I suspect most of you will reply an emphatic yes, but some of you will say no. Before I give you my take, please ponder a similar question: "Is inflation or deflation coming?"
I posed the inflation question to the audience in my presentation at the Wine Country Conference. My answer was "It depends".
When I asked the audience "On what does it depend?", one person answered that it depended on what the Fed did. That answer is incorrect.
Whether the state of affairs is inflation or deflation has precisely the same answer as the question "Is the Fed Printing Money?": It all depends on the definition.
I started thinking more about definitions while reading the Hoisington Quarterly Review and Outlook for First Quarter 2013 by Lacy H. Hunt and Van R. Hoisington.
“The Federal Reserve is printing money”. No statement could be less truthful. The Federal Reserve (Fed) is not, and has not been, “printing money” as defined as an acceleration in M2 or money supply. Just check the facts. For the first quarter of 2013 the Fed purchased $277.5 billion in securities (net) as their security portfolio expanded from $2.660 trillion to $2.937 trillion. A review of post-war economic history would lead to a logical assumption that the money supply (M2) would respond upward to this massive infusion of reserves into the banking system. The reality is just the opposite. The last week of December, 2012 showed M2 at $10.505 trillion, but at the end of March, 2013 it totaled only $10.450 trillion which was an unexpected decline of $55 billion. Printing money? No.My Opinion
Personally, I think the Fed is printing. Indeed Bernanke is on record stating that he is printing.
For an extremely humorous look at the question of printing as captured on the Daily Show, please consider Caught in a Massive Lie: Daily Show Comments on Bernanke's Lies Regarding "Printing Money"
The pertinent point is not whether or not the "Fed is Printing" but rather the consequences of alleged printing and the effect that is having on the credit markets and the Fed's ability to stimulate loans.
Rather than debate the meaning of "printing" let's look at the facts Lacy Hunt points out.
- M2 is falling
- Velocity is at a six decade low
- No signs suggest credit creation is turning more productive
- Debt Constrains Growth
- Commodities are down 20% in the last two years
By Lacy's definition, the Fed is "not printing". By mine, the Fed is. Bernanke says one thing on one occasion and humorously denies it the next. Can all of us be correct? Yes, if Bernanke gets to change his definition mid-stream. Neither Lacy nor I have to.
Note that the unemployment rate is allegedly 7.6%. By a more reasonable measure, the unemployment rate would be over 10%. Of course that starts a debate as to the definition of unemployment.
Similarly, I contend this environment is extremely deflationary. Others mock the deflation assertion pointing out the massive increase in base money supply. They also have to ignore everything else under the sun generally typically equated with deflation.
Does the precise definition of printing or inflation really matter? Only in the context of a debate. One cannot have a debate without agreeing on definitions.
What's really important is not any definition per se, but rather an understanding of credit, the expansion of credit, and the Fed's futile attempt to stimulate both credit and hiring.
On that score, I am pretty much on the same page as Hunt and not on the same page as inflationists and hyperinflationists who have expected a massive outbreak of price inflation for the last eight years.
Someday the inflationists may be correct, but it sure does not look like that day will be any time soon.
Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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