. Lending to large businesses will be the initial recipients.
Bernanke has told us what he will do in response, raise the interest rates paid on reserves banks to encourage them not to lend it out. This will fail, since the rates will be insignificant when compared to the potential profits earned through bank lending.

Few talk about the about the impact higher rates will have on value of the portfolio of securities held at Federal Reserve Capital Management. Higher interest rates translates to capital losses on the Fed’s balance sheet.

A reasonable estimate for the Fed to hike will not be when inflation is out of control. It is when the toxic debt on the Fed balance sheet turns a profit. This will be long after inflation is entrenched and as suggested, will fail anyway.

Efforts to reign in inflation in the 70’s failed due to preemptive abandonment of tightening policies, collapsing under the pressure of businesses, unions, Congress, and the President. Expect similar protests from the the Keynesian contingent and the crony capitalists that now influence government policy, such as unions and banks.

Source: The Fed’s Anti-Inflation Exit Strategy Will Fail – Wall Street Journal

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