Very interesting. Does that mean that the Fed is basically capitalizing sick banks for free, so they can make their stress test goals and capital ratio’s? Just asking because I don’t know enough about what counts as “capital” in the regulatory requirements, and I figure it must be serving some purpose to move that paper money from the Fed vault to the bank vault.

In this economic downturn, 2.5 percent inflation might be “high” considering nobody is spending money … If job losses were eliminated and foreclosures were not happening, my guess is that the “long-term inflation expectation” would be much higher than 2.5% and reflect an increase due, likely, to the increase in monetary “inputs”…

Of course, I wear glasses as well…

Money cannot create inflation until it gets into the hands of consumers (or investors). If it hits the hands of housing consumers it will create inflation in housing, if it hits the hands of stock consumers it will create inflation in stocks.

Right now the amount of money they are creating is not enough to compensate for the destruction of money created by financial institutions in the past decade. It seems that the created money is almost all hitting the hands of “government bond” investors so we have inflation in bonds. The money destroyed is coming out of consumers of housing & stock investments, so we have deflation there. Since the finaincial institutions refuse to put their bailout money where it is needed to fight deflation, government must bypass them and invest directly.

Keynes v Friedman are NOT the only 2 ideas.

http://www.debtdeflation.com/blogs/2009/01/31/therovingcavaliersofcredit/

2. Government is reinjecting money into the zombies. People aren’t stupid at one point that money will flow out of the dead sectors and go into the new ones.

3. But when this happens, the money into those sectors will probably flow faster than production so prices will increase.

4. Contrary to popular belief, throughout history deflation has been a good thing… it’s not so good now that we have central banks! Government NEEDS inflation to make future debt affordable.

5. Deflation is my personal best case scenario and because there is an obvious lack of fear when it comes to the prospect of inflation, I’m betting we’re going to get hit.

“…1. Central or “free” — the bank serves only one
critical function in an economy (a slight
exaggeration, but not by much)

2. That function is wholly described in Roger Ward
Babson astoundingly fine book on _Banking,
Bond and Stocks: The Elements of Successful
Investing_, 1919

Do visit two citations to this book in the
CITS DEBT WATCH:

http://groups.google.com/groups?q=%22roger+ward+babson%22+1919&ie=ISO-8859-1&hl=en

3. The one critical function of banking is to assure
that the income from loans exceeds the cost
of loans.

Babson notes that the only thorough way to assure
this is a banking process where bankers have
extensive knowledge of the risks attendant to
each loan.

The banker sets a risk premium accordingly.

The bankers who fail to do so, are put out of
business during economic hardships.

The bankers who loaned according to careful
practices stay in business.

4. As for the money supply, as we know from the
very basic principal of macroeconomics:

PY=MV
(where P stands for aggregate price;
Y for national output; M for money supply;
and V for velocity of money)

The relationship between M (commonly M2),
and inflation is hotly debated.

Indeed, if the treasury expands the supply
of money via the purchase of goods and
services that no debt secures, then, they
are truly printing money. And, most often
the result is inflation — a nasty punishment
of all “fixed income” folk, who, now, continuously
pay the “hidden tax” imposed by the “printing
of money” that lacks backing — either as federal
debt, or as a “call upon” future tax income.

My point is — unless hoarding occurs, the
velocity of money can increase as fast as
modern banking can get money to exchange hands.

So, a fixed money supply has only a secondary
effect on an economy’s ability to grow, as, that
growth can simply have a 1:1 correspondence with
the increased velocity.

But I do see a tension. It takes time and
deliberation for a banker to meet the risk
assessment process described in #2, above…

*****In summary, it is my view that over 90% of outstanding loans
would not pass the risk/security test that Babson describes
in his 1919 book. ******I.e., we are facing the possibility of
huge defaults. Does FDIC save the day? Well, if you are
a federal government with a $44 trillion debt, and if an
economic downturn assesses that the U.S. Federal Government
is a bad risk — they have no money except via taxation.
(there is less than $1 of reserve against every $100 of FDIC
insured funds)

And, if we have a President who doesn’t have a clue about
all this, and he actually just signed a bill to yet increase
the U.S. Federal debt by another $330 billion per year, and I’d
say “our goose is cooked.”

There is only one, non-hyperinflationary avenue out of such
a mess. The President has the power, by executive order,
to convert all “T” bills to 30 year bonds…”
http://www.colorado.edu/peacestudies/sustainable-economics/debt/archives/msg00784.html
01 June 2003

and, as a reminder MIT is not Hartford..