Still Worried About All Those Reserves?

Many commentators still seem to be screaming that hyper-inflation is around the corner. The crux of their argument is that the Fed has pumped hundreds of billions into bank reserves. There is a chart circulating, which you may have seen, illustrating this explosion of credit. After all, reserves normally translate directly into fresh lending. I have reproduced the chart for you here:

Idiot Revisited: Fisher

A while back, last September 9th to be exact and right before the world really fell apart, I took some flack for calling the Dallas Fed President Richard Fisher the economic idiot of the week. If you don't recall why, let me help you. As the world was rapidly deflating in a giant credit crunch, Mr. Fisher's position was described in the Fed's meeting minutes as

"While the financial system remained fragile and economic growth was sluggish and could weaken further, he saw a greater risk to the economy from upward pressures on inflation." [Emphasis mine]

A few months later he changed his tune and accepted that the right thing to do during a credit crunch is not tighten credit, but rather expand credit and liquidity. Thankfully, Bernanke already knew this.

I raise this issue again because Mr. Fisher was in the news again today. Bloomberg reported on some of his remarks this week. I'll quote from Bloomberg's article (again, emphasis mine):

Velocity

We have had some spirited debate about inflation here at TLRB. One concept that keeps arising is that you can't have inflation without growth in the money supply. That is, prices are a function of dollars chasing goods. If the number of dollars grows faster than the amount stuff to buy with them, then prices rise. In a recent post, a commenter took me to task (which everyone is welcome to do) for saying "generally speaking, growing demand increases upward price pressures." I didn't respond in full because the length of the response is worthy of a post in itself, so here it is.

Deflation, Not Inflation, Is Your Worst Enemy

Some of the most common questions and comments we get concern inflation and the money supply. Many feel that a fixed or tightly controlled supply of money would prevent inflation. One email predicted chaos due to rampant "double digit" inflation "sure" to come next year because of the Fed and Treasury's recent actions. There is a hidden danger to a lack of inflation that is not readily apparent.

Economic Idiot of the Week

The Fed doesn't get it, at least not entirely. While I normally don't read the minutes to the Federal Open Market Committee meetings, I thought they might shed light on the Fed's thinking at this critical stage in the economy. Here is a paragraph from the minutes of the August 5th meeting:

GDP update

Last week I wrote how the upbeat revised GDP number seemed fishy.  At the least, it was an inconsistent data point in an otherwise dour economy.  Today, Barron's had another explanation of why this number was suprisingly optimistic and may also be the reason why the official GDP numbers have been stronger than many of us economy watchers would have thought.