Best of the Week
Most Popular
1.Is the Stocks Bull Market Over? Dow Trend Forecast into End January 2015 - Nadeem_Walayat
2.Gold and Silver Stocks Apocalypse Now, Bear Market Review - Rambus_Chartology
3.NHS Baldrick Plan to Spread Ebola Across UK - Sheffield, Newcastle, Liverpool, London Hospitals - Nadeem_Walayat
4.Ebola Terror Threat Suicide Bio-Weapons Threatens Multiple 9/11's, Global Plague - Nadeem_Walayat
5.Second-Richest Man Says Mortgages Now a "No Brainer" - Dr. Steve Sjuggerud
6.Gold And Silver Still No End In Sight - Michael_Noonan
7.NHS Baldrick Plan to Spread Ebola Across UK - Sheffield, Newcastle, Liverpool, London Hospitals - Nadeem_Walayat
8.The Gold Bug is Set to Bite Back - EWI
9.How Alibaba Could Capitalize on the EBay-PayPal Split - Frank_Holmes
10.The Consequences of the Economic Peace - John_Mauldin
Last 5 days
Tesco Meltdown Debt Default Risk Could Trigger a Financial Crisis in Early 2015 - 24th Oct 14
Saudi Move to Cut Oil Prices Is Now Russia's Biggest Economic Threat - 24th Oct 14
US Stock Market Top Is Now In Sight - 24th Oct 14
New Profit Points in the Shifting Balance of Power, Welcome to Saudi America - 24th Oct 14
QE Failure & Folly Of Paper Mache, Treasury Bond Integrated Lifeline Patches - 24th Oct 14
U.S. Economy Faltering Momentum, Debt and Asset Bubbles - 23rd Oct 14
Annuities - Afraid Your Money Will Vanish before You Do? - 23rd Oct 14
What Debt Deleveraging? - 23rd Oct 14
How to Profit from Massive Spin-Offs with Just One Play - 23rd Oct 14
Evaluating Ebola as a Biological Weapon - 23rd Oct 14
Euro, USD, Gold and Stocks According to Chartology - 23rd Oct 14
Why You Should Always Be Invested in the Stock Market (Even Now) - 23rd Oct 14
Five U.S. Housing Market Warning Signs Point to Real Estate Market Downturn - 23rd Oct 14
The Better Short: Gold or Silver? - 23rd Oct 14
Focus on Graphite Companies with Green Energy and Technology Strategies - 22nd Oct 14
Crude Oil Price Hitting Bottom - 22nd Oct 14
Evidence of Another Even More Sweeping U.S. Housing Market Bust Already Starting to Appear - 22nd Oct 14
Gold Or Crushing Paper Debt Stocks Crash? - 22nd Oct 14
India Gold Demand Surges 450% and Bank of Russia Demand At 15 Year High - 22nd Oct 14
Bitcoin Stock Exchange Could Be "More Valuable than Alibaba" - 22nd Oct 14
Currency War - How to Profit from a Stronger U.S. Dollar - 22nd Oct 14
Banks Hold Treasuries and Make Loans- 22nd Oct 14
Gold and Silver Timing is Everything - 22nd Oct 14
Don't Get Ruined by These 10 Popular Investment Myths (Part VII) - 22nd Oct 14
Follow the Baby Boom to Biotech Stock Profits - 22nd Oct 14
Copper, Nickel and Zinc Won't Be Cheap for Long - 22nd Oct 14
How Will We Know That the Gold & Silver Price Bottom Is In? - 21st Oct 14
Is Gold as Dead as Florida Hurricanes? - 21st Oct 14
First Swiss Gold Poll Shows Pro-Gold Side In Lead At 45% - 21st Oct 14
The Similarities Between Germany and China - 21st Oct 14
The REAL Reason Why the Stock Market Turned Down - 21st Oct 14
Petrobras is a 'Scheme, Not a Stock' - 21st Oct 14
Stocks Bear Market Indicator Is Off the Mark - 20th Oct 14
Stock Market Ideal Turning Point is at Hand - 20th Oct 14
Investors Quit Complaining, The Environment is Perfect Right Now - 20th Oct 14
Ebola Armageddon Could Trigger a Rebirth in Gold and Silver Prices - 20th Oct 14
Gold vs Euro Risk Due To Possible Return of Italian Lira - Drachmas, Escudos, Pesetas and Punts? - 20th Oct 14
Stocks Rebounded Following Recent Sell-Off, But Will It Last? - 20th Oct 14
U.S. Responsible for West Africa Ebola Outbreak Says Liberian Scientist - 20th Oct 14
Stock Market Intermediate B Wave has Started - 20th Oct 14
Gold Stocks Analysis – FNV, CG, NCM, SBM - 19th Oct 14
Stock Market Primary IV Wave Counter Trend Rally - 19th Oct 14
Gold And Silver - Financial World: House Of Cards Built On Sand - 18th Oct 14
Anatomy of a Stock Market Sell-Off - 18th Oct 14
Why OPEC Has Declared an Oil War on Russia - 18th Oct 14
Gold and Silver Extreme Shorting Peaks - 18th Oct 14
Bitcoin Price Fall to $350? - 18th Oct 14
Tesco Supermarket Crisis Worse To Come as Customers Vanish! - 18th Oct 14

Free Instant Analysis

Free Instant Technical Analysis


Market Oracle FREE Newsletter

Stocks Epic Bear Market

Why Inflation in 2013 Is Imminent

Economics / Inflation Feb 14, 2013 - 03:48 PM GMT

By: Money_Morning

Economics

Jeff Uscher writes: Is a spike in the monetary base - currency in circulation plus bank reserves at the Fed - the first sign of imminent inflation?

Art Cashin, the well-respected director of floor operations at the New York Stock Exchange for UBS, recently told King World News the increase in the monetary base may well be a sign of impending inflation.


Monetary base, sometimes called high-powered money, is the basis for the bank lending that drives our economy. When interest rates are normal, banks use their reserves for lending.

Unfortunately, these are not normal times. The U.S. Federal Reserve and other central banks around the world continue to hold interest rates at zero.

Zero interest rates mean zero returns. Investors don't get paid for investing. Banks don't get paid enough interest to compensate for the risk of lending money into the economy. Looking at it another way, there is no penalty for doing nothing with your money.

Unprecedented Accumulation of Excess Reserves
Most of the money the Fed pumps into the market each month ends up sitting on bank balance sheets as reserves held by the Fed itself. That money never gets into the economy, where it can do some good.

To put it in economic terms, the velocity of money - the rate at which money is exchanged - has slowed.

From January 1959-August 2008, banks held an average of $0.8 billion in excess reserves at the Fed. The one exception was in September 2001, when excess reserves rose to $19 billion in the immediate aftermath of the September 11 terrorist attacks.

Between 9/11 and the collapse of Lehman Brothers in September 2008, banks held an average of $1.7 billion of excess reserves at the Fed.

Following the Lehman collapse, excess bank reserves held at the Fed soared. Excess reserves peaked at more than $1.6 trillion in July 2011 and remain at more than $1.5 trillion as of the end of January 2013.

That's more than $1.5 trillion that could be put to work in the economy, but is just gathering dust in the Fed because interest rates remain at zero.

That is where all of the Fed's quantitative easing has gone.

"To use [Fed Chairman Ben] Bernanke's own analogy, let's assume he printed up a billion dollars of brand new money and he flew over your house ... and dropped it on your lawn," Cashin told King World News. "But you were so worried about the market, worried about the economy, worried about everything that you simply picked it up and put it in the garage. That's why we haven't seen any inflation with all this aggressive money printing."

Money Morning Global Investment Strategist Martin Hutchinson agrees.

"Monetarists will tell you that the decline in monetary velocity is due to the massive balances, over $1 trillion, which the banks have on deposit with the Fed, which just sit there and do nothing." Hutchinson said. "That's probably correct since while the deposits exist, the ordinary mechanisms of monetary movement simply don't work, since that money has no velocity."

The Danger in the Fed's Exit Strategy
Through quantitative easing, the Fed has created a gigantic amount of money that has had no impact on the real economy. Some Federal Open Market Committee members have started to talk about ending quantitative easing but keeping interest rates at zero.

The question is whether rates can be kept at zero when the Fed's balance sheet is shrinking.

Most market observers think long-term interest rates will rise once the Fed stops buying Treasury bonds for its quantitative easing operations. If long rates start to rise, it may awaken inflationary expectations that might be amplified by the Fed keeping short rates artificially low.

If that happens, banks - once again able to earn a reasonable risk-adjusted return - may start to mobilize that $1.5 trillion in excess reserves and that is when you will see inflation take off out of nowhere.

Check out Martin Hutchinson's full analysis of why there's no U.S. inflation -yet - in 2013.

Source :http://moneymorning.com/2013/02/12/u-s-economy-recovery-doesnt-fool-struggling-americans/

Money Morning/The Money Map Report

©2013 Monument Street Publishing. All Rights Reserved. Protected by copyright laws of the United States and international treaties. Any reproduction, copying, or redistribution (electronic or otherwise, including on the world wide web), of content from this website, in whole or in part, is strictly prohibited without the express written permission of Monument Street Publishing. 105 West Monument Street, Baltimore MD 21201, Email: customerservice@moneymorning.com

Disclaimer: Nothing published by Money Morning should be considered personalized investment advice. Although our employees may answer your general customer service questions, they are not licensed under securities laws to address your particular investment situation. No communication by our employees to you should be deemed as personalized investent advice. We expressly forbid our writers from having a financial interest in any security recommended to our readers. All of our employees and agents must wait 24 hours after on-line publication, or after the mailing of printed-only publication prior to following an initial recommendation. Any investments recommended by Money Morning should be made only after consulting with your investment advisor and only after reviewing the prospectus or financial statements of the company.

Money Morning Archive

© 2005-2014 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

Free Report - Financial Markets 2014