What if they had an inflation and nobody came?
January 27, 2009 22 Comments
I noted that trend back in December. Note the already-dated Ron Blagojevich joke: “The Fed is inflating the money supply to the mother-Blagojeviching moon.”
Thing is, the money supply has inflated, but price inflation hasn’t come, and may not for some time. Instead, we’re still seeing lower housing prices, energy prices, and stock prices. Other consumer prices are being forced down by excess and liquidating inventories. The consumer price index declined the most since 1947 and household savings went up for the first time in ages.
Not that the Federal Reserve isn’t trying. Watch this animated GIF of Federal Reserve injections since its founding to see just how unprecedented this money supply increase is by any historical standard. The Fed has never pumped this much money into the economy and to so little effect. (You may need to reload the image to see the whole thing, or you can go here to see a YouTube video clip.)
Or if you prefer inflation-adjusted charts:
I’ve said elsewhere that inflation won’t happen until the recovery phase, that the recovery phase can’t happen until after we hit bottom, and that we’re nowhere near hitting bottom. Right now the Fed is so afraid of deflation that they’ll spend any amount of money to stop it and have basically put interest rates to zero.
So what are the banks doing with all of the low-interest money the Fed is injecting into the money supply? Sitting on it. The banks know how awful their financial situations are. They know how bad option ARM recasts are going to be. They know what’s going to happen to the asset side of their balance sheets when all of that overpriced real estate enters foreclosure and they have to mark a $500,000 California mortgage down to the $300,000 the house will fetch on today’s market. They’re holding onto the TARP money so that they can bail themselves out, not other people.
The banks are like over-extended homeowners who get a credit card offer in the mail. They won’t put anything on the credit card because they know they already have an oppressive mortgage, two car payments, and a pile of credit card bills. If they grab the lifeline it will pull them down further.
Many banks are no longer healthy. That’s why so many of them had to be bailed out. Many banks bought up real estate and built new branches the same way everyone else did – by overleveraging themselves. They can’t repay all of their deposits and neither can the FDIC. The government is trying to keep the lid on things to prevent bank failures and a run on banks.
- A word to the wise from Michael Shedlock
- Will lower interest rates help adjustable rate mortgage holders?
- This is where inflation fears are coming from
- The Fed, money supply, interest rates, and inflation
- Inflation-adjusted U.S. house prices 1975-2008
- How irrational were California real estate prices?