Inflation is beginning to rise so I ask myself what trick should the fed pull out of the bag to cure this bug? Would raising the reserve ratio tighten the money supply without causing too much damage?

http://news.yahoo.com/s/csm/20060203/ts_csm/apocket

What has surprised me over the past two years is the growth in the money supply, rise in the price of Gold, yet insignificant rise in inflation. This has obviously been due to the world market and lowering prices, of commodities and finished goods.

As an example, I was just in Wal-Mart, checking on those Vlassic Pickles, and happened to look at the lineup of coffee makers. Would you believer that a generic white coffee maker, with glass pot, but no timer, was selling for $4.25? Now that is anti-inflationary. Even the top of the line makers were less than $25. Amazing!

Somehow, my earlier concerns were misplaced, and Larry Kudlow was correct. the growth of the economy, and the lowered costs of goods has kept inflation down.

However, I have been expecting this inflation. It seems to me that the Fed's idea of reigning in the market by increasing interest rates tends to be self defeating. If they were serious, they could simply tighten liquidity, or changing the reserve ratio as you put it. This would automatically make it more difficult to obtain loans, yet keep interest rates lower, AND help bring the price of gold more closer in line.

I'll admit that the excalating rise in the price of gold had me worried, but Kudlow brought up the fact that it was mostly the shortage of gold AND the lowering of finished products that did not leave him overly concerned. I think he has been right.

However, this rise in oil prices is the only reason I can see that is leading the way with inflation. I'm rambling: I'm sorry.

So if the reserve ratio was raised there would be less money to lend so interest rates would increase some but not as much as they would if the Fed raised the discount rate?

Im just trying to get a feel for this as I am still learning economics. I looked through my economics textbook (written by my professor) that said raising taxes was a good way to curb inflation. I looked at that as unacceptable.

that is just one way to accomplish it. Another is to restrict liquidity. Should inflation rear it's ugly head, it is a result of too much money within the economy, thus making it less valuable. Simply restrict it's access. The typical Keynesian solution is to raise interest rates. However, calling in a percentage of it's bonds from the banks will cause less dollars and increase the value of those remaining.

Read this lesson, Money Creation, from Uncle Jude.

You mean sell government bonds to restrict the money supply,
if the Fed buys bonds it increases the money supply!

Please go back and read the "Money Creation" lesson.

But it says exactly what I said!

"The money you have in your wallet or purse is non-interest-bearing debt of the national government. In the United States, it comes into circulation through the operations of the Federal Reserve Bank, which has the power to "create money." It does so through the simple process of buying interest-bearing debt that had previously been issued by the Treasury Department. That is, Treasury issues a bond in the amount of $1000 in order to finance its spending needs if tax revenues are not sufficient. The $1000 bond pays an interest to its holder at maturity. The Fed can "buy" the $1000 bond with a check for $1000 written in a checkbook that has simply been given it by Congress."

The NY Federal Reserve website makes it clearer, see under Open Market Operations.

I understand that. That is pretty basic (supply and demand of the dollar).

As I said earlier I don't think government should use fiscal policy to control money supply as my professor states in his textbook. I think he misses the point that the only party, in recent history, that wants to raise taxes is democrats. However, they dont raise taxes to tighten money supply. If they did that they would have to sit on the money and not spend it. I wouldn't trust the government to such a thing. That is why money supply issues should be the responsibilty of the Fed and the Fed only.

Opposition to Inflation


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This thread that is over two years old/dead is resurrected because in fact, the inflation bug is starting to creep. Or, more like gallop. We see it most obviously at the gasoline pump, but keep in mind that gasoline for private cars is a tiny fraction of the entire use of a barrel of oil. That cost is reflective of the huge decline in the dollar as an international currency. Two dollars for an English pound! Just about two months ago, only 31.3 little old Thai baht purchased one almighty US dollar. That last rate has gone back to 33.33 today, though; not that you Americans should care. But you should care that oil has reached almost $140 on the spot market or futures market. And that cost will surely, quickly ripple though the entire economy. Will your wages rise? Will your old folks' SSA pensions rise accordingly?

Heard on the radio this a.m. that Saudia Arabia is beginning to increase their output R/T worldwide complaints about the prices, such as Spain etc. S.A. is concerned that the market will crash.........and who will buy their oil if we are all broke ?????

It's called "stagflation". Remember the Carter years? No economic growth with rampant inflation. Fk the rigged CPI numbers, they are not reflecting reality. Just go to your local market and compare the prices of what you buy to a year ago. Real inflation is well over 15% and will continue to climb as the price of crude ripples into every aspect of our economy. We are fked, plain and simple. How did we get here? Thank the liberals. We have the largest oil reserves in the world but cannot harvest these reserves. Had we tapped Alaska and all our offshore sources your price at the pump would still be less than 2 bucks.