inflation confusion

This is a discussion on inflation confusion within the Economic & Fundamental Analysis forums, part of the Methods category; This indirectly relates to equities. I understand that just because the fed is pumping money into the economy that this ...

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Old Sep 6, 2013, 4:46pm   #1
 
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inflation confusion

This indirectly relates to equities.

I understand that just because the fed is pumping money into the economy that this will not cause inflation unless that money flows through the economy at a faster rate i.e. velocity. But hasnít the fed been pumping stale money in the economy for a while? And, when the economy starts heating up, wont there be a ton of money just sitting there waiting to be moved? Wont this cause crazy inflation?
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Old Sep 6, 2013, 5:17pm   #2
 
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Originally Posted by bezzer11 View Post
This indirectly relates to equities.

I understand that just because the fed is pumping money into the economy that this will not cause inflation unless that money flows through the economy at a faster rate i.e. velocity. But hasnít the fed been pumping stale money in the economy for a while? And, when the economy starts heating up, wont there be a ton of money just sitting there waiting to be moved? Wont this cause crazy inflation?
Nobody knows.

You could just as easily argue that they have been pumping money in for so long and inflation hasn't really taken off suggesting that deflationary forces are incredibly strong.
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Old Sep 6, 2013, 8:08pm   #3
 
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Nobody knows.

You could just as easily argue that they have been pumping money in for so long and inflation hasn't really taken off suggesting that deflationary forces are incredibly strong.
Yah I agree that it is tough to predict. But IF the economy really heats up will the currently immobile cash be a large catalyst for inflation? I guess if this becomes a problem the fed will start selling bonds?
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Old Sep 6, 2013, 9:46pm   #4
 
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Originally Posted by bezzer11 View Post
Yah I agree that it is tough to predict. But IF the economy really heats up will the currently immobile cash be a large catalyst for inflation? I guess if this becomes a problem the fed will start selling bonds?
There's a variety of ways which the Fed can use to "slow down" the cash if it starts moving too fast. Selling bonds is just one such method.
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Old Sep 7, 2013, 1:06am   #5
 
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Originally Posted by ZaBu View Post
Nobody knows.
wtf?

er yes they do know, theres official figs of how much money the banks are sitting on eg M1 figs.

cos you clearly fail to read up on a subject you are happily keen to comment on, heres a link re deposits vs investment (loans) & whats happening to QE cash:

Thank You CTRL-P: Deposits Rise To Record $2.1 Trillion Over Bank Loans | Zero Hedge

theres a million more articles if you decided to google before answering.
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Old Sep 7, 2013, 1:57am   #6
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Originally Posted by ZaBu View Post
Nobody knows.

You could just as easily argue that they have been pumping money in for so long and inflation hasn't really taken off suggesting that deflationary forces are incredibly strong.
I agree with this 100%, but it doesn't really affect my trading style, so I don't worry about it....

However I think we are heading more towards deflation, rather than inflation. Interest rates have to rise, and the 10 yr yield has been rising, and rising quickly lately so who knows... bottom line is have cash on hand and don't finance anything thing and you will be good.
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Old Sep 7, 2013, 8:17am   #7
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Originally Posted by bezzer11 View Post
This indirectly relates to equities.

I understand that just because the fed is pumping money into the economy that this will not cause inflation unless that money flows through the economy at a faster rate i.e. velocity. But hasnít the fed been pumping stale money in the economy for a while? And, when the economy starts heating up, wont there be a ton of money just sitting there waiting to be moved? Wont this cause crazy inflation?
You mention velocity of money. Interesting point. My very basic understanding is that you donít need to create or inject new money to create inflationary pressure. Just moving what there is around a bit faster has a similar effect.

Case-1: HS2. Regardless of the eventual cost, due to what is termed the multiplier effect, virtually all that government spend comes back as increased GDP. The workers and contractors and service companies involved in HS2 will get paid, and pay their workers and their suppliers and so on down the chain. Those people go out and buy good and products and services. All comes back into increased GDP.

Case-2:UK has a great summer. You can apparently largely discount tourists to the UK (exports) as they come/donít come regardless of the weather. Sales in the leisure and tourism sectors in the 3 months of summer equalled last yearís annual sales. The money that would have just been sitting in peopleís banks got spent. Same amount of money sloshing around an effectively closed system, but itís sloshing Ė not sitting. This will filter through to an increase, albeit minor, in GDP. Have I got that right? Seems like smoke and mirrors.
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Old Sep 7, 2013, 9:50am   #8
 
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Originally Posted by rsh01 View Post
wtf?

er yes they do know, theres official figs of how much money the banks are sitting on eg M1 figs.

cos you clearly fail to read up on a subject you are happily keen to comment on, heres a link re deposits vs investment (loans) & whats happening to QE cash:

Thank You CTRL-P: Deposits Rise To Record $2.1 Trillion Over Bank Loans | Zero Hedge

theres a million more articles if you decided to google before answering.
So from those two words you have concluded that I haven't read up on a subject. Didn't the following sentence suggesting a counter argument even plant the smallest seed of an idea that I might have done?

I was also answering the final question posed - which was along of the lines of won't all this money cause crazy inflation. I still contend that nobody knows for certain. There are arguments for both inflation and deflation from here and indeed deflation followed by inflation. But as I clearly haven't read anything on this I must just be guessing
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