The events of the last ten days are surely for the history books. And blogs everywhere are reviving the inflation/deflation debate.
The public often miscontrues what inflation is.
By pure definition inflation is the expansion of the monetary supply, while deflation is the decline in that supply.
Everywhere we hear about the deflation threat and this threat is cited as the justification for all the liquidity that is being pumped into the system. The US Federal Reserve has expanded the US$ money supply through USTreasury debt monetization severely the past 2 years to the tune of at least $2 trillion.
That is bigtime inflation!!
The reaction has been to protect against the price inflation (higher costs) and bond deflation (lost value) by the widespread purchase of both Gold & Silver (safe haven).
Speaking of growing the money supply (inflation) there was an interesting story over on Bloomberg Wednesday that asks: Is the European debt crisis poised to flood U.S. banks with money?
Joseph Abate, a money-market analyst at Barclays Capital wrote in an Aug. 5 report that a game of monetary 'hot potato' could result.
The higher deposit cost, the potential need for additional capital and the flight-prone nature of these balances clearly outweigh the 25-basis-point return the banks would earn depositing the money at the Fed.
Abate wrote that any reduction in the interest rate on excess reserves - a move Fed Chairman Ben S. Bernanke told Congress in July might be possible - may create a “serial round of deposit fees” since banks would try to “push cash from their balance sheets” like a game of “hot potato.”
“Domestic banks will work very hard to shed those surplus reserves,” said Lou Crandall, chief economist at Wrightson, a New Jersey-based unit of London-based ICAP Plc, the world’s largest inter-dealer broker. “They’re not eager to expand their balance sheets with low-yielding assets even when they earn a small positive spread.”
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