How much bailout money can the Fed throw in without creating hyperinflation?

As Everett Dirkson said, “A billion here, a billion there, after awhile it adds up to real money.” Currently, he must be spinning in his grave.

Bear Sterns, Freddie Mac, Fannie May, AIG, multiple commercial bank failures. Who knows what’s next. What’s the limit until the Fed is bled dry and just has to print money and make all of those bonds being held by the Japanese and the Chinese (and us) worthless?

I’d like to know this too. Where does this money come from exactly?

Are they just “printing money”, is the USGov taking out loans that taxpayers will have to pay back, or what?

The Fed has $800 billion in assets and has now allocated about $500 billion of it.

But that doesn’t really answer the question. Those allocated assets aren’t worthless and the Fed can create more funds by printing money or issuing paper. Even if it adds an extra $500 billion (highly unlikely but within the realm of possibility), that’s about 3% of GDP. Hyperinflation is not a issue. That’s just a scare word.

In this sort of financial crisis, inflation is not the danger, deflation is.

Banks and other institutions are afraid to give loans. People take their money out of money market accounts and maybe out of banks. This creates illiquidity–the inability to buy or sell due to lack of funds or credit. So to sell something, the asking price has to be lowered. That’s deflation. When a bank’s assets decrease in value, they have less cash reserves to make additional loans. Or they even have to sell assets to increase their cash reserves. That continues the deflationary spiral.

It’s what happened in the Great Depression. Inflation is bad, but deflation is many many times worse.

The joke about throwing money from helicopters is not too off from what the Fed needs to do to stop a deflationary spiral.

In addition to the preceding, consider a thought experiment.

The US spends an extra $10 billion on new roads. That adds to total demand for goods and services in the economy as architects, planners and road crew are hired. Do that enough and you could get inflation, starting with construction workers and firms bidding up their services.

In the second instance, a bank finds that its assets fall short of its liabilities and collapses. The FDIC organizes a rescue over the weekend and coughs up $10 billion. So Jane Depositor, who has a $20,000 CD at the bank wakes up Monday morning to find that …she still has a $20,000 CD. Net affect on aggregate demand: nothing.

Now I’d have to study the details of the particular bailout. But many of them involve large numbers, but little or no additional stimulus to the economy. So the risk of hyperinflation could be nada.

This is wrong on both counts.

Adding value to the economy never results in inflation. Creating new value, whether it is in tangible form like new infrastructure or in higher productivity of workers, is the only road to true wealth creation in an economy. Wealth creation is exactly what an economy desires. That will always add a nominal amount of inflation to the system, but the most dreaded condition is to have zero inflation, because that indicates a stagnated economy that will eventually collapse on itself.

Inflation comes about when products currently in existence, like housing, start costing a disproportionate amount more than the overall increase of value in the society, or when commodity products, like oranges, steel, or oil, that can be expected to be produced year after year at a predictable amount and cost, suddenly start costing disproportionately more. Hyperinflation occurs when the supply of objects greatly lags the demand for them and when the faith in the local currency (and therefore in the government backing them) has disappeared. Neither condition is at all likely for the U.S. in any foreseeable future.

In the second instance, banking failure affecting deposit accounts is such a minor aspect of the current crisis that it can be completely neglected. The real issue is money creation. Most people think that money creation is the same as wealth creation, but that’s not true. As explained above, wealth creation requires an increase in a tangible end product. Most of the increase in the country’s growth over the past couple of decades has come through productivity improvements. That has made the country fantastically wealthy.

Money creation occurs by leveraging the wealth created. Money is created by loans. In the classic example, a bank took in $1 million in deposits. Knowing that there would be no normal time in which all the customers would demand their money back at once, it would lend out that money over and over, for a fee, and create more money. The old rule of thumb was that a bank could do five times the value in loans as it had deposits.

That number is seen as ridiculously small today. Some of the failed institutions had 300 times the loans (no housing or business loans, but commercial paper based on supposed assets that really were little more than pyramid expectations of greater future returns) as they had assets to cover them. That works as long as everything goes up. As soon as the balloon pops, it’s easy to see that worthless loans quickly make it impossible to cover actual needs, even if the amounts that are worthless are a fraction of the total.

There have been threads elsewhere on the Board that indicate that people think that foreclosures are the problem with the system. They aren’t. They were just the trigger. The real problem was that no real value was created, but an imaginary inflated value was presumed to be real and multiplied beyond reason. It is a failure of the overall financial system, not the housing system.

The difference between wealth creation and money creation is critical to the understanding of economics. Wealth creation is the greatest good. Without that, no money creation can follow without an eventual blowback.

No. You misunderstand.

  1. An addition to the capital stock will indeed increase the productive potential in the economy. (If it’s a bridge to nowhere, of course, the increase will be very very small.)

But the process of increasing the capital stock -what economists define as “investment” - will represent extra demand for goods and services. Somebody has to build the bridge after all, and therefore in some way their services have to be outbid relative to other activities. Before the bridge is finished, construction enters the demand side of the ledger, not the supply side.
2. Don’t believe me? Consider a huge increase in the money supply. That will decrease interest rates and stimulate investment in one way or another. From there you can see that an inflationary spiral can be led by an investment boom. (Admittedly, such spirals typically involve loose monetary and fiscal policy.)

  1. If you have some background in introductory macroeconomics consider AD = C + I + G. Any one of those (an autonomous increase in consumption, higher investment or added government spending on goods or services) constitutes an increase in aggregate demand. If you disagree with this, then you have a non-mainstream point of view. That’s fine, but it should be labeled as such.

I think you’re the one misapplying whatever you learned in school.

What I’m saying is basic mainstream economic theory. I tried to find a source online and got bogged down in blogs, which I was sure wouldn’t be accepted.

However, I did find a reference at Google Books to Ellen Frank’s The Raw Deal: How Myths and Misinformation About the Deficit, Inflation, and Wealth Impoverish America.. Check it out starting on page 37, where she has a discussion of wealth creation vs. money creation in the stock market.

This is true, but it’s hard to imagine an increase in AD that would lead to hyperinflation–that’s a supply or flat currency issue. Has rising AD ever driven hyperinflation?

It is worth noting that to anyone under 30, any inflation looks like hyperinflation, because they really haven’t seen much in their lifetimes. But, of course, it isn’t.

The debt ceiling will need to be raised by about 7% to accommodate the $700B being proposed. I have no idea if the $700B ever comes back or if just gets paid out one way. Exapno?

I’m not sure it’s an issue of inflation v deflation since various strategies have been tried by various nations over the years to bail themselves out, and I am sure we’ll try both. I wouldn’t pretend to be more profound on economics than Exapno Mapcase but it does seem to me the typical endgame, at least, is inflation in modern times. (I suppose it would be unfair to mention Zimbabwe here…but how about post-WWII Europe? The hundred quintillion pengo ring a bell?) The Great Depression wasn’t an endgame; it was just bad times, and perhaps bad times when there was a general culture of actually paying off debts with Real Money tied to Real Gold. I wonder if those days are gone, and if that model is history.

My bet’s on inflation, really nutty inflation within a quarter century. It’s cheap and easy for the politicos who buy votes with promises paid for with scraps of paper. Buy gold. But if gold plummets, hey–I told you right here EM is smarter than I am.

You say $800 billion. With what has already been allocated, plus the $700 billion for the overall bailout, that exceeds a $1 trillion and is well past your figure of $800 billion. So where does the extra come from if it’s from somewhere other than the printing press. Yes, there are supposedly some assets that back up that number but if they were any good the banks would hang on to them.

For the sake of argument, lets say that any amount above the $800 billion the Fed thinks they can eventually recover. Fine. But what kind of situation is it to have a Federal bank that is suppose to be backing up all of the other banks yet has an asset value of zero? As many countries have proven, when you run the presses you create inflation. It’s like a company that issues more common stock, they devalue the current outstanding shares.

Now, I’m not an economist or I wouldn’t be asking the question. Please explain how this works.

The new $700 billion comes from the general tax revenues of the government and is not backed by the assets of the Fed. Two different pots of money.The Fed does not have an asset value of zero.

The $700 billion figure is mostly misleading in any case. The government has taken over the portfolios of the institutions involved and now is the one that has to try to collect the money owed. That total is almost certainly not $700 billion, but even more certainly not $0. Nor do the loans have to be repaid at once. They have a variety of due dates extending out into the future. Some of the losses will be immediate, but the repayments will be a source of funding in the future.

I’m still not seeing where the inflation comes from. There will be some rise in the cost of loans, as lenders become more conservative in their practices which always drives the percentage up. But the Fed rate is at 2% for Pete’s sake. Current futures peg it to be 2.25% next March.

If you want to argue nutty inflation in 25 years, I have nothing to say in return. Absolutely anything’s possible in 25 years. Ignorance may have been successfully fought by then!

Neither is especially likely, though. :smiley:

Has it ever not?

Typical scenarios occur when the government plugs its budget deficit by printing money. But that’s just adding to total demand for goods and services beyond that which can be supplied by the economy. So a bidding war breaks out, and inflation spirals upwards.

Exapno Mapcase: (If you quoted a blog from a recognized economist such as the conservative Tyler Cowen, that would be worth reading.)
FWIW, here’s a listing of popular economics blogs:

Let’s take a look at Ellen Frank, p. 37:
Emphasis added:

Ms. Frank starts out confused and ends with a half-truth.

Her first three sentences would be true if there was no such thing as substitution and the price mechanism did not exist. In reality though, car production varies from year to year: more generally, capacity utilization varies. In response to price signals, each factory can vary the quantity of its goods in response to demand shifts among consumers. Overtime is one mechanism. Hiring workers from another industry or from the unemployed is another. The same is true among doctors. Over a one year period, there’s a lot more supply flexibility than she implies.

In aggregate though, there are tighter short run capacity limits. But they are not rigid: again, overtime permits total output growth to vary from quarter to quarter. In the terms of introductory macroeconomics, the aggregate supply curve is upward sloping, but not vertical.

It’s not unusual to read such tripe in the popular press. After all, publishers do little or no fact checking, never mind peer review. Frankly, the situation sucks. Then again, there is a tradeoff between accuracy and clarity when writing. And if you want a good narrative (or a good outrage) analytic quality can be a burden.

Ya. Just to elaborate, I’ll quote from the banking dictionary, “The term usually is applied when consumer prices are rising at rates in excess of 50% per month, particularly in developing countries.”

50% per month converts to over 10,000% per year. So, no, I doubt whether we will be seeing any hyperinflation.

[hijack and tangent] Interestingly, I suspect that Exapno Mapcase would know better than to assert on this message board that if car manufacturers create 5 million cars per year, then that is that: nothing more can be done. But you can make such a claim in a book.

Magazines tend to have somewhat higher standards, but even they come out with whoppers that just don’t cut it here.

Ignorance is a bug. And with some exaggeration, “Given enough eyeballs all bugs are shallow.” [/hijack and tangent]