Here’s What A Balancing Act Between Inflation And Stagflation Looks Like

“Balancing Act”
Modified from Stock World Weekly

Inflation and stagflation have been important topics of debate, particularly since the Fed announced the QE2 program last fall, and even more so as prices of commodities have been rising unabated. While Fed apologists make academic arguments that QE shouldn’t cause inflation, many financial commentators disagree. Jason Kaspar, of, discussed the subject with SWW editor Ilene.

Jason wrote, “The real definition of inflation is an increase in the money supply, and according to me, that includes credit as well. The real definition of deflation, conversely, is a decrease in the money supply.

“Logic presupposes that when the money supply increases, the prices of goods will increase. This is generally true. However, the reverse is not always true. An increase in the price of goods does not necessarily mean there has been an increase in the money supply.

“For example, during the collapse of 2008, a tremendous amount of money was vaporized through de-leveraging (among other things). We saw much of this occur in the mortgage market with innumerable foreclosures. When the Treasury instituted its stimulus spending and the Fed helped facilitate this spending through quantitative easing in 2009, the stimulus served only to replace the money that was lost. The Fed bought mortgage backed securities (in QE1) and treasuries from the banks, but instead of lending that money out to individuals, the banks allowed it to build in reserves at the Fed (which renders it useless) or have been investing that money in assets, like food, equities, gold, etc.

“Therefore, even though there is no overall increase in the money supply (M3 has started contracting again recently), some of the QE money has been shifted into specific assets, which are enjoying nominally large price increases. This is the difference between money supply inflation, and price inflation.”

What the U.S. economy is experiencing now is price inflation – that does not mean all prices are going up (houses aren’t, for example), but what is going up are the prices of necessities, such as food and energy. According to Wikipedia, stagflation “is a situation in which the inflation rate is high and the economic growth rate is low. It raises a dilemma for economic policy since actions designed to lower inflation may worsen economic growth and vice versa.”  Increasing price inflation coupled with stagnant wages (high unemployment, low economic growth) diminish the real value of worker’s income. This can happen without an increase in the money supply, as Jason Kaspar noted. 

As Phil of PSW commented: “Inflation has indeed become the United State’s chief export as the deflating Dollar is the World’s Reserve currency at 62% of all the money in the World and growing fast as Ben buys ’em as fast as Timmy can print them and then loans them out to the Banksters, who promptly lever that money 10:1 to buy commodities. Oh, I’m sorry, did I say buy?  I meant speculate – buying commodities is what poor people do…”  While the overall money supply may not be increasing, the money that the Fed is feeding into the system is flowing into commodities and stocks. That people are losing value in their houses may offset price inflation in other goods, but it doesn’t help the average person. 

Russ Winter, at Wall Street Examiner, and author of Winter Watch writes, “The following chart says it all (below). The Fed’s aggressive Treasury monetization has been the causa proxima (90-per cent correlation) to the pedal-to- the-metal Minsky Meltup in commodities. I suspected this would be the effect but confess I did not believe the Fed and government could be so irrational and stupid as to attempt it, especially with the blowback evident by year end. Though I am one of the most persistent critics of Fed rabble, this exceeded even my worst fears and nightmares. This is what Bernanke refers to as ‘temporary’ inflation. Nor did I anticipate the markets ignoring such clear and present danger either. The transmission of this inflation disease appears to take about six months, which corresponds to the MIT price survey I have been using. It, too, now shows that inflation is in full swing.”


“If the Fed continues its purchases, we can calculate that each new $100 billion of Treasury purchased will add about 5 per cent to the commodity index and $7 to oil. It takes four weeks for the Fed to purchase $100 billion in Treasuries. What a game of chicken being played out and right before our eyes! You can sense the collision, flying glass, blood and bones at almost any moment. If the Fed desists or scales down its Treasury buying, the stark trillion dollar question becomes who will buy them?” (The Game Of Chicken: Collision, Blood and Bones, originally posted on the Winter Economic and Market Watch.)

According to Michael Pento, “

U.S. import prices surged 2.7% in March from February! Prices of imports rose 9.7% for the year ended in March. Fuel prices increased 28.7% during the year, driven by a 36.6% advance over the past six months. And in case you are thinking soaring import prices are just about energy, food and beverage prices jumped 18.9% YOY. 

“Prices for foods, feeds, and beverages advanced 4.2% month over month, the largest monthly rise since the 4.3% increase in July 1994. So let’s say you wanted to avoid paying these soaring import prices for fuel, beef and beverages and decided to ride your bike to the health food store. You would be shocked to find that even imported vegetable prices had jumped 26.8% YOY.

“Skyrocketing import prices mean the GDP estimates for Q1 will be coming down. Slower growth and higher inflation…I think there is a word for that condition–STAGFLATION!”

Michael Pento, Euro Pacific Capital. 

Might there be an end in sight?  

Lee Adler, editor and publisher of Wall Street Examiner 

suggests that 

“banks are again out of the Treasury buying game. It also shows that they lost money in the first quarter, which is insane considering that their cost of funds is zero. It’s an indication of just how dire the circumstances are. Banks continue to accumulate cash at a frantic rate in their accounts at the Fed. The last time reserves rose this fast was in the midst of the crisis in 2008.

“Although the banks did buy some Treasuries in mid March, they have again stopped buying and reduced their holdings, opting to hold cash at the Fed instead. The banks are pulling cash out of the system and depositing it in their reserve accounts even faster than the Fed is printing it, lately 60% faster. We have to wonder what has them so spooked.

“At the same time, FCBs [foreign central banks] purchases of Treasuries are also backsliding, and are well below the threshold where they need to be to keep the markets stable. These elements essentially neutralize the Fed’s pumping. It may not be enough to send the markets lower, and in the absence of new Treasury supply, Fed buying should be enough to keep the field tilted in favour of higher prices. April’s bias should be to the upside, but the background drag will be there. Things will get tougher in May when Treasury supply increases, and really tough this summer when the Fed presumably will stop pumping.” (Fed Gets To Skate On Thin Ice In April)


This article was excerpted and modified from the Week Ahead section of our weekly newsletter. Click on Balancing Act for the full newsletter. 

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