Inflation: Definition & Effects on Rates

[PhilKravitz]

Wow Woowee looks like massive inflation if these price increases work their way into consumer products.

 

[WhoWee]

IMO - the only thing holding inflation back is the interest rate. Now Moody's and S&P are warning the US the AAA rating could be lowered.

 

[talk2glenn]

The projected scale of QE2 is consistently quoted as at least $1 trilion (6.7% of GDP) and potentially $2 trillion (13.3% of GDP). I'm not sure where your 3.5% of GDP number comes from.

Projected by whom?

The Federal Reserve Board has authorized the bank to purchase up to $600B in Treasurys. This is commonly referred to as QE2 in the media. The actual amount purchased and pledged to be purchased is much less, at approximately $400B.

As for growth impacts, let's do some rudimentary static analysis. Assume a constant multiplier of approximately 2, and that the whole $600B is spent. This means $1.2T in wealth is injected into the economy, and must be absorbed either by price increases or new growth. If the full amount is absorbed by growth, then the economy will expand by $1.2T over 12 months due to the Board's actions, an impressive stimulus by any measure. Again, this is simplistic and rudimentary, but illustrates the point. Obviously, some of that money will be lost in both price increases and buybacks by the Fed as securities come to term. Further, the currency is injected over time, and not all at once.

But this is sufficient to demonstrate the Board's intent.

 

[PhilKravitz]

As for growth impacts, let's do some rudimentary static analysis. Assume a constant multiplier of approximately 2, and that the whole $600B is spent. This means $1.2T in wealth is injected into the economy, and must be absorbed either by price increases or new growth.

Or consumed by deficit consumption. The 600 billion of federal debt paper that no one would buy that is being "printed" by the federal reserve private bank. In which case there will be zero growth. But at least there will not be 1.2 trillion contraction.