Tags: us | inflation | zimbabwe | yellen

A Coming Avalanche of Inflation

By    |   Tuesday, 20 Apr 2010 09:07 AM

Does a bad economy protect us from inflation?

If you ask Janet Yellen, president of the San Francisco Federal Reserve and soon to be Fed vice chairman, you would think so. She says that because of factory capacity underutilization in the United States it is highly unlikely we will have inflation — despite the Fed massively increasing our money supply.

When somebody says something like that, I like to pull out a $100 trillion bill (yes, I said trillion) from Zimbabwe and ask “Did a bad economy protect them from inflation?”

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Back in our own country, in the early 1980s, a bad economy didn’t protect us from inflation. There was plenty of under-utilization in auto and steel factories and in many other industries, but we still had double-digit inflation.

Few people know, but before Germany’s Weimar Republic became the Weimar Republic of wheelbarrows-of-cash fame, it had a thriving economy with unemployment of less than 1 percent.

Unbelievable? Well, as we know, it was unbelievable. As the initial positive impact of the massive increase in the money supply wore off and the time passed since the beginning of that increase (known as a “lag factor” in economics) inflation inflicted a heavy dose of reality on the Weimar economy. A bad economy is not a vaccination for inflation.

Clearly, size matters. If you don’t increase the money supply that significantly, don’t expect a lot of inflation. In the case of the United States, our monetary base has increased to almost $2.4 trillion from $800 billion in the fall of 2008. That’s a huge increase in 18 months.

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Our GDP, of course, has not tripled in size in that time. To put the increase in perspective, it took almost 14 years for our monetary base to increase to $800 billion from $400 billion (from 1994 to 2008) during a period of much higher growth in the economy than we have had in the last 18 months.

As long as the economy is growing rapidly, the Fed can increase the money supply at a similar rate and not cause inflation. A 300 percent increase in the past 18 months, however, is much faster than the growth in our economy (in fact, it has not grown much at all), so it’s hard not to get some serious inflation.

Inflation doesn’t have to come immediately. But that it hasn’t happened immediately doesn’t protect us from inflation down the road. Fed Chief Ben Bernanke wrote a paper in 1999 that said lag factors between increases in the money supply and inflation could be quite lengthy, 18 to 24 months and even longer in a down economy.

Think about an avalanche. Snow is building up on the hillside. Ice is cracking. The sun is shining down. Hundreds of tons of wet snow are perched, silently, over a small town far below.

Whatever Janet Yellen thinks, U.S. inflation is that avalanche. Just because something doesn’t happen immediately, don’t presume that it won’t happen at all.

About the Author: Robert Wiedemer
Robert Wiedemer is president of the Foresight Group, a macroeconomic forecasting firm that customizes its forecasts for specific businesses and investment funds. He is a regular contributor to Financial Intelligence Report, the flagship investment newsletter of Newsmax Media. Click Here to read more of his articles. Discover more about his latest book, Aftershock, by Clicking Here Now.

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Does a bad economy protect us from inflation? If you ask Janet Yellen, president of the San Francisco Federal Reserve and soon to be Fed vice chairman, you would think so. She says that because of factory capacity underutilization in the United States it is highly unlikely...
us,inflation,zimbabwe,yellen
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2010-07-20
Tuesday, 20 Apr 2010 09:07 AM
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