Why Inflation is Still Years Away

January 4, 2013

What is the 10-Year Treasury Telling Us?

As the Federal Reserve has “printed” money over the last 5 years, few Americans understand that the majority has been electronically generated (placed on the Fed’s balance sheet by the mere entering of a number in a computer), and “distributed” into the economy via mandatory loans to the major banks in 2008.  The interest rate on these loans has ranged between zero and 0.25%, but these are loans nonetheless, and are therefore subject to calling or repayment.  This is important, because many are under the false impression that there are now three times as many printed dollars in circulation as there were before Bernanke took over at the Fed, logically making each dollar worth one-third of its former value.

During the Weimar Republic in 1920s Germany, such runaway printing did actually occur, debasing the currency to such an extreme as to bankrupt the citizenry.  The only way the government could have reeled in their monetary expansion, would have been by confiscating those Marks during a severe depression, not something that would have met with docile compliance on the part of a starving and angry electorate.

Today, however, such is not the case, as the bulk of the dollars Bernanke has created were conceived electronically, and are mostly on loan to the banks—and the bulk of those remain on the bank balance sheets, unlent to small businesses based on the latter’s inability to qualify for such loans amid scarred credit and a sluggish economy.  So while the Fed’s “dissemination of dollars” has solved the Liquidity Crisis of 2008, those dollars are hardly “in the economy”, flooding the market the way the Weimar Deutsch Mark did in 1923.  As quickly as Bernanke forced those large loans onto major banks who didn’t want them, he or the next Fed Chairman will be able to call them, redeposit them onto the Fed’s computers, and delete them over time.  I am less concerned with runaway inflation than I am with runaway federal spending, and besides: The 10-year Treasury remains at 1.92%, a telling sign that plenty of buyers don’t believe interest rates will rise substantially over the next decade.  After all, who ties up their money for 10 years at only 1.92% if they honestly believe interest rates will be substantially higher in just 3 or 4 years, due to inflation?  Answer: Only bond-buyers who are said to be more concerned with the return of their money, than the return on their money and—if inflation truly is coming in buckets, then that argument doesn’t wash either because their low-yielding dollars would have lost considerable purchasing power at maturity.

What about Japan, the country most famous for expanding their money supply over two decades, raising countless predictions of impending doom due to inflation?  In this excellent analysis and again here from Tanweer Akram of ING, the analyst writes, “despite years of an expanding monetary base—and contrary to monetarist mantras—Japan remains mired in deflation”, not the inflation so many have predicted for years.

In summary, be wary of inflation warnings that seem too dire to be true, especially when they emanate from firms selling gold, silver or other commodities, since their advice and forecasting can hardly be deemed objective.  And remember that central bankers can erase a currency expansion as quickly as they created it—electronically and methodically over a measured period of time.

Breathe easy, and spread the word.


Thomas K. Brueckner

President & Chief Executive Officer

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