QE's Fail to Inflate - Deflation Here We Come!

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paranoid's picture
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QE's Fail to Inflate - Deflation Here We Come!

If the expectation is that we QE to infinity and hard assets inflate then why is velocity of money shrinking? 1980's - last commodity bull top velocity was in clear uptrend which led to the blow off top. Now velocity of money is dropping like a rock.... Does it tell us that QE is not really working and we are to continue deflation process??? 

It seems that its not inflation that Fed is scared of - its deflation! Hence this last QE announcement. My question is --- will it work? The answer is below. 2008, 2010 - two QE's later and we still did not reverse the trend. Why would it work this time?

In other words - in order to see true inflation (ala germany 1920's) we need to see money velocity to pick up. Right now we are holding onto our money which means that we are not really afraid of money losing value. Gold/silver managed to advance, a lot of it is debt risk driven IMO not true inflation.

Would like to hear what CM experts think??

tictac1's picture
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Not an expert, but...

Correct, the FED and government are afraid of deflation.  They intentionally create "manageable" inflation, though they only recently admitted to this.  I remember growing up with adults bewildered and arguing on what causes inflation, now we know!  Inflation benefits the banks and government, deflation favors the thrifty consumer.

I believe you would see velocity pick up when/if consumers began borrowing to spend again.  There are some that believe the excess liquidity will have to break loose at some point, thus triggering massive inflation.  I'm not sure, the financial system is incredibly complex.  Purposely so, I believe.

ralfy's picture
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Certainly deflation, as that

Certainly deflation, as that affects income and production as well. Unfortunately, this is only one problem involving the global economy.


dmger14's picture
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How about a velocity pickup

How about a velocity pickup when, in response to growing debt and monetization thereof, foreigners (and US citizens) either dump, or let their treasury holdings mature and spend the dollars here in the US?  As people lose faith in the value of the dollar, they will spend them faster to secure real goods before prices increase further, which will feed on itself and increase price inflation.

Other points to make are that 1) QE3 is UNsterilized, so will cause price inflation, and 2) the fed has been questioned about lowering the interest it pays on excess reserves, which would force banks to lend money to make money, which would inject more cash into the sytem and cause price inflation that way.  BOTH OF THESE TWO POINTS ASSUME THAT VELOCITY WILL NOT DECREASE AT THE SAME RATE OR MORE THAN MONEY CREATION.

Seems to me that with real incomes falling, velocity cannot decrease much more because people need to spend money on necessities regardless of fear of the economy and fed.

Bottom line, loss of faith in the dollar leads to people spending it for real goods as quickly as possible, which feeds on itself and causes price inflation.  Coupled with money supply increase, the effects could be powerful.  BTW, even in a high unemployment situation, there will be demand for wage increases at some point as prices rise.  We had pay increases during the stagflationary 70's early 80's though unemployment was high. 

phecksel's picture
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Aren't we seeing a

Aren't we seeing a combination of deflation (wages), and inflation (commodities) right now?

Wendy S. Delmater's picture
Wendy S. Delmater
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As I have long maintained we would, we are seeing inflation in necessities and a deflation in luxuries. Everyone needs food, clothing, shelter, healthcare and energy. McMansions, SUVs, fancy vacations, the latest doo-dads and thingamabobs--all bought on credit--are gonna get a lot cheaper. And have fewer and fewer buyers.

dmger14's picture
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Yes, but at some point high

Yes, but at some point high dollar credit items will go up in nominal terms even as they experience asset price deflation.  Like in the 70's, house prices rose, but at a rate lower than inflation because higher inflation led to higher interest rates, which had a depressing impact on housing than otherwise.  Looks like we're in a stagflationary environment again, only this time we can't jack interest rates up to nearly 20% to quell the inflation because debt service payments would consume all of the tax revenues.

RJE's picture
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I truly believe that the

I truly believe that the moral hazard created by the Elite for the Elite will have its consequences. That the road less traveled by many middle class families have yet to be taken. I believe many two income families that lose one income and are struggling will see clear to bankrupt their debt, stay and negotiate a better mortgage, let the second mortgage go because the equity on the first mortgage is NEVER going to be recovered. All retirement accounts are NOT subject to bankruptcy court and your investments are safe. I think when this cat gets let out of the bag then watch out.

What is to gain from this strategy? 2nd mortgage, all debt removed, and your freedom back. Mmmmm, sounds like an out actually, and if you payed yourself this cash for ten years you just might be able to buy your next house free and clear!? Buy a car, a cottage all with cash! This is legal and you never have to feel guilty because it's just business. Imagine, this could mean well over $100,000-$200,000 bucks in 10 years! Anyone know a good bankruptcy lawyer?

I too believe that the velocity of money matters and if debt is destroyed faster than can new credit be taken (who wants it?) then Deflation, and the PANICKING FED are in trouble. Do you think that's why the Fed went all in?! I think there's trouble out there not seen just yet but certainly feels pretty bad. Banks are NOT lending and too much debt rules the day so Deflation is what has scared the hell out of the Fed. IMHO

"Inflation-Deflation? Yes"

Go Tigers


nameofthegame's picture
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I doubt it. At least not

I doubt it. At least not right away. What happens to commodity prices, and stocks too, when Euro and Dollar bondholders pull out on a grand scale? The fact that it hasn't happened yet doesn't mean we'll see prices falling, or money in circulation shrinking so soon. [edit: That is to say, that the observed drop in the St. Louis Fed chart will continue]

dshields's picture
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I am not sure what exactly is going to happen - too many unknowns.  However, it is a sure bet that whatever it is it is going to be bad.  The US owes far more money than it can pay back.  And, the promises for future money are outragous.  Welfare states never work.  I do not know why people think it will work now.  Every welfare state that has ever been has failed.

So they "print" and monetize the debt.  It is actually working for now.  It will not work forever.  The good part is this allows people to prepare.  If you live in a city you have time to organize a place outside of a city.  If you live in the country you have time to stock up.  The Fed Res is actually buying us time.  Use it well.  The class of entitlement is going to be very unhappy when it finds out that it is not going to get the free gig it was counting on.

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