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Five Things: Inflation Will Be a Long, Long Time Coming


What happens when government throws a lending party but no borrowers show up?

1. Inflation Will Be a Long, Long Time Coming

"Credit cards, home equity lines, student loans, car financing: none come cheaply or easily in these credit-tight times. The banks, the refrain goes, just will not lend money."
- New York Times, "U.S. Tries a Trillion-Dollar Key for Locked Lending," Feb. 19, 2009

The banks just will not lend money. Indeed. That is exactly how the refrain goes these days. Which is probably why it's so wrong. While governments around the world are doing their best to unlock lending, what happens when government throws a lending party but no borrowers show up? This:

Farce As Just Four Apply for Home Loan
But Government plan will still cost €300,000 to run

By Shane Phelan and Denise Clarke
Monday February 16 2009

"A CONTROVERSIAL Government plan to get first-time buyers on to the property ladder can today be unmasked as an expensive flop.

Just four people have applied for the Home Choice Loan scheme, which could end up costing the taxpayer almost €300,000 in administration costs this year alone.

When economic actors hold currency, they are making the ultimate risk averting decision: get as low on the risk curve as you possibly can by owning the actual notes themselves. That is the one reason why, year-over-year, the U.S. Dollar Index is up 15%. This is an indication of the deflationary process underway, not of some nascent reflationary forces.

But wait, what about all this currency being printed by global central banks? Think of it this way: If the Treasury issues $500 billion in Treasury-Bills and the Federal Reserve buys them, then the Fed now has $500 billion in T-Bills and the Treasury has $500 billion in Federal Reserve notes. That is monetization.

However, if the Treasury then takes that $500 billion and injects it into banks, and the banks refuse to lend it out (as politicians claim), or rather, as is also the case today, people refuse to borrow money, then the money still hasn't entered the economy and therefore is not inflationary. Moreover, when the Treasury injects capital into banks, those banks typically buy T-Bills with the cash (either because they don't want to lend or consumers don't want to borrow, or in this case both), so the capital injection puts a bid underneath Treasuries as well, which is why interest rates remain at the lowest level in 50 years.

I agree that in the long-run, the very long-run, some sort of upward inflationary shock is inevitable, but people are today being misled into thinking it's happening earlier than it is, based on headlines about government intervention, the money supply stats, and hyperbolic inflationary commentary being trotted out by those with a vested interest in encouraging people to buy gold.

2. In Dodd We Trust?

Things seemed to be going so well at midday. The market was down only 1.5%, a handful of stocks were actually up on the day, gold was at $999.99 an ounce, just shy of $1,000 and in the office we were able to successfully complete a lunch transaction which resulted in food being delivered, just the kind of exchange this economy needs in order to continue functioning. And then Senate Banking Committee Chairman Christopher Dodd spoke.

"I'm concerned we may end up having to [nationalize banks], at least for a short time," Dodd said in an interview on Bloomberg television.

The thing is, this should hardly be a surprise, particularly to anyone who has been reading Minyanville for the past few years. While Dodd may be "concerned" the banks will have to be nationalized, I am not concerned at all, because it's not a question of IF but WHEN, and the when is coming fast upon us.
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