Cash in Circulation

It is a fact that very few individuals reading this blog post will remember the bad old days of the Carter administration when inflation and high interest rates created a really, really bad economy. The term "stagflation" was coined to describe the odd circumstance where the economy was stagnant yet there was rampant inflation.

The lousy economy (not all attributable to Mr. Carter) was a major contributor to the eventual success of Ronald Reagan. So, perhaps stagflation wasn't all bad afterall. In 1979 I held a 14.3% home loan. Chew on that number for a minute: 14.3%. You think the housing market is bad now, imagine how awful it would be with home loans selling for 14.3%.

That brings me to the discussion of Cash in Circulation (CinC). I was reading through Moodies on-line the other day and they noted something that scared the crap out of me: the value of CinC has tripled since August 2008. Tripled.

The tripling of CinC is a result of a number of actions taken by the Federal Reserve to staunch the flow of red at the nation's banks under both Mr. Bush and Mr. Obama. The free-flowing cash into the market place has the short-term goal of freeing up money at the banks to be lent to consumers and to business. So far, that strategy has been less than effective. That should not be too big a surprise: one should not expect monetary policy to gain any sort of foothold for 6-9 months. If past history is any indication there should be a loosening of credit come the August or September time frame.

Like I said, the short term goal was to free up loans. Now, what about the long-term consequences? If Economics 101 is correct (and EVERY 101 class is correct) we should expect to see inflation (and a lot of it) when all those dollars pumped into the economy by the Fed begin chasing goods and services which have been depressed for almost 18 months. It is the classic setting for run-away inflation: too much cash and too few goods.

If you are South of 40 years old you have never known inflation. If you are over 50 (like me) then you remember the pain of eroding value of the dollar held in your wallet.

Bottom line: There are a lot of people who have never seen run-away inflation. There are a lot of people who are going to see something for the first time - very soon, and in very large doses.