As promised, there will be more on inflation this week and maybe even next week.

For those of you who either flunked Money and Banking or never took economics in the first place, we live in a fractional reserve world, where banks are required to maintain a fraction of their liabilities in actual reserves to meet the demands of their customers. The rest of the money is available to be lent-out. So, if you’re a banker with $1,000,000,000 in deposits, you’d have to retain $100,000,000 in reserves if we had a 10% reserve requirement. Looked at another way, if the bank as $100,000,000 in capital, it can create $1,000,000,000 in assets. The bank can take the $100,000,000 of high-powered money and multiply it. This is the guts of the money creation machinery. But today, banks aren’t taking their high-powered money and creating even more money. If they did, the economy would be screaming, assuming the monetarist economists are right. Read more

We’ve seen some real wild swings in the dollar recently. That is largely because the ‘safe haven’ trade is coming off around the world. Currency speculators are selling the dollars they bought when it looked like Armageddon was upon us and buying something that may have a better outlook. Also, there is this huge wave of bonds that have to be sold by the Treasury and they will swamp the market. Then the US is likely to enjoy a period of untoward inflation in coming years. So why would anyone be surprised if the dollar went down a bit. The issue is that the dollar has gone up a bit here lately. Part of that might be the dollar got oversold or some other currencies got over-bought or some other technical explanation (can you say Iranian elections?). Part of it could be that the scare that foreign central banks would stop holding dollars as their principle reserve currency isn’t going to pan out after all. Read more

“Too many dollars chasing too few goods,” that was Herb Stein’s definition of inflation and it is as good as any. What we’d like to see is too many dollars chasing too few stocks in the upcoming months. There are over $4 trillion in money market funds, versus about $2.5 trillion a couple of years ago. Some of that increase is just that, an increase in the amount of money people feel is an appropriate level of liquidity they need for their well-being. But, part of that money is fugitive stock market money that is hiding-out waiting for the all-clear signal that buying stocks is okay again. There are other pots of money in other liquid alternatives to cash. Sooner or later, this will get back into the equity market or some other growth vehicle. Read more

What about High yield bonds?

Another reader question prompted us to look out into the future (always a daunting task). One should always remember that what you are about to read is pure fiction at this point in time as opposed to editorial or news. Our crystal ball has been getting bad reception ever since cable became the preferred mode of mass communication in this country, so don’t put too awfully much credence into what you are about to read. Read more