An interesting post from Scott Grannis on inflation. Here’s a sample snippet:
What’s happening these days is a vicious circle of sorts: money demand has failed to keep with the growth in the money supply, and this has led to rising prices; rising prices, in turn, erode the demand for money, since the value of money is declining as prices rise, and all of this reinforces the public’s desire to reduce money balances, borrow more, and increase spending.
This inflationary dynamic won’t end until a) the Fed substantially reduces the supply of reserves to the banking system, b) the Fed substantially increases short-term interest rates (by enough to offset the erosion of money’s value via inflation, c) the banking system becomes less willing to lend, and/or d) the public becomes less willing to borrow.
Of those four the easiest to accomplish from a technical rather than from a political standpoint is b closely followed by a. Then c and, finally, d. The politics is different. The ease is exactly the opposite. I’m guessing the Fed and the White House both start complaining about d.
I got a little lost at “people wanting to not hold on to moneyâ€.
In the world I know, money is to pay monthly bills, if there’s any left maybe you go out to eat.
If prices rise, you don’t go out to eat, maybe you fall behind on your mortgage, you still spend as much money but it buys less.
That’s bad for business and should be deflationary.
Sure, in hyperinflation, you spend before it loses more value, but if its all allocated you can only tighten your belt.
Borrowing at below inflation rates makes all the sense in the world, especially if the credit term is relatively short compared to inflation duration expectations. Quite frankly, I’m surprised by bank’s mortgage rates, even as a hard collateralized loan. Now, credit card and consumer finance rates………..