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Guest Post: Where Is The Inflation Today?

Tyler Durden's picture


Submitted by Hunter Lewis via The Circle Bastiat Mises Economics blog,

People often ask today: if the Fed has created so much new money, why hasn’t it produced more inflation?

When the Fed creates masses of new money, it initially flows to Wall Street, which profits from  it in a variety of imaginative ways, but from there its path is unpredictable.

The Fed inserted into the TARP bill in 2008 the authority to pay interest on bank reserves. Of course this interest is paid by creating even more new money, but it provides an incentive for banks to leave reserves idle.

On the other hand, the reserves are not as idle as they look. For example, they support derivatives activity. The total amount of derivatives held by the top four US banks is estimated at the moment to be $217 trillion. And keep in mind that it was derivatives exposure that brought Lehman Brothers down in 2008.

To the degree that the new money does get out into the economy, it will flow in different directions and have different effects. If it reaches the average consumer, it will produce consumer price inflation. This does seem to be happening. Consumer price inflation calculated as it was in the past would be much higher than today’s reported 1%.

If the new money  reaches rich people, it will drive up the prices of what rich people buy. We see this today when a single townhouse in Manhattan is listed for over $100 million. If it flows into the stock market, it will raise stock prices. If enough flows in this direction, it will create an asset bubble, which seems to be happening once again today. Asset bubbles are followed by crashes, which in turn bring recession and unemployment.

Wherever the new money flows, it may increase demand in the short run, only to reduce it in the long run. This is because the new money created by the Fed is not just given away. It is made available to banks to lend, which means that it enters the economy as debt. A little debt, especially if spent or invested wisely, may help an economy. But too much will strangle it.

As consumers, businesses, and governments become weighed down with more and more debt from the past, especially debt that was spent unwisely, the interest and principal payments become increasingly burdensome. Dollars that might have been spent on new investments with the potential to create new jobs and new income are instead siphoned off to pay for past mistakes. We end up with a zombie economy, still breathing, but just barely.

Historically we can measure how many dollars of economic growth we get from each new dollar of debt. At the moment, it seems to be negative. In other words, more new debt makes it worse, not better.

Despite this plain evidence, the Fed continues to try to persuade consumers and businesses to increase their borrowing and spending and also underwrites government borrowing and spending. It holds interest rates very low, which for now keeps the debt house of cards from tumbling down.

Will the Fed’s feckless money creation end in inflation or depression? It could go either way, which is potentially confusing. Insofar as it stokes demand, it could lead to inflation. Insofar as it increases an already too heavy debt burden, it could lead instead to recession, joblessness, and depression. Or it could lead first to the one and then to the other.

It could also lead to a third possibility: stagflation. In this scenario, consumer prices advance even while unemployment increases. We had this in the 1970’s. If we measured inflation as we did in the 1970’s, it would be apparent that this already exists today.


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Thu, 01/16/2014 - 20:29 | 4339523 maskone909
maskone909's picture

Seems to offer more questions than answers

Thu, 01/16/2014 - 20:33 | 4339540 LMAOLORI
LMAOLORI's picture



What it boils down to is any of the possible outcomes are bad.

Thu, 01/16/2014 - 20:38 | 4339555 economics9698
economics9698's picture

The inflation is out there, food.  Go to a restaurant and see the smaller, crappy portions and substitutions away from quality.  Then look at the check.

Thu, 01/16/2014 - 21:13 | 4339648 KickIce
KickIce's picture

Not only are prices up but I think you also have to consider lost jobs, lower pay from the decrease in quality jobs and less hours as many go from full to part time.  Factor in all the above and it's easy to see why many are getting their asses kicked.

Thu, 01/16/2014 - 22:00 | 4339776 NoDebt
NoDebt's picture

If you rely on your (stagnant to falling) wages to buy things, there is inflation.  All the usual stuff that regular people need to buy (surprised nobody even mentioned healthcare costs yet, but I digress).  For the "asset owning" class, there is no inflation, only capital appreciation.

The economy is not really any bigger than it used to be, but it's held in more concentrated number of hands now, as has been posted about many times on ZH and elsewhere.  But what are the visible effects of that?

When an ever smaller number of people economically "matter" they are going to concentrate themselves in a few popular areas where they can easily interact with others like themselves.  Small geographic pockets will be wildly successful while many other areas will stagnate and wither.  The big-hitters aren't going to spread out evenly across the countryside.  They'll "clump" in certain geographic areas like New York, maybe San Fran on the west coast and other notable cities of commerce and finance around the globe.  It simply makes sense for them to do so.  And none of the mega-rich seem to have any "hometown" tendencies these days.  They are NOT going back to make good with their friends and family where they grew up (in fact, that's very much frowned upon- getting the hell out and never looking back is the name of the game).

For every successful, growing area there will be 100 other towns and cities that never see a hint of that prosperity.  If you're in one of the few properous areas you can be forgiven for thinking it must be going on everywhere to a greater or lesser extent.  If you're not, you'll think that the growth and "prosperity" that's talked about is a bald-faced lie.

The "averages" don't matter any more.  Most people are not "average" or representative of the whole any more.  So most people can not even recognize what is described by the average numbers.  This is what it looks like when you hollow out the middle class.  

Thu, 01/16/2014 - 22:54 | 4339904 KickIce
KickIce's picture

No doubt there are two economies,

Fri, 01/17/2014 - 09:03 | 4340412 N2OJoe
N2OJoe's picture

"Will the Fed’s feckless money creation end in inflation or depression?"

Well this is certainly not the end but if you look at the real numbers, we already have both. Smaller portions at the same price = inflation. Labor force and tax revenues declining = depression.

Many of these articles on ZH are good but would be great if they didn't rail against some .gov lies while accepting even more blatant ones as truth...


Thu, 01/16/2014 - 21:15 | 4339659 cougar_w
cougar_w's picture

When you stop paying for it because it sucks, you just created a deflationary signal.

Deflation is when people give up or can't do it anymore.

Thu, 01/16/2014 - 20:57 | 4339600 CarrierWave
CarrierWave's picture

Did the author of this article ever get from behind his/her desk and went out there to watch the real life on Main street?

The US is not a Zombie Economy. It's alive and kicking. OK, so some retailers have not done so well, but the economy in general is pretty strong. People have jobs, make good income, buy, party, go on vacations etc.

Come to the Bay area and see for yourself. The Bio + Hi-tech are in full steam ahead mode.

The Stock markets will not bow to imaginary scenarios and charts that so many alarmists on ZH have been putting here day in and day out for several years now.

Listen to those and you only find yourself on the wrong side of the market.

Stay with the market trend. It's going higher in 2014 (An election year.. think the gov will let the market crash? - Think again..)


Thu, 01/16/2014 - 20:59 | 4339611 Bay of Pigs
Bay of Pigs's picture

Horseshit. CA is in huge trouble going forward if you drill down moar than a quarter of an inch (which you completely ignore). 

Inflation is running at 6-8% minimum. This list includes food, oil, power bills, rent, insurance, new cars, cable, tuition, taxes, booze, clothing, etc...almost everything but electronics. Airfare has been flat (from what I see) and you can still find some cheap flights if you are flexible. Other than that, I don't know of anything going down in price over the last several years (aside from gold and silver getting smashed the last two and a half years).

Anyone suggesting "there is no inflation" (currency debasement) is a dimwit, gov't shill, carnival barker and buffoon.

Thu, 01/16/2014 - 21:19 | 4339673 cougar_w
cougar_w's picture

CA (in particular the Bay Area) might be an important exception. There is hot money from all over the planet pouring into many parts of the Bay Area and the cost of things money can buy is going up. Housing, fuel, entertainment, education. Personally I think it's fine so long as my wages keep pace (they are). But CA is not the whole world; the hot money coming ashore in CA is leaving somewhere else and isn't likely to return. In those places, deflation will likely eat those people alive.

Thu, 01/16/2014 - 21:35 | 4339728 pitz
pitz's picture

Most of the Bay Area tech companies that are apparently 'doing good' don't even have earnings.  They're sucking in more capital than they're actually spitting out.  Once the investors wake up and want their money back, things will get very interesting. 

Thu, 01/16/2014 - 21:46 | 4339752 OpenThePodBayDoorHAL
OpenThePodBayDoorHAL's picture

Whaddya mean I bought Twitter it has like a $40B market cap, they're gonna use all that money and try and do something they've never ever done before: earn a dime of profit. It's gonna be great!

Fri, 01/17/2014 - 11:10 | 4340804 OceanX
OceanX's picture

"Personally I think it's fine so long as my wages keep pace"

If your dependent on wages to make a living, you are in no better of a position...

Thu, 01/16/2014 - 21:03 | 4339620 Major Major Major
Major Major Major's picture

"think the gov will let the market crash?"

Therein lies the problem and is probably the reason why bio and high-tech are in fool steam near your hood. 


Not looking down only works in car tunes.

Thu, 01/16/2014 - 21:34 | 4339726 pitz
pitz's picture

Most of the Bay Area tech sector is in real trouble and has been for years.  Don't let a few social media startups with non-existent earnings, or a few ad companies (who mostly displace more traditional ad mediums) confuse you. 


Thu, 01/16/2014 - 20:34 | 4339545 kaiserhoff
kaiserhoff's picture


Shit or get off the pot.

Thu, 01/16/2014 - 21:06 | 4339633 Buck Johnson
Buck Johnson's picture

I knew stagflation would happen when they started printing money.

Fri, 01/17/2014 - 08:31 | 4340366 Nothing but the...
Nothing but the truth.'s picture

Oh the inflation is there allright, the government is simply misreporting it's severity.

Fri, 01/17/2014 - 09:35 | 4340484 TMLutas
TMLutas's picture

But is there money in properly reporting it? 

Thu, 01/16/2014 - 20:29 | 4339525 ncdirtdigger
ncdirtdigger's picture

Inflation? Go price a pound of bacon and then tell me about your G0dd@am 2% CPI Ben. FU

Thu, 01/16/2014 - 20:36 | 4339550 LMAOLORI
LMAOLORI's picture



How about those shrinking packages too.  Yes sure we don't have inflation on a flat screen TV but if you have to eat that's quite a different story.

Thu, 01/16/2014 - 20:51 | 4339592 Debeachesand Je...
Debeachesand Jerseyshores's picture

I give you a good example of "defation and inflation".


Have you notice that the width of toilet paper has gotten smaller but American butts have gotten bigger!!!!!!!!!

Thu, 01/16/2014 - 21:05 | 4339628 FredFlintstone
FredFlintstone's picture

How can that get a down vote?

Thu, 01/16/2014 - 21:06 | 4339634 El Vaquero
El Vaquero's picture

Fat finger response?

Thu, 01/16/2014 - 21:11 | 4339649 Fidel Sarcastro
Fidel Sarcastro's picture

It must have been from a depressed fat ass.

Fri, 01/17/2014 - 08:27 | 4340360 therover
therover's picture

Kinda like what we want to happen to PM's...the physical gets bigger than the paper.

Where is the chart showing the relationship between paper gold vs physical, and toilet paper width vs American asses ?

Thu, 01/16/2014 - 20:59 | 4339607 mijev
mijev's picture

I always assumed Ben wouldn't eat Bacon. Unless sucking Yellen's cock is considered consuming pork.

Thu, 01/16/2014 - 20:31 | 4339531 stant
stant's picture

because it never entered the real economy. stuck in the big banks . who would loan it out at risk when they could just play with it

Thu, 01/16/2014 - 20:31 | 4339533 pragmatic hobo
pragmatic hobo's picture

a painting just sold for $160 million ... a pound of coffee costs $20 ... a gallon of gasoline costs $4 ... go ahead and tell me there is no inflation ...

Thu, 01/16/2014 - 20:59 | 4339612 massornament
massornament's picture

Very true. Here's a personal example: I bought my house in 2003 for $132,000... I put about 50,000 into it (roof, furnace, flooring) and today it is (supposedly) worth $350,000 - 375,000. Of course, I am paying property taxes on that latter valuation.

Thu, 01/16/2014 - 21:17 | 4339667 Umh
Umh's picture

Where are you getting that pound of coffee?

Thu, 01/16/2014 - 20:32 | 4339537 BringOnTheAsteroid
BringOnTheAsteroid's picture

A stag is a male deer. Just saying.

Fri, 01/17/2014 - 11:03 | 4340787 dearth vader
dearth vader's picture

So, stagflation is a male deer audibly suffering from constipation?

Thu, 01/16/2014 - 20:34 | 4339542 LetThemEatRand
LetThemEatRand's picture

Fourth scenario and the intended one:  serfdom.  

Thu, 01/16/2014 - 20:37 | 4339552 UP Forester
UP Forester's picture

Historically, that happens to an unarmed population.

Education-wise, this population is definitely unarmed.  But that can be remedied.

Thu, 01/16/2014 - 20:40 | 4339561 LetThemEatRand
LetThemEatRand's picture

I spent an hour tonight at a local pub talking with a guy who spent 3 years in China working for a major drug store retailer.  He was singing the praises of the Chinese system of work or die, unless you can't work in which case you are kept alive just barely by public assistance.   He also made a point to say how well educated the Chinese kids are.  

Thu, 01/16/2014 - 21:19 | 4339678 Death By Cold S...
Death By Cold Steel Report's picture

Did he mention the Fox Com factories?

Did he mention the chained up kids outside the building?

Did he mention the Suicide Nets?

Oh and did he mention why he was in the US since work or die works?

Did he mention the Mobile Execution Van's harvesting organs?

Did he mention the One Child Policy?

Did he make a point to mention the Empty Cities and the Riots?


I'm sure he didn't and Ive recently been over there.... No Thanks

Thu, 01/16/2014 - 22:13 | 4339815 LetThemEatRand
LetThemEatRand's picture

Yes on most counts. You can buy your way out of the one child policy.   He is in the US because he has roots here but he'd like to go back.   He'd probably take an organ if it was available.

This is what they have in mind for us, my friend.   The guy at the pub -- who is real, and who is well off but not wealthy -- thought it was cool.

Thu, 01/16/2014 - 20:46 | 4339583 B2u
B2u's picture

I went to a local  restaurant a couple  of days menus with 10% higher prices...

Thu, 01/16/2014 - 20:56 | 4339601 Nid
Nid's picture

Well sure, but you felt wealthier by eating there, right? See, it works.

Thu, 01/16/2014 - 21:08 | 4339637 Clowns on Acid
Clowns on Acid's picture

Restaurant prices in NYC and Boston are up 25% in the last 2 years.

Thu, 01/16/2014 - 20:53 | 4339587 gwar5
gwar5's picture


Thu, 01/16/2014 - 20:52 | 4339593 gwar5
gwar5's picture

We are already in a Depression technically, and otherwise, if you use real data from Shadowstats. There is no effort to mitigate the problems in the real economy.  The wipeout is being used to eliminate democracy and establish authoritarianism. 


Nancy Pelosi: "Every aspect of our lives must be subjected to an inventory to combat global warming."



Thu, 01/16/2014 - 20:52 | 4339594 gwar5
gwar5's picture

We are already in a Depression technically, and otherwise, if you use real data from Shadowstats. There is no effort to mitigate the problems in the real economy.  The wipeout is being used to eliminate democracy and establish authoritarianism. 


Nancy Pelosi: "Every aspect of our lives must be subjected to an inventory to combat global warming."



Thu, 01/16/2014 - 20:54 | 4339595 _SILENCER
_SILENCER's picture

You want inflation? Try rolling into a whole foods and watch as the soy boys bleed bleed bleed through their B of A debit cards for their pita chips and coconut water enema bags.

Fri, 01/17/2014 - 00:15 | 4340063 Muppetrage
Muppetrage's picture

Those "soy boys" may just understand that inlation is also in the quality of the food you eat. If you eat at any chain restraunts , even the ones with waiters , you're eating low grade industrial food. Oil, salt, corn syrup. Look around at all the fatties out there.

Thu, 01/16/2014 - 20:53 | 4339597 Prairie Dog
Prairie Dog's picture

If you can't see the hyperinflation, you're just not looking hard enough!

Fri, 01/17/2014 - 11:27 | 4340884 OceanX
OceanX's picture


"Economists usually follow Cagan’s description that hyperinflation occurs when the monthly inflation rate exceeds 50%"

We do have inflation, depending on how you measure: 80s index 8%, 90s index 4%, current index: 1% However, that is in no way hyperinflation.  Hopefully, we will never see it...  They say it srikes like lightnening and there is nothing you can do to prepare.  In zimbabwe, price went into the quadrillions in a matter of months...

Things are bad enough, extreme exageration is not necessary.


Fri, 01/17/2014 - 11:26 | 4340885 OceanX
OceanX's picture


"Economists usually follow Cagan’s description that hyperinflation occurs when the monthly inflation rate exceeds 50%"

We do have inflation, depending on how you measure: 80s index 8%, 90s index 4%, current index: 1% However, that is in no way hyperinflation.  Hopefully, we will never see it...  They say it srikes like lightnening and there is nothing you can do to prepare.  In zimbabwe, price went into the quadrillions in a matter of months...

Things are bad enough, extreme exageration is not necessary.


Thu, 01/16/2014 - 21:08 | 4339640 Magnum
Magnum's picture

The government is very actively and intentionally hunting money from every possible place they can get.  So many new taxes, new enforcement (fatca), they are going at full unlimited speed to hunt down as much money as they can for themselves and the bankrupt budget.  This creates deflation.  Money is digital in form, there is no proverbial printing press.  We will see economic hardships owing to deflation and lack of money, lack of investment, due to government looking everywhere they can to extract money from the population.  Only when confidence in the dollar is destroyed, will there be hyperinflation.  If the US$ is the reserve currency of the world, there is no chance of hyperinflation.  So pay attention to the status of the US$ around the world.  

Thu, 01/16/2014 - 21:28 | 4339703 chump666
chump666's picture

There is inflation, more so energy inflation.  Off set by Obama's credit card reform act on interest rates (2009).  So the average joe and jane can load up on credit cards (on capped rates) and cycle the debt around all the while not really noticing prices spiking.

Nice hustle

Thu, 01/16/2014 - 21:27 | 4339704 Ulterior
Ulterior's picture

gold price says - no inflation

Thu, 01/16/2014 - 21:53 | 4339765 akak
akak's picture

Actually the gold price screams -- manipulation.

Thu, 01/16/2014 - 22:19 | 4339829 Ulterior
Ulterior's picture

na -- Insuffiecient demand

Thu, 01/16/2014 - 22:30 | 4339854 adr
adr's picture

The cost of living has skyrocketed under Bernanke and the Lords of Banking. So much so that making $60k a year if you have a wife and kid is practically poverty. You can't afford to live anywhere that has jobs and you can't qualify for any assistance. You're better off going on welfare.

To even have a chance at some disposable income you've got to make $100k a year. Even at that level you have to be careful. Twenty years ago if you made over $100k a year you could live in the gated country club community in the town I grew up in. Now if you make $100k you can barely afford to just live in the town. $365k 1500sq ft homes, $5000 a year in property taxes, fucking bullshit.

A simple gauge of real inflation is the Big Mac index. In 2004 a Big Mac value meal cost $3.80, in 2014 just a Big Mac sandwich costs $3.85. The meal costs $5.90. Ten years and 65% inflation. Gasoline is up 120%, nat gas is up 100%, and just about everything else you need to live on is up at least 100%.

Even if your cotton underwear costs the same, there's still inflation there when the thread count is half what it was. Pick up a Hanes t-shirt from ten years ago and one today. One feels like a shirt, the other feels like a piece of copy paper.

Thu, 01/16/2014 - 23:05 | 4339929 Miffed Microbio...
Miffed Microbiologist's picture

I was told by a friend who is a financial advisor that a family of four living in San Diego making 150K a year is strictly subsistence living . No saving would be ever possible and when they come to him for advice he sends them away telling them to try not to starve. This is where we have come and I am simply stunned how people manage to live here. And there are people here who claim there is no inflation. I wish I were taking the drug they must be on.


Fri, 01/17/2014 - 06:55 | 4340307 Debugas
Debugas's picture

150K a year IS ALOT

half of the world lives on $2 a day

Fri, 01/17/2014 - 10:05 | 4340576 Ulterior
Ulterior's picture

you are from... Lithuania? You can survive on $2 a day too

Thu, 01/16/2014 - 23:30 | 4339982 rickv404
rickv404's picture

We have inflated prices, for sure. Gas prices have not dropped below 3 dollars a gallon, in most states, and prices for most everything else I can see, are slowly going up, not down. With Yellen at the helm and Obamacare growing, expect price inflation to get much worse, before the present louse in the White House is done with his second term.  

Thu, 01/16/2014 - 23:31 | 4339987 RaceToTheBottom
RaceToTheBottom's picture

Great, so they have motivated the banksters to only invest in riskier boondoggles than the gift 6%.  Hense the derivatives, to increase the risk. 

Great, we are building even riskier WS Banksters Criminalistas....

Thu, 01/16/2014 - 23:39 | 4339999 dexter_morgan
dexter_morgan's picture

It's coming. Raising minimum wage will be a start.

Fri, 01/17/2014 - 00:06 | 4340050 Prairie Dog
Prairie Dog's picture

I love Zerohedge - Stupid Central. I read the comments, and I laugh


and I laugh


and I laugh...


Fri, 01/17/2014 - 04:28 | 4340247 JackWills
JackWills's picture

You laugh cause you must be looking in the mirror. Yo mamma left ya cause you were ugly too besides being damn stupid

Fri, 01/17/2014 - 04:33 | 4340253 GreatUncle
GreatUncle's picture

A chuckle bunny on this article ... so amusing. Inflation and deflation are relative concepts and not absolute.

If we are in a deflationary position then likely the level of QE has only been enough to cancel this out.

The efficiency of a system is a natuaral deflation and we have been utilising a form of QE for decades hidden in the leverage in loans and even that was not enough so debt was being incurred = USA 16 trillion + and growing. That forgetting all the value that in reality become 0 if the system collapses. Seems like the population has been SOLD A PONZI AS AN ECONOMIC SYSTEM from where I am sitting.

Driving for even more efficiency to combat the level of debt drives the deflation apsect deeper and that might be the negative return of "it seems to be negative. In other words, more new debt makes it worse, not better."

Reckon the threshhold has been crossed and will only become worse as we get more people not working back into employment producing something that nobody can afford to consume. Think of 100% consumption, then 200% or 300% production, maybe an even higher global production. That is deflationary.

Fri, 01/17/2014 - 04:37 | 4340256 GreatUncle
GreatUncle's picture

A subliminal thought?

Why are ponzi schemes illegal?

Because they would compete with the one true ponzi.



Fri, 01/17/2014 - 06:52 | 4340305 Debugas
Debugas's picture

consumer prices will increase when consumer income increases which is mostly wages+welfare

it is hard to expect companies would now increase wages so we will see continuation of welfare and government debt growth


Fri, 01/17/2014 - 09:16 | 4340430 kenezen
kenezen's picture

WOW! I'm not easily impressed! But you made flow and understanding of very intricate financial paths and product very understandable. VERY NICE!

I wasn't aware that we had 217 trillion of derivative product. Do you know what are the current leverage ratios of derivative finance to invested cash? It used to be before 2008 up to 40% financing leverage on banks money invested to derivative product. What ratio of leverage are the derivatives now? The majority of derivatives used to be Interest rate risk swaps then various form of CDO's Trups, Synthetics and debt CDO's. How are they hedging these things or do they naturally crosshedge by their very nature. Are derivatives still being stored in FDIC accounts?

Thanks for your great Article! 

Fri, 02/07/2014 - 05:42 | 4410930 Vincent Cate
Vincent Cate's picture

As Venezuela and Argentina go into hyperinflation it is a good time to read up on the theory and details of how hyperinflation works.   If you do, I don't think you will think that Japan, the UK, or USA are safe from it.

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