patrick.net

Interesting article. I'm not an economist either, so take with a grain of salt.

MV = Py.

Obviously V is low in recessions, b/c people are less inclined to take on risk when inflation is low or negative. So, increasing the money supply has to fight the decrease in velocity of money.

Also, when you give money to rich people, they tend to just save or invest it. When you give money to average folks, they spend it. At the moment, rich people have ass loads of money, and there are not so many great investment opportunities. So, they buy treasuries driving down the price of the 10 yr notes. This drives mortgage rates down. If the investors thought that there was something better to do with their money, they would do it. If banks thought that there was a chance in hell of inflation around the corner, they would not have credit cards with 18 month 0% intro aprs.

On the other side, half of the population is either stuck with student loan debt or are underwater on their mortgage. These people cannot refinance, so they are stuck paying 7% or more on loans during a time when we have no real inflation. These people are likely looking for some scam to improve their lot, or, they are just refusing to spend money. Every cent they spend is at relatively stupid high rates, so they tend to put off purchases. These people are (should be) hoping for inflation to kick in and save them.

CL says

you can't have inflation with such slack demand.

It depends on which force is winning: the deflationary forces or the inflationary forces? QE is a response to deflation (or anticipated deflation). The CBs are afraid of severe inflation, but they're a hundred times more afraid of deflation.

The following charts are zoomed in 2008-present.

So QE 1 and 2 blew up the monetary base (M0), but the vast majority of that money had to be held in the Reserve Balances. As such, it cannot be multiplied out by the system.

What's important is the difference between the charts, not M0 by itself. The reason is that if you print a whole bunch of money, stick it in a hole and bury it, it won't contribute to inflation. That money does nothing! It merely makes Bank balance sheets look better. I just eyeballed the above charts and conclude that the difference is about $1.2T. That's 33% up from $900B just before QE1.

The full money stock (M3) is estimated to be about $15T (since the Federal Reseve had stopped tracking M3, the number may vary from one source to another). I'll be using M2 in the analysis below.

Here is M2 2004-2012:

I'm just eyeballing the charts, but here:
M2 2012: $9,900B
M2 2008: $7,400B

$9.9T / $7.4T gives you 133%. M2 grew 33% just like M0 in the above charts.

Plumetting velocity is deflationary. Currently, it is below historic levels. Here's M2 velocity 2004-2012:

Again, here are my rough estimates:
M2V 2012: 1.58
M2V 2008: 1.9

The formula is M*V = P*y, but looking only at the change in M*V we have:
(9.9 / 7.4) * (1.58 / 1.9) = 111% change

So now, use a CAGR calculator and plug in 111% over 4 years, and you get a 2.64% annual inflation. But I'm looking at only half of the equation.

CL says

(This seems easier, in comparison: http://www.forbes.com/sites/johntharvey/2011/05/14/money-growth-does-not-cause-inflation/ )

The article isn't saying M*V = P*y is wrong. In page 4 it says:

M: A precise definition and identification of money is elusive in a modern, credit-money economy, and its volume can change either with or without direct central bank intervention

Basically, "M" isn't the old monetary base. It's not that simple.

As you can see above, Velocity keeps plumetting. No doubt, another QE is in the works.

A huge debate between the Deflationists and Hyperinflationists had been going on since 2008. Some hyperinflationists don't understand how the system works. They keep yelling "hyperinflation" yet they couldn't explain why prices aren't skyrocketing after QE 1 and 2. I believe the Forbes article is in response to such people.

A more realistic batch of hyperinflationists think differently:
1) 98% of deflationists' predictions will happen.
2) The CBs will print money in order to save debt.
3) Don't yell out Weimar or Zimbabwe as soon as there's any mention of inflation. More realistic hyperinflation events throughout history have been 3-to-1, 10-to-1, 1000-to-1. The trillion-to-1 hyperinflations are extremely rare and are the result of severe exogenous economic circumstances

Here's a chart originally posted by Baron Dayne:

Basically, M3 will continue to shrink and M0 (via QEs) will continue to cover the gap. At some point, M0 will explode in response to hyperinflation. Printing money is the result, not the cause. This subject matter is so dense, I have neither the time nor the energy to explain it. I'll just have to refer to FOFOA's rebuttal on a deflationist article.

tdeloco, do you have similar charts for Japan? It would be interesting to see what their money supply and inflation have looked like over the last 20 yrs.

Sorry, I don't. I sure wish I could find more reliable data on Japan. The money supply charts came from the website of the Federal Reserve of St. Louis. They developed some really good web tools for anyone to use.

However, what I've been saying all this time is that the conditions between Japan and the U.S. are very different.

Well, the chart predicts complete disappearance of credit and replacement of it by printed money.
Is it politically possible?
Won't banks, who control each and every financial decision, be able to prevent this?
How will it affect our creditors? (Chinese etc.) There will be quite a long period when new credit will be gone, but the interest on existing credit still has to be paid. The only way to hold in this situation will be government printing of lots of fiat money. What will be creditors reaction to such printing?

Many more questions.
For example, when credit will be gone, what will be the meaning of being the world reserve currency?
Won't other instruments replace dollar as such even prior to this?

When this happens, will it cause a huge price inflation with no actual increase in money supply?

Thank you for your time. A lot for me to pour over, since I never used to like economics I feel like I'm working from a deficit.

I will read and re-read the information above, so you can know it won't be in vain (unless I fail) :)

Thanks again guys!

QE causes PM's to go up. Commodity prices have to many variables, like crop disease for instance. Oil and gas become easier to get with technology.

Looks like bigger pockets is where the flippers/contractors/realtars hang.

Definitely shows how RE has been sold out completely, investors, Realtars, and banks pretty much control the market.

The policy of TPTB are to inflate, which is the trend. Deflation is why they push QE in the first place.

Still, with a global market, and shitpiles of dollars sitting around in foreign countries, or investors pockets we have 5-10% foreign investment in RE now, which is your basic more dollars chasing fewer goods, and housing prices are up as a result.

E-man says

Anyways, just my 2 cents. YMMV.

Thanks E. Much appreciated. :)