rising cost of food

Or it's bad to use corn as an additive in most foods. I've noticed that some brands of cola are switching back to real cane sugar. Yes, sugar is now less expensive than highly subsidized corn.

 

Corn shouldn't be used as food to begin with.

 

Wonder how long it takes before somebody reads the title and starts posting nonsense about out-of-control inflation again.

 

Touche. Allow me to reword my statement.

I wonder how long it takes before someone with only a marginal understanding of macro-economics start pontificating about the Fed's "printing press" as the source of all things inflationary.

 

I wish my grocery store sold 'bushels' of corn.

 

******* Barack Hussein

 

Supply & demand. Sure.

 

No, not quite. Contrary to popular belief, the Fed can't do helicopter drops. It can only credit banks' reserve accounts at will. It's equivalent to printing cash, handing it to a bank, and telling them to keep in their vaults. Where's the inflation if that money's just sitting in a big concrete box?

That money can only drive up prices if it's out in the economy chasing after goods and services. The only way it does that is if it gets lent out to consumers. In an environment where the private sector is reluctant to get into any more debt, where banks are much more risk averse, there aren't very many loans getting originated. That's the reason that even though the monetary base tripled, inflation's still hovering around 2-3%.

Furthermore, people vastly underestimate private lenders' roles in increasing the money supply. It doesn't all come from the Fed or from Congress' spending. Even though their bank reserve accounts get debited when originating a $X loan, they've effectively increased the amount of money in economic play by $X.

Bottom line, the banking system and forex markets are far too complex to make a blanket statement that printing causes inflation or devalues the dollar. It's more important to focus on producing things people need/want, and stop caring about the "value" of the currency. So long as production is sustained, the currency that buys those products will have value.

 

lol I figured we'd get Kyrodis coming in and screaming "but what if the banks don't lend all that money they got"!!!

Let me ask you this, Kyrodis - do these actions serve to weaken the dollar relative to other currencies? Is oil and many food commodities based on the dollar? Describe the impact that might occur.

TIA

 

lol Try asking questions don't reveal your lack of knowledge. The USD index is actually up from four years ago.

What evidence do you have demonstrating a "weakening dollar relative to other currencies"?

TIA

 

...and when the Fed monetizes our debt? IIRC, the Fed monetized ~60% of our debt in 2011...

 

The Fed didn't monetize anything...didn't make a single bid at Treasury auctions.

Primary dealers made offers on all bonds sold. In fact, the primary dealers oversubscribed Treasury auctions by 2X in 2011. Why are they always so eager to buy Treasuries? For one, they're required to, but what if they decided to boycott auctions? They could, but then there's very little else they could do with their excess reserves.

The Fed later turned around and bought bonds from primary dealers in an effort to ensure they had enough reserves to continue lending (IMHO a misguided notion since banks are no longer truly reserve constrained). Naturally, the vast majority of those bonds came from recent auctions because older bonds would've already been sold in the secondary market.

 

1. Yes, that means they monetized the debt. Regardless of whether they bought it directly or indirectly the effect is still the same. The Fed used newly printed money to buy government debt. I bet now you are going to tell me that printing money doesn't cause inflation....
2. Where did they get those 'excess reserves' from? Explain to me how that wasn't a result of QE...

And here is the article from the Wall-Street journal....Demand for U.S. Debt Is Not Limitless

 

If you're going to argue that the Fed semantically "monetized" the debt then fine...I'll concede that point. The bigger issue is whether the Fed needed the buy those bonds. Twenty or so of the largest banks in the world bid over double the amount the Treasury Department was auctioning in 2011...repeatedly. Go look up the auction records yourself and see how much the primary dealers tendered. Primary dealers might have a legal requirement to participate and make offers, but they showed up in spades and couldn't get their hands on enough Treasury bonds.

The fact that the Fed later decided to flood banks with reserves in a misguided effort to spur lending is inconsequential. True debt monetization implies that nobody's showing up at auction and that the central bank needs to buy that debt. Right now, that couldn't be further from the truth.

If the government printed $100 trillion dollars and buried it 200 miles underground in the middle of nowhere, would that cause inflation? Crediting reserve accounts with tons of additional dollars is almost equivalent. Bank employees can't exactly write checks from the Fed reserve account and start buying yachts and penthouse condos. Those dollars don't make it into the economy without being lent, and the Fed can destroy those dollars anytime if they so desired via reserve drains.

If you're so convinced that QE caused inflation, then show me the data. I challenge you to show me data by any reliable metric that demonstrates inflation rate today after QE1/QE2 is any higher than it has been historically the past 20 years or so. If you can, I'll gladly shut up and rethink my macro outlook.

Banks, particularly very large ones like the primary dealers, have excess reserves all the time. They also usually hit Basel capital constraints well before they reach their minimum reserve requirement. Furthermore, it's sound business practice to hang onto additional reserves in excess of the reserve requirement anyway (not that banks are really reserve constrained per se because of the Fed Funds Market and the Discount Window).

I'm not arguing that the banks don't have tons of additional reserves after QE. I'm arguing that those additional reserves don't amount to anything inflationary in an environment absent a demand for loans.