More than they can turn a profit on, apparently. At the rate we're going, we'll soon probably have to pay the banks a nominal fee for storing our money. In reply to:
My money is in my bank account, coiled up like a tiger, about to pounce on the American economy in a spending orgy!
Uninformed, if Inflation is healthy, and if wages rise with inflation to keep pace in a healthy economy, then whats the point? Inflation is the devaluation of the currency. How can the currency be devalued in a robust, growing economy? The only reason for prices to rise in a robust, growing economy is if there is a greater demand and a lack of supply. And that has nothing to do with wages. If anything, prices should go down in a robust, growing economy because things become more streamlined and efficient. I sincerely want to know from your perspective how a healthy economy = rising prices. And on top of that, how that relates to higher wages. If higher wages are the result of higher prices, then everything pretty much stays equal. The wages are simply keeping pace with the increase of prices. The standard of living is at a stand still. Im not getting it.
Inflation is an increase in the supply of money. It is accompanied by price increases when the supply of goods and services does not grow adequately to absorb the excess available money. Money can be defined and quantified in a variety of ways. Devaluation of the currency with respect to goods and services is a hidden tax that affects all walks of life. It has an especially pernicious effect on those who live on fixed incomes or for whatever reason have much of their wealth tied up in actual money. It rewards indebtedness, as the real value of the debt shrinks despite nominal stability. If money is a way to store value, inflation represents the leak in your money tank.
That makes sense to me KGP. The devaluation of currency is a result of having too much money. If goods and services increase to match the excess money, then prices come back down. At least that is how it seems it should work to me. And the question is, why is there an excess of money? Why is the money supply being expanded unless the goods and services are able to match it? And if they are able to match it, then prices shouldnt be going up because it is all relative.
And if the fed wasn't holding interest rates down, we might well have that. As it is, that interest rate has been held artificially low for a long time, and lot of people would argue that's one of our issues right now.
Good thread. Money is always a topic that is near and dear to (almost) all of us. Interest rates are low partially because of the slow economy and also because of the Fed's large repurchases of long-dated U.S. Treasuries (which lowered the supply of Treasuries and artificially drove down rates). The increased money supply hasn't resulted in as much inflation as some might have expected, at least according to official inflation figures like the CPI. Using the M*V=P*Q formula, I suspect that velocity has decreased somewhat even though M (money supply) has increased. The lack of lending by banks (who are flush with cash) to others (who would then turn around and spend/invest) tends to support this argument IMO. The problem is that the low rates have stimulated things such as mortgage refinancing but not actual home sales (probably due to offsetting factors such as more stringent loan qualifications by banks these days). The high unemployment rate has also dampened spending and consumer confidence as well. Some comparisons have been made to Japan, where interest rates have been close to zero for many years, yet their economy has stayed fairly subdued. Someone likened it (central bank policies to artificially drive down interest rates in an effort to stimulate the economy) as trying to push a string. Edit: Came across this article tonight in the WSJ, saying inflation in food prices is underway...
Just wanted to say that Bevo's explanation above is correct. And for a little more detail on the Fed for those who don't know, the Fed has 3 tools at its disposal to effect the money supply and inflation: Changing the reserve requirement Changing the discount rate Open market operations The first 2 tools are used less frequently and get interest rates in the ballpark while day-to-day money supply changes are used daily to fine to rates. If the reserve requirement is lowered for banks, banks can lend more and the money supply increases. More money supply means banks can charge lower interest rates. The discount rate is the interest rates that banks can get from the Fed. If banks can get money at a low interest rate, they can loan money out at a low interest rate. Again, this leads to an increase in the money supply. Open market operations are simply the buying and selling of government bonds in the open market. If the Fed buys treasury bonds in the open market, they pay for them with cash and receive bonds from investors or banks. The cash is deposited into banks and the money supply is increased. Again with the increased supply of money, its value falls as do interest rates. The Fed considers its main goal, price stability, meaning low inflation. Money acts as a storer of wealth, a representation of goods and services in an economy. Inflation destroys the value of money as it is defined as less money being able to buy the same amount of goods. Runaway inflation called hyperinflation, will show up as a drastic decrease in the value of money. It causes investors to become skittish because investors become concerned about the government and the intrinsic value of the currency. Deflation is a general decline in prices that is most often caused by a reduction in the supply of money. Deflation can be caused also by a decrease in spending in the economy (by gov't, companies, or individuals). The opposite of inflation, deflation has the side effect of increased unemployment since there is a lower level of demand in the economy.
