Tuesday, March 29, 2011

Is the US economy likely to hyperinflate, and what measures can the Federal Reserve System take to avoid hyperinflation?

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 the world has been pondering on the beginning and extension of the financial crisis for some years. The USA, however, did know about the crisis before its sharpest phase. That's why it worked out solutions. To fight deflation the FRS is said to use a mathematical model made by Gauti Eggertsson representing the macroeconomic modeling in NY FRB

The USA is fighting deflation and trying to confirm the world that soon inflation will rise and that it's better to invest money into a business rather than keeping it in banks. To fight inflation the USA uses the method of Quantitative Easing. Following this policy, the US central bank increases the money supply of the banking system by billions of dollars. And now analysts start thinking if America is able to get rid of hyperinflation.

Is US hyperinflation a real risk?

In brief, there is no such threat. The FRS now buys assets via a stock market, thus increasing the money supply and decreasing public financial resources. If inflation appears to be above the target, the FRS will sell overpriced assets (we have inflation, don't we?). The FRS will sell the exact amount of assets allowing the banking system to reduce excesses of the money supply.

To buy and sell assets in the deflationary economy - which the USA has been known of for already 10 years - the FRS needs a stable stock market.

To be honest, only stock markets allow buying and selling something in a large volume. Besides, buying highly marketable goods is not an obligatory procedure capable to increase the money supply. To decrease the money supply, selling something marketable and over-priced in a small amount will be a good measure.

Apart from the conspiracy theory, this is the only logical way capable to explain the fact that the first thing to be saved in 2008 was the stock market and also the fact that the stock market recovery is considered to be the first sign of the economic recovery.

Then we get a clear view: the FRS deals with the stable stock market in deflation and, without threatening one's fiscal position (see words in bold above), increases the money supply, thus increasing inflationary expectations and intensifying economical growth.

All the rest measures, used to get rid of the crisis, are nothing more but patching small and medium-sized holes and firefighting in a rough-and-ready manner. That's why these measures are given away to politicians and reporters. The state needs to live till the time when methods, used by the FRS, take effect.

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