Response to rfaramir & David in Qatar (ignore this if you don't like boring posts about inflation)
May 11, 2011
– Comments (28)
Over here in comment #54, David in Qatar wrote:
"http://en.wikipedia.org/wiki/Hyperinflation#Examples_of_hyperinflation
Plenty of modern countries and democracies have suffered from hyperinflation or mass-inflation."
This is true. However, those countries were, in fact, "printing money" at alarming rates. The situation in the United States is completely different, and we certainly are not faced with a risk of hyperinflation, for reasons that should become clear from my response to rfaramir.
In comment #39 of that same blog, rfaramir wrote:
"It's not their being 'spent' that makes the excess reserves a threat. It is their being lent out. They will be lent in a fractional reserve fashion, meaning that each dollar in reserve will be the basis of about 9 more dollars in new deposit accounts created by loans capitalized by that reserve dollar.It is only the fact that the Fed is actually paying banks interest on their reserves at the Fed together with their fear of loaning money in the current climate that keeps those dollars in excess reserves. They are a nuclear warhead ready to go off at the first sign of a real recovery (nowhere in sight at the moment).
Speaking of end game scenarios, Chris Barker's $2000/oz price for gold is not a "terminal" price because a realistic price for gold when the dollar goes "terminal" cannot be stated. A) It's probably at least $40,000/oz by today's money supply measurements..."
First, it's true that excess reserves are very high right now, at a little over $1.4 trillion. It's also true that via fractional reserve banking, this could potentially result in the creation of an additional $12.6 trillion to the money supply. Of course, for this money to be created, the banks would need to loan it to someone. So my first question is, who would they loan this $12.6 trillion to?
For rfaramir's doomsday scenario to come true, we would need to see a quick turnaround in the housing market.
Based off these recent stats (which are probably too generous to begin with), I'll make some very rough and very generous estimates of home sales going forward:
Existing home sales: 6,000,000 per year at $200,000 per house = $1.2 trillion/year
Housing starts: 1,000,000 per year at $250,000 per house = $0.25 trillion/year
Total: $1.45 trillion/year
Even in this overly-optimistic scenario, it would still take: $12.6 / $1.45 = 8.7 years to loan out $12.6 trillion.
This would increase the M2 money supply from $9 trillion to $21.6 trillion over 8.7 years, a total increase of 140%. Annualized, this represents an increase to the money supply of 11% per year. This would cause high inflation, but it's still nowhere near the level of monetary creation that we saw in David's examples of hyperinflationary countries.
And again, these are "worst-case" estimates, which don't account for the obvious fact that the Fed can slow down lending by raising their rates and/or increasing their reserve requirements. Plus there is the fact that housing prices are still dropping, and housing starts are not exactly looking very strong right now.
Borrowings from the Fed are basically zero at the moment, so we still have quite a long way to go before we reach $12.6 trillion. If we can't get anyone to borrow money, even with a Fed rate of 0.1%, why would we expect lending to suddenly take off at unprecedented levels?
Can't we all just agree to worry about real problems (like unemployment) instead of imaginary problems (ie: hyperinflation)?
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