Four Letters Re: Currency Inflation Expectations for the US


The letter [from reader PNG] has severe mistakes and is fundamentally misleading – your readers deserve even more refutation before anyone is lulled into a false sense of security. To quote: “Let’s say the Treasury just invents another two trillion dollars by printing currency and forgiving loans. Let’s say they do that every year for the next five years. How much inflation would that create? The absolute maximum inflation rate from this example is about 20%, because there’s ten trillion dollars in circulation already.”

  1. These numbers are incredibly far off the mark. Actually M1 is the narrow definition of money – the core money supply that the Fed controls. It just spiked from ~ 850 billion to ~1,010 billion ($1.01 trillion) in one month.
    So he’s off by a factor of 10 here. If the Fed printed (or created digitally) the hypothetical two trillion $ this would triple the M1 money supply. Three times as much money chasing goods would ignite hyperinflation very quickly…
  2. And let’s not forget about the multiplier effect of fractional reserve banking! Even much smaller amounts of money creation are going to create serious inflation because we live with the fundamentally dishonest and unstable fractional reserve banking system. $10 deposited in a bank is used as “reserves” to loan out more than $100. (Banks are only obligated to keep less than 10% in reserves to pay depositors). Off by another factor of 10! Two trillion in new money becomes more than twenty trillion dollars in loans.
    Quoting again: “But in practice, the additional money dilutes the much larger pool of value represented by goods and services. This must be true because the entire money supply isn’t enough to buy everything that is for sale.”
  3. Actually money has velocity – it is spent, or changes hands, several times per year. The money supply multiplied by the velocity determines the amount of dollars bidding for the total supply of goods. E.g., $100 times a velocity, or turnover, of 10 times a year = $1,000 spent in one year. This $1,000 bids for the supply of goods, NOT just the $100.
    In the US (right now) velocity is moderate. In Zimbabwe it is incredibly fast. So looking at just the supply of money is only half of the equation when you look at the $ bidding up prices for goods.
  4. There are lots of other mistakes here, but one last note is in order “That kind of inflation is literally unprecedented in otherwise functional economies” Crack open an encyclopedia, and look under W, for Weimar Germany! And don’t confuse cause with effect – economies become dysfunctional because of inflation – Argentina is a good place to start reading…

An aside – thanks to Dr. Gary North for making the link above freely available on the public section of his web site. Sign up for his free Reality Check newsletter if you’d like advance notice of economic trends based on real numbers. (BTW, I have no relation to Gary North, other than gratitude for giving me far more education than I paid for as a subscriber.) Yours truly, – OSOM


Here are a couple of facts about inflation I’d like to share:

FACT: The US Federal Reserve is issuing loaned money at its discount window at the rate of $100 Billion per day which is $36 Trillion, annualized. The $100 billion daily rate is actually increasing each week. These quantities of money will never be paid back because the national debt is 10T$ which it took 95 years to accumulate. This is highly inflationary.

FACT: Every bank account has been guaranteed to $250,000 [more than twice the old limit] with unlimited funds to back up FDIC insurance. This will be highly inflationary, if banks fail. – J.K.


Referring to the letter by PNG, “currency inflation expectations” and your response. I would like to quibble a great deal with PNG, and a little with you.

First, for reader PNG,

Week before last, the Fed increased the money supply by nearly 23% in one week. They have been increasing the supply by huge amounts weekly, but that one took the cake. Disregarding Jim’s accurate argument that there are other things to inflation, (e.g. velocity of money) simply multiplying 22% times 52 weeks gives a minimum annual inflation number of 1144%. The way the Fed has been “printing” money since Aug 17 this year, triple digit inflation is almost a given. (Not that the Fed can really “Print” money, but it can sure “Create”.)

The government is constantly changing the way it calculates inflation. Now they talk about “core” inflation, leaving out the “volatile” food and energy, etc. costs. Since when do we not need food and energy to survive? If one calculates inflation using exactly the same methods used during the Clinton administration, (as they do over at the “shadow stats” web site) you will note inflation is running well over 10% NOW, and it takes some time for newly “printed” money to work its way through the system to become inflation.

And for you, Jim,
I certainly agree with your observations about debt and derivatives. The world bank and others are coming up with estimates that the notional amounts of derivatives run in the order of 1.31 Quadrillion dollars. No one knows for sure. If any one of the three counterparties to a derivative default, then the notional amount owed becomes a real amount owed. To put that in perspective, the GNP of the entire world economy doesn’t run over $50 trillion. A bailout of $700 billion is peeing in the ocean because there are a lot more zeros in a quadrillion than in a billion. A quadrillion is a million billions. Parts of this house of cards are failing now, (your comment about Lehman’s explosion date of Oct. 21 is spot on) and the numbers are so huge that undoubtedly one will take down others in a row of dominoes effect. Lehman may be that first domino.

My quibble with you regards another possibility to inflation. In our fractional reserve banking system, every dollar “printed” by the Fed is normally multiplied by about 10 by the banking system (Theoretically it can be much more than 10) So to inaccurately describe in economic terms, the dollar bills “printed” by the Fed might be called M1. By the time that one M1 dollar makes its way through the banking system an additional 9 have been created via loans for any purpose to the average guy or company. That might be called M3. The commercial banks get one dollar but loan out ten. And there is no way of telling whether what you are spending is created by a commercial bank loan or was “printed” by the Fed, and in practice, normally it doesn’t matter. There are, however rules as to how much the banks can loan out based on reserves, which are normally the capital and accumulated profit. (Equity)

However, in special circumstances such as we now face, it does matter whether dollars are Fed created or commercial bank created. Normally, to make as much profit as possible, commercial banks will try to lend out every dollar they can. In the current situation there are two things that stop the commercial banks from lending. The first is they are scared silly, and rightly so. They have gone from worrying about the return on money to worrying about the return of money. No one can tell whether a bank is bankrupt or not, because IF they hold derivatives, those derivatives may suddenly become a giant liability. As well, all the major companies used derivatives freely, and they are suspect too. Ergo we have a credit crunch where the banks are afraid to lend, even to each other. The fractional bank multiplier (one in, ten out) is not working, contracting the M3, or money on the street. Very deflationary.

All these billions the banks are “writing off” come directly from their equity, or reserves. Since they can only lend out a certain multiple of their ‘reserves’, those reserves, or accumulated profit, are dropping like a rock because of the writeoffs. They must contract their lending to remain within the rules. So, it becomes an issue of the commercial banks being neither willing, nor able to lend.

The government allows certain borrowings from the central bank to be counted as reserves in time of turmoil, which hasn’t been a problem within the life span of most alive today. During 2007, and prior, US bank reserves ran in the order of $43 billion. The latest US figures I saw shows “non borrowed” reserves at minus $403 billion. The rest is government loans “counted” as reserves. Every bank in the US, and most of the rest of the world, is bankrupt. Well, there will be one or two prudent exceptions, but they will also likely be taken down too, if only because of the number of checks in circulation.

Suddenly those nine dollars of commercial bank created dollars are shrinking, and they can shrink even faster than the government can print. All this is highly deflationary, as the world found to its dismay in 1929. Why do you think Paulson has opted to buy equity in banks with a significant part of his $700 billion? It pumps their reserves, so they have the ability to lend. No one has mentioned how they can cause banks to have a willingness to lend.

My point is that so many assets are being destroyed, as they were in 1929, that a deflationary scenario is entirely possible. And deflation is a much meaner beast than inflation. I have previously forecast elsewhere an inflation followed by deflation until it is all Fed created money. Then it is Zimbabwe[-like situation for America], if the system holds together that long.

Like you, I much prefer a world of sleeping well at night, hot showers and lights that turn on at the flick of a switch. – Allen


Mr. Rawles;
In response to he recent post where another reader thought that triple digit inflation could only happen with $10 trillion per year increases in the money supply I would like to provide some further economic insight for your readers.

  1. Prices are determined by supply and demand; therefore, a drop in demand for dollars can have a far greater effect than a increase in supply. Many people do not realize that in Germany the inflation rate was many times the rate of the increase in the money supply.
  2. If the dollar loses its reserve currency status (currently being discussed) then international demand could fall off a cliff forcing half of the dollar supply back to the United States (100% inflation).
  3. There is a time-lag for inflation. In the early days people expect price stability and so inflation is much lower in than the actual increase in supply. Over time people expect more and more inflation until it spirals out of control. It is a geometric function where most of the action takes place in a very short period of time. In other words, the huge increase in the money supply that resulted in home prices going up has not yet fully been priced into other goods and services.
  4. A decrease in production (due to recession) decreases the supply of goods competing with existing money causing inflation.
  5. Ever dollar FDIC pays out is inflationary; therefore, with the government backing almost everything these days every deflationary “force” is countered by inflationary government action. Ultimately, interest on the national debt will exceed the ability to tax… this is the end game for the dollar.

When you factor in these things, triple digit inflation does not take much time to get rolling. In fact, it can go from 10% (current) to 100% inflation in just a few weeks. I hope this material is useful for your readers. – Dan in Virginia