Bernanke QE – Where is the inflation?

Peter Schiff, Ron Paul, Marc Faber etc are constantly talking about inflation and yet there does not appear to be any. Where is it? This is my theory.

It’s on the sidelines. Bloomberg have highlighted that the balance sheets of American corporations have never been healthier. You have the president of the Dallas Fed saying the Fed has done more than enough.

http://www.bloomberg.com/video/fed-policy-costs-greater-than-benefits-fisher-says-z~p6WIS1T_~GmwsNDdM~XQ.html

Why is the money on the sidelines?

In a word uncertainty. Businesses are waiting for stability. The Fed is reacting to markets at present, the markets are never stable which means as long as the Fed is following the markets rather than following specific monetary policy there will be no investment from businesses.

Businesses know the current Fed policy is not sustainable, the spectre of inflation is being talked about more and more. Businesses are waiting for the Fed to get out of the markets.

When the Fed gets out, when businesses have a solid foundation to look at, then they will start investing and that is when the inflation is going to come.

The Fed has said it will continue QE indefinitely, this can only mean balance sheets growing and more money piling into commodities. Businesses would be foolish to invest in an economy than is being so blatantly manipulated. Businesses would be foolish to invest in an economy which is not on a sustainable path. It would be foolish to base investment decisions on today’s economic picture.

Only when market forces take control of the economy back from the Fed, will investment start and that is when inflation will begin.

There will be a massive boom and shortly thereafter there will be massive inflation.

The other option is that the Fed and the banks are moving this cheap money abroad. Who is going to invest in US government bonds at 2% when you can invest in Brazilian bonds at 7%?

Bu the fact of the matter is even this exported inflation will come back to the US. Businesses in Brazil are competing for the same commodities as those in the US, in short there is no protection from inflation, it can only be delayed.

Timeline

With regards to a timeline it is hard to judge, many commentators have said they would have expected more inflation by this time and I would have to agree. There is  only one answer. Businesses are hoarding cash and preparing themselves for the inevitable downturn, call it Squirrel Syndrome. Only when the worst of the winter has passed will banks and businesses really start exploiting their stores of money.

 

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