Wednesday, 6 March 2013

There Are Much Bigger Problems Caused by Monetary Expansion than Price Inflation

Michael Pollaro explains in the article "Chairman Bernanke, Price Inflation is the Least of Your Problems", the bigger problems with monetary expansion,
...while easy money policies always put price inflation in play, though economically debilitating, it is of relatively minor import. Infinitely more important (and putting aside whatever short-term, transient economic benefits may ensue) is the fact that easy money policies guarantee economic busts, and the larger the monetary largesse fostered by such policies, the larger the bust. And whether that bust be a deflationary one brought on by a cessation of those easy money policies, like that which brought on the housing boom turn bust turn Great Recession…or an inflationary one brought on a by continuation of such easy money policies ad infinitum, meaning a bust via a destruction of the currency (a la Weimer Germany), bust we will have.
Scarily, it seems to us that the Chairman’s focus on price inflation as the primary cost to his monetary policies is virtually guaranteeing a bust for the ages. The reason… the monetary inflation cycle currently being nurtured by the Chairman (what we call here the Bernanke Boom Bust-to-Be) is, for now, largely bottled up in the financial markets, bidding up asset prices instead of goods and service prices. This says to us that this monetary inflation cycle will not stop until either the Chairman’s economic nirvana is reached or all this monetary inflation finally works its way, in earnest into the published producer and consumer price inflation indices. Given the economic backdrop, we think this means that this monetary inflation cycle, already larger than the monetary inflation that gave us the Great Recession, has a ways to go, still… 
He provides these charts to show the extent of Bernanke's monetary inflation vs previous cycles (TMS2 is True Money Supply M2, Pollaro's own definition of M2) and concludes,
And that means the eventual economic bust is going to be a doozy.

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