patrick.net

I'm sorry to inform everyone that hyperinflation is not coming. If people fully understood the Fed they would know that the Fed cannot directly manipulate the money supply. The Fed can only make circumstances more enticing for consumers to voluntarily increase the money supply by taking on more debt. One way they do this is by lowering the interest rate. 100% of the increase or decrease in the money supply comes from our fractional reserve banking system. Accordingly, people who take out debt (voluntarily) directly increase or decrease the supply of money, not the Fed.

If the Fed creates 100 trillion dollars through quanitative easing and has it sitting in the banks, nothing happens; zero inflation. The money supply actually increases when that money is lent out to customers and is spent. Resultantly, it is turned into someone else’s income that will eventually end up in a bank which will then have a fraction (90%) of this money loaned out.

So, the process starts all over again. The bank loans it out and more money is created. The only thing remaining in the bank is the reserve of 10%. If the Fed creates 1 trillion dollars and has it in the banks, it has the potential to create approximately 9 trillion in new money through loans. No inflation has occurred form the feds actions, ONLY THE POTENTIAL FOR INFLATION! Banks are who cause the increase or decrease of the money supply, and that is based on the supply and demand of new money from customers and their loans. REMEMBER IF THE 1 TRILLION IS NEVER LOANED OUT AND CHURRNED OVER AND OVER IN THE FRACTIONAL RESERVE SYSTEM, IT IS AS IF THE MONEY IS NOT IN THE ECONOMY.... NO INFLATION!

This means when a large group a people all increase debt at the same time they are increasing the money supply. As a result you will see excessive inflation where they spend that money. This my friends is why housing has had a bubble. This is exactly what happened in the 90's when the baby boomers where in their peak spending/earning years (40-55) and bought everything on credit. The mistake that the Fed did in the 90's and in early 2000 is they adjusted the interest rate making debt look more appealing at the exact time that they should have been trying to prevent the largest cohort in U.S. history from spending debt, which would cause inflation.

Currently generation x, which is a much smaller cohort, is approaching their peak spending/earning years and will have a lesser aggregate demand for debt(created new money) than in the 90's. This decrease in the money supply will result in less new money flowing into the economy and less "stimulation". A lesser demand for the money supply produces lower wages and as a result lower asset prices.... hence, deflation. What is even worse is that we still need to pay back all the excessive debt created from the last 15 years.

This brings up the subject of deleveraging. The reason we are hurting is that we are paying back the dollars we spent 10 years ago with no economic benefit today. This problem the Fed and Gov. want to fix by taking on more debt. This thus perpetuates the cycle and makes it worse! The pain has to occur in order to restore to reality. We need to pay the money back with real money, not easy debt money. The more we extend and pretend the worse the debt gets and the more the future generations will be enslaved to pay for our Fed's mistakes.

#housing