Even if inflation is the dog that never barked, there's no harm in asking whether it's still a dangerous dog and might it bark and perhaps bite at some point in the future?
Martin Wolf has a piece from a few days ago which sadly ends with a safe and logical answer amid talk of public debt levels and central bank balance sheet expansion. If i tell you it starts with a 'g', you'll guess it in a second.
Nevertheless, Wolf does have a few important points to make. Firstly is the point about a US Republican warning of hyperinflation three years ago (Okay that's not an important point but it would be fun guessing who if the sample size wasn't so large!)
But the point about the money multiplier (or the lack of it), is important. Because common sense initially makes you wonder upon observing the explosive growth in the base contrasted with the growth of broad money - that is the link between the reserves of commercial banks held at the central bank and their lending to the public. An assumption that banks will eventually lend more (future monetary expansion) is almost unfounded.
This is where the bank's own solvency comes into question. If, as Wolf states, equity capital of a bank is a far more significant determinant of its lending ability than its reserves...and furthermore, the excess reserves are controlled by the Fed, then a lowering of excess reserves can be accomplished by simply raising reserve requirements (the IOER) or selling government debt to the public.
What's more important from the inflationary standpoint, is not the indicator of the behaviour of excess reserves but the impact that inflation has upon debt. Enter redistribution issues and the generational balance queries.
Thus, under some fairly basic assumptions, the strategy of 'growing out of the debt' seems plausible. At the same time, the threats don't seem to be receding - that a sharp contraction in real growth would have a negative impact on house prices, unemployment, price levels in general and make every government balance sheet far worse off. The low interest rate offsetting could be mitigated and one has to look no further than Japan to observe this.
Ultra-low interest rates simply cannot protect an economy against stagnation, deflationary pressure and adverse fiscal deficits among other things.
Martin Wolf has a piece from a few days ago which sadly ends with a safe and logical answer amid talk of public debt levels and central bank balance sheet expansion. If i tell you it starts with a 'g', you'll guess it in a second.
Nevertheless, Wolf does have a few important points to make. Firstly is the point about a US Republican warning of hyperinflation three years ago (Okay that's not an important point but it would be fun guessing who if the sample size wasn't so large!)
But the point about the money multiplier (or the lack of it), is important. Because common sense initially makes you wonder upon observing the explosive growth in the base contrasted with the growth of broad money - that is the link between the reserves of commercial banks held at the central bank and their lending to the public. An assumption that banks will eventually lend more (future monetary expansion) is almost unfounded.
This is where the bank's own solvency comes into question. If, as Wolf states, equity capital of a bank is a far more significant determinant of its lending ability than its reserves...and furthermore, the excess reserves are controlled by the Fed, then a lowering of excess reserves can be accomplished by simply raising reserve requirements (the IOER) or selling government debt to the public.
What's more important from the inflationary standpoint, is not the indicator of the behaviour of excess reserves but the impact that inflation has upon debt. Enter redistribution issues and the generational balance queries.
Thus, under some fairly basic assumptions, the strategy of 'growing out of the debt' seems plausible. At the same time, the threats don't seem to be receding - that a sharp contraction in real growth would have a negative impact on house prices, unemployment, price levels in general and make every government balance sheet far worse off. The low interest rate offsetting could be mitigated and one has to look no further than Japan to observe this.
Ultra-low interest rates simply cannot protect an economy against stagnation, deflationary pressure and adverse fiscal deficits among other things.
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