Usually the price of things people need falls like housing. But in the UK it has risen because they keep increasing the level of debt people can get into. So in short people are just borrowing more to sustain the economy for a few.
I guess I should try to clarify what I meant when I responded to zdreg by writing that the Fed was not the engine of inflation. I certainly agree with you that there can be several causes of inflation, and you mentioned two of these in your response to oldtime quoted above. What I really had in mind though when responding to zdreg was this penchant most of us have to blame the Fed for inflation when in fact they are usually just reacting to economic conditions within the confines of what they are charged with by the Congress, which is to control inflation and foster full employment, while at the same time trying to maintain a stable, well-functioning banking system-- one of their main tools being monetary policy. Naturally, a result of their specific actions, or inaction, can be inflation. But their actions are in response to what is happening in the economy, so I see economic activity in the private and government sectors of the economy as being the root causes of inflation, not the Fed per se. Of course the Fed can stop inflation in its tracks whenever they choose by throwing the country into deep recession and risking deflation, but in a debtor nation such as the US that's a Hobson's choice if ever their were one.
Good answer but what about the impact on inflation the fed doesn't even recognise. That the real cost of QE is the impact it has on the currency as an investment vehicle. If this is the real cause of inflation at least in the main part, which I suggest in this recent article you can read below, then is the fed the real driver of inflation when they use QE. http://morganisteconomics.blogspot.co.uk/2012/10/is-way-central-banks-view-inflation.html
I read your article, and I want to think about it some more. Traditionally the Fed only buys and sells treasuries or government agency paper, however in what we have all been calling quantitative easing they broke from this tradition and bought private sector assets, for example mortgage backed securities. Their goal was to stimulate the credit markets by replacing illiquid bank assets with liquid cash -- and also of course solve an accounting problem for the banks! You raise some very good points regarding the differences between the effects of QE versus targeting interest rates, as in conventional monetary policy. And since interest rates are already effectively zero, the Fed had to find methods of further stimulating the economy by trying to get banks to lend. To me the expression "printing" when applied to Fed operations means monetizing. Pure monetizing from my point of view would be for example the creation of money by the Fed to be used by the Treasury directly in payment on debt. I think this is the definition Bernanke is using when he says, "we haven't been printing." What's happening of course is either the purchase of Treasuries by the Fed on the secondary market or the purchase of bank assets, e.g., MBS. The Fed does have income from assets on its balance sheet for these activities, but they also can create money for these purchases when necessary. This is, I think, what most people mean when they refer to the Fed as "printing." The effect of this kind of "printing" however isn't necessarily the same as what I think of as printing, as described above. More on this later as I have time. And I do have some questions for you re your article. But out of time right now.
I think what you are calling monetizing or balance sheet activity is qualitative easing rather than quantitative easing. The structure of the fed's balance sheet is changed on qualitative easing. When quantitative easing takes place the size of the balance sheet increases in addition to the existing monetary capability of the economy.
It is interesting I recently had a discussion with the central bank of Bahrain on a similiar situation. Would you like me to share the discussion with you.
Sure, that I help me understand what it is you are driving at. But to go back and finish my comments earlier. I fully agree that Fed actions can cause inflation, however my main point was that, generally speaking, Fed actions are not the true genesis, or root cause, or "engine", if you prefer, of inflation. It's a fine point, I admit, and may be coming from my own distorted way of looking at things. But I see the Fed, when they are acting responsibly and in the best interests of the economy and the country, as merely responding to the current economic situation thrust upon them by Congress' fiscal policies. So in my mind, I see Congress as the engine of excess inflation, whereas I see the Fed generally as the source of what we can call the base rate of inflation-- that one or two percent that they aim for. And when we talk about inflation, we are talking about excess inflation over and above that small, and sustainable base rate. That said, without question there may be occasions when the genesis of inflation lies with the Fed itself. For example in the case of Fed screw-ups that later result in excess inflation as part of the effort to clean up the mess they have created. That is a point of view that has some validity with regard to the recent financial crisis. If you read Soros you will learn that he believes that the recent crisis was avoidable, and so do I. But in spite of repeated warnings and even the acknowledgement by Greenspan himself of excesses in the mortgage market, he did absolutely nothing. I have concluded that it was his steadfast belief in market equilibrium theory that led him to ignore the warnings, and do nothing. (Of course there is a political dimension to these situations as well as an economic one.) Now regarding your article re QE versus targeting of the interest rate directly via conventional means. It is this paragraph of yours, I am struggling to understand: "When debasement occurs it is an expected loss. Quantitative Easing will have a more dramatic impact on the currency value than a reduction in the interest rate because it is a real term loss not an increase in the domestic money supply of one nation through credit expansion. When money supply is increased through interest rates the currency value is changed by the volume of money supply and the impact it has on exchange rates. When money supply is increased through QE the integrity of the currency itself is questioned decreasing value." I'm not convinced this is correct, but neither am I convinced it isn't. Perhaps you can clarify exactly what you are getting at here. Here is the problem for me. It seems to me that you are talking about two different ways to accomplish essentially the same thing. That thing being expansion of credit and making more money available in the economy. One way is through targeting interest rates, and the other is through quantitative easing to put more liquid capital into banks. Either of these, it seems to me, but perhaps I am wrong, should have the potential of producing some inflation, i.e. by making more money available, and another way of saying "inflation" is "currency debasement". What is currency worth. It is worth what we can buy with it. What I am not understanding is why there is a much difference between debasement brought about by making borrowing more attractive via targeting interest rates directly versus making more money available for lending at an already low rate. It seems that to the extent that either of these actions work as intended they both have the potential to debase the currency relative to other currencies. I do understand that there is a fundamental difference between making borrowing more attractive by lowering interest rates and trying to get banks to loan more at already low rates by increasing the liquidity of their capital. It seems the second approach only works if the amount of capital that banks have available to lend is a limiting factor, and neither approach works well if there isn't much demand for credit. What am I missing here?
the big bang? Almost everything we see created from practically nothing. It's not like the earth doesn't have enough resources to support all it's inhabitants. As a matter of fact, there is plenty left over. Tell me, just give me one concrete reasonable answer why a poor kid in Africa should be hungry? Is there some law of physics I am missing?
Currency value creates inflation because the main factor that will determine prices is the price of foreign goods. You have to understand the role of currency as an investment vehicle and the impact any kind of debasement has in destroying that. I think the article below will explain that point. http://morganisteconomics.blogspot.co.uk/2012/01/investment-currency-mechanism-uk-and.html The key to economic success is something that creates enough stability to make foreign investors use its currency as an investment vehicle. Then the ability of that country to buy goods from abroad is increased. If that is damaged that is the main driver of inflation, if the stability of the economy or currency goes then you will get high inflation because investors will take out their money from that country and invest in another country's currency. Think about it as a shift in the stock of investment. If there is so much saved that saved money or capital will shift to the safest place with the best return. If a currency devalues all investments made in that country are devalued against the global economy. So if a currency is weakened enough or the stabilising factor that created that currency strength goes the investment capital will shift and the price of the currency will fall and the ability to purchase goods will go creating inflation. This is the real mover of international economics. The ability to attract investment and sustain a stable currency. Another article you might like in relation is below. http://morganisteconomics.blogspot.co.uk/2012/05/consequence-of-tax-on-foreign.html It is basically a international game. This is the reason there will always be rich and poor countries people will look for the best investment and money will shift from the weaker countries to the richer. I think we are seeing that shift in Europe, which may help the US in the short term at least.
I guess it could be solved in theory but then human nature kicks in. It would be a matter of policing to share wealth, which doesn't seem to work remember communism and shared wealth. Human nature thrives on greed. The best you can do is to understand it and manipulate it to help. Even if you are not greedy other people are and you can't control their actions.