The financial world we live in is just as wild, if not more, than the mountains and woods we walk through. We are told that the fundamentals of our economy are strong, but we can feel that something is wrong. My unique financial background and survival passion make Financial Survivalist and excellent place to learn and share.

Friday, September 7, 2012

Why The Fed Isn't Worried About Inflation

I've been thinking a lot about why the Fed is so willing to print money (ie quantitative easing).  Essentially, there are 3 reasons they are not worried: money supply, velocity of money, and wage deflation.

1. Velocity of money, how quickly money moves through the economy, has to be high for inflation and it is really slow right now.

2. The money supply was extremely decreased by all the debt discounting and write offs that happened as a result of the housing crisis. A decrease of the money supply leads to deflation, which is really bad. To counter that they are printing money.

3. The average median household income has dropped almost 10% recently. This is very bad. When people make less, they spend less. When people spend less there is less money in circulation and that can lead to deflation (ie bad).

The fed isn't worried, and I am not worried, about inflation in the short term because it isn't likely to happen. It's more likely we see a deflationary period that can be very damaging to the already weak economy.

Long term the fed thinks they can take out the extra money by selling the debt they have been purchasing. This is only possible in pristine economic conditions that are not likely.

It is more likely that in the long run quantitative easing will cause more economic woes than it has prevented. It has always been this way, and as they say "history repeats itself."


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