It’s All Transitory: How Inflation Seeps Into the US Economy

Would you like to litter in a national park or blow up a Homeland Security office? This may be your big chance…

The government might have to shut down on May 16th. Is that bad news? A lot of people don’t think so…more below…


Worried about inflation? Don’t be. That was Ben Bernanke’s message yesterday. Bloomberg was on the case:

Federal Reserve Chairman Ben S. Bernanke said he expects an increase in commodity prices to create a “transitory” boost in US inflation and that the central bank would act if he’s proven incorrect.

“So long as inflation expectations remain stable and well anchored” and commodity-price increases slow, as he’s forecasting, then “the increase in inflation will be transitory,” Bernanke said today in response to audience questions after a speech in Stone Mountain, Georgia.

“We have to monitor inflation and inflation expectations extremely closely because if my assumptions prove not to be correct, then we would certainly have to respond to that and ensure that we maintain price stability,” he said.

He told lawmakers March 1 that Fed officials “continue to monitor these developments closely and are prepared to respond as necessary,” while the FOMC said on March 15 that it “will pay close attention to the evolution of inflation and inflation expectations.”

Of course, if you’ll recall, the feds told you not to worry about the crisis of ’07-’09 too. They’re not necessarily the most reliable market forecasters. But who’s reliable when it comes to making predictions? Especially about the future?

On the other hand, if the feds don’t know when inflation is coming, who does? After all, they’re the ones responsible for it. Inflation is always a monetary phenomenon, said Milton Friedman. And the feds control the money, don’t they?

Well, yes…and no.

Today, we continue to step back…to see the bigger picture. It’s easy to get distracted by the details. You begin to lose sight of what is really going on.

In a word – the Great Correction is still doing its work. But the picture is greatly distorted.

The Fed says that the core inflation rate is still under 2%…

But you will pay as much as $4 for a gallon of gas.

Corn…oil…wheat…all are hitting records. Silver is at a 31-year high. And look at stocks.

It’s as if the world economy were booming!

The Fed says these increases are “transitory.” It could be right; much bigger inflation numbers could be on the way.

On the surface, it looks simple enough. The Fed prints money to fight the Great Correction. The money goes into the banking system. Then, it seeps into the economy, right? Inflation, right?

Well, not exactly. Our Family Office investment guru, Rob Marstrand, points out that the “money” put into the system is not really going into the consumer economy – at least, not directly. Instead, the money has been going into bank “reserves”…sitting at the Fed, doing nothing.

Generally, the more money in “reserves,” the more sluggish the economy becomes (since this money is effectively sidelined, rather than being put to work…building…hiring…spending…).

The banks buy US Treasurys from the feds. The Fed “prints” money; it buys US Treasury debt from the banks. The banks take the cash and use it to build their reserves. The government takes the cash and uses it to cover its deficit spending.

So, it’s not the Fed’s cash that is pushing up prices directly. Instead, speculators are guessing that all this new cash will EVENTUALLY cause consumer prices and investment assets to go up. They are looking ahead…and exchanging cash for something they think will give them more of a return.

This is not to be confused with a genuine recovery. It’s something very different.

The feds try to stop a correction by putting in a lot more money they don’t have…and a lot more credit the economy doesn’t need. They say unemployment is going down (this, they arrange, largely by not counting people who’ve simply given up looking for work).

As for those who are working, the Wall Street reports that they aren’t exactly getting rich either:

“Wages fail to keep up with inflation,” is the headline.

Of course, housing prices are still going down.

The confusion continues, in other words…with the feds desperately trying to push up prices and the Great Correction pushing them down.

Where will it lead? Again, looking at the big picture, the feds will keep putting in cheap cash and cheap credit… and then “eventually” will come. The feds will win this battle…

…and wish they had lost.

And more thoughts…

Why will they wish they had lost? Because a “normal correction” – even a great one – is a lot less painful than a hyperinflationary depression. That’s what happens when all those bank reserves, and all those overseas dollars, are suddenly dumped on the market.

It will happen; at least, that’s our story for now. And when it happens, it will happen fast. Maybe next year…maybe 5 years from now. Stay tuned.

*** The government will have to shut down on May 16th, says Treasury Secretary Tim Geithner. That’s when he thinks the debt ceiling will be reached. And since the government runs on borrowed money, if it can’t borrow it will have to turn out the lights and close the doors.

A report circulated yesterday that said that during the month of March the feds spent 8 times as much as they collected in taxes. An atypical month, to be sure…but maybe an evil portent.

Word on the street is that a lot of people would like to see the government out of business – at least, temporarily. The Tea Partyers think it will send a message to the nation…and make it easier to cut big chunks out of the budget. The Democrats want to see the government shut down because they think the voters will be appalled, undermining support for the Republicans.

For our part, we just want to see what would happen.

Probably nothing. But if you’re itching to set fire to a national forest…rob a regional federal reserve bank…or blow up a post office…

Mark your calendar!


Bill Bonner
for Markets and Money

Bill Bonner

Bill Bonner

Since founding Agora Inc. in 1979, Bill Bonner has found success and garnered camaraderie in numerous communities and industries. A man of many talents, his entrepreneurial savvy, unique writings, philanthropic undertakings, and preservationist activities have all been recognized and awarded by some of America’s most respected authorities. Along with Addison Wiggin, his friend and colleague, Bill has written two New York Times best-selling books, Financial Reckoning Day and Empire of Debt. Both works have been critically acclaimed internationally. With political journalist Lila Rajiva, he wrote his third New York Times best-selling book, Mobs, Messiahs and Markets, which offers concrete advice on how to avoid the public spectacle of modern finance. Since 1999, Bill has been a daily contributor and the driving force behind Markets and Money.
Bill Bonner

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5 Comments on "It’s All Transitory: How Inflation Seeps Into the US Economy"

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This is a fascinating article. Apologies for this long post, but I think I may at last be starting to understand this conundrum. It’s all about money circulation. The Federal reserve prints money to buy government bonds off the banks. At this stage, the banks have the money in their Reserve account. Then they withdraw it and buy bonds off the US Treasury. At this stage the US treasury has the money, in its account at the Federal Reserve. Then it withdraws it and uses it to pay for the myriad services it buys in the general economy (wages, Medicare,… Read more »

A good analysis, particularly of the US situation, Doug.

Where does (un)employment and the resultant tax base (rising or falling) fit into the explanation?

I think unemployment is just another symptom of the stagnating/declining “real” economy. As is the declining tax base, because the creditor class has both favourable tax treatment and more ability to plan/avoid tax. The only things I can see breaking the cycle I postulated are eventual repayment of private debt, causing more money to go toward productive activities, and eventual recovery of house prices, giving the debtor class enough equity to start borrowing again. Whether either of those things will occur in any reasonable time frame is a guess – we need analysis of actual data to see any trend… Read more »
Governments cause inflation because they spend more than they raise in taxes. All Governments cause inflation because they all spend more than they raise in taxes. Give a politician a $ and he will spend a $1.10. Everything else used to justify expansion in GDP is a misdirection from the original cause, your leaders have spent more than they have got. I worked for a large retailer in 1998 and the CEO announced at a mass meeting at their head offices (along with a flash and expensive Millenium clock) that the Boots company has just announced to the London stock… Read more »

For a completely different view of this, today’s episode of the Keiser Report (Russia Today) discusses the role of the Mexican drug trade has in maintaining liquidity of US banks. Something I knew very little about previously, but an issue that has recently been uncovered to a significant degree under FOI laws in the US – there is a queer relationship between how badly the US is failing to fight the drug trade and to how well the banks are doing.

I would like to know what Mr Bonner’s opinion of this theory is.

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