The Fed isn't and hasn't been causing hyperinflation. 4 pieces on economic theory and gas prices.

[Imperialism Inc.]

There has been a debate raging for the last 2 years. Will Fed actions lead to hyperinflation or won't they? One view , the hyperinflation view, isn't based on any particular economic model. It is based on applying past observation of specific situations and assuming they apply universally at all times. The fed prints money (which they technically aren't actually doing) and you get inflation. Over the past 2 years this view has been a spectacular failure. Despite record action by the Fed, last month inflation trends were at a six decade low.

On the other hand is the view developed around the crises of the last couple decades, especially Japan, based on Keynes and called liquidity trap theory. Liquidity trap theory predicts that when the economy experiences a shock that puts it up against the zero interest rate lower bound that the Fed can make large monetary moves and inflation will remain low. This theory has been successful at predicting not just inflation trends but also when the effects of the stimulus would start to peter out. The basic point is that when the demand shortfall is big enough the Fed can "print" as much money it likes and there will be not much inflation because no one is actually borrowing and spending the newly created reserves.

For anyone interested in a scientific way of looking at the world this should all be very interesting. We have two views of the world and when we look at the actual data only one survives, and it ain't hyperinflation. Despite all this we have people on the right like Glenn Beck and Sarah Palin, and many on the left as well such as plenty of people here at DU, who just won't give up the ghost. These 4 pieces look at the recent increases in gas prices as explained by global demand meeting ever dwindling supply.

I don't harbor any illusions about changing many minds. People "just know" that Fed action = inflation even though the data doesn't support it. It kind of sucks since we could be well into a strong recovery by now if the liquidity trap theory was taken seriously and Fed actions had been accompanied by a second stimulus.

Anyway, on to the articles.

Partying Like It’s 1923: Or, The Weimar Temptation
http://krugman.blogs.nytimes.com/2010/12/27/partying-like-its-1923-or-the-weimar-temptation/

And the remarkable thing is how many people are determined to Weimarize recent events, even though the actual experience of the past three years has been an object lesson in the fact that sometimes that framework just doesn’t fit. In late 2008 there was, maybe, an excuse for looking at the big rise in the monetary base and thinking that inflation was coming — although not if you had actually looked at Japanese experience. At this point, however, it’s just bizarre to use that obviously failed framework rather than the well-developed theory of the liquidity trap, which has sailed through recent events with flying colors.

The Finite World
http://www.nytimes.com/2010/12/27/opinion/27krugman.html?_r=1&partner=rssnyt

What the commodity markets are telling us is that we’re living in a finite world, in which the rapid growth of emerging economies is placing pressure on limited supplies of raw materials, pushing up their prices. And America is, for the most part, just a bystander in this story.

Commodity Prices and Inflation
http://krugman.blogs.nytimes.com/2010/12/27/commodity-prices-and-inflation/

Anyway, it’s worth pointing out that commodity prices do have a habit of fluctuating, a lot — and that historically, such fluctuations have generally presaged neither major inflation nor major deflation

Petroleum Prices and the International Dimension
http://www.econbrowser.com/archives/2010/12/petroleum_price.html

[Skink]

1. Krugman always debunks the arguments and news cycles we get 6 months from now.

so get ready for the inflationistas.

[Art_from_Ark]

2. "Inflationista", huh?

Personally, I don't buy the ridiculous notion that inflation is "at a 6-decade low". Having spent money during most of those 6 decades, I can say that prices in the late '60s were more stable than they are today. And tuition at my old university, utilities, groceries, all types of insurance, handyman fees, health care, property taxes, have all gone up in just the past year in my hometown.

[Imperialism Inc.]

3. An all too human response. When what you want to believe is contradicted

by reality it must be reality that is wrong not your preferred belief. Sad, dangerous and all too typical. And so the slump continues.

[OllieLotte]

4. We are seeing noticible inflation in a few areas.

Food, energy and a number of commodities. Wages are being held down by unemployment and housing prices are falling. Overall, its a bit of a wash on the inflation front. Once housing prices stabilize (which might take years) inflation is going to be scary.

[Imperialism Inc.]

5. It has been just around the corner for 2+ years now. I won't be holding my breath.

[roamer65]

6. We're now starting to enter the first effects of the Fed's monetary inflation.

Price inflation will be horrendous over the coming years.

Since we are not going to pay for all the bailouts with high taxes, we are going to pay by watching our life savings become nearly worthless.

[Statistical]

7. You are aware that quantitative tightening also exists right.

Fed can control inflation by doing the exact opposite of what it is doing now.

QE
1) Fed creates money from nothing
2) Fed buys T-bonds on open market adding bonds to it's balance sheet
3) The seller of the bond gets the feds "created money"
4) M3 supply increases by the amount of the sale.


QT
1) Fed sells T-bonds on open market taking it off its balance sheet.
2) The buyer of the bond gets the bond, and gives Fed money.
3) Fed destroys the money. Money into nothing (reverse of #1 in QE)
4) M3 supply decreases by the amount of the sale.

[roamer65]

8. Tightening will tank the economy just like in 1980-1981.

With U6 unemployment at nearly 17%, they will not tighten one bit.

The Fed is hamstrung and locked into the path of money creation and ZIRP.

I am well aware of tightening, but it simply won't happen for quite some years...just like the 1970's.

[Imperialism Inc.]

9. The worthless life savings meme is a fairy tale.

In this fairy tale even without any action by the central bank (and preferably by the fiscal authorities as well) people get to keep their savings no matter what happens to the economy. Back in the real world people who lose their jobs have to use their life savings to survive. Alternately , if they don't, then the economy shrinks even further as less goods are purchased and even more jobs are lost. When you compare reality to a fantasy it is no surprise the fantasy comes out looking better.