Staving off inflation

Because of all the money being printed and the stimulus bills i imagine we are due for some pretty healthy inflation. But i don’t want to see 10% inflation so i have decided to take it upon myself to stave off inflation and keep it to about 1% or so.

What would i have to do? Put my paychecks in a bank, or cash it and stuff it under my mattress?

How much money would i have to do this too?

I admire your optimism. But for the time being, we’re still just treading water in staving off the threat of deflation.

If you really think that the money supply will increase at a level that will cause 10% inflation, and you’d rather it be 1%, then you’ll need to take about 9/10 of the increase of the money supply out. Putting it in the bank won’t work - the bank will just use that money to create more money by lending it out. Burn it, or hide it under your mattress so you can leak out a few bucks at a time in case you miscalculated.

Well, this is based on the (erroneous) assumption that the Velocity of Circulation will remain constant.

The relationship between the money supply and the rate of change of prices (MV=PT) is only this direct if changes in the Money Supply (M) leave the Velocity of Circulation (V) and the level of economic activity (T) unchanged.

Since they don’t, then the 9/10 answer doesn’t work. And, morever, you only have control over stuff that fits in narrow definitions of money. If someone were to corner enough of the narrow definitions to impact the real level of the money supply, more broad money would be generated.

Putting the money in a bank won’t do anything except increase the money supply further due to the money multiplier. Basically, banks lend their deposits out, so your money goes right back into the economy. Even worse, you can get at and spend your money at any time, so it’s just like you still have the money. The net effect is that when you deposit $1 in the bank, and the bank lends out 90 cents of your dollar, the money supply has grown by 90 cents.

And that’s just the first-order effect. Whoever gets the loan will likely either spend it or deposit it in a bank. If they spend it, whoever they spend the money with will likely either spend it or put it in the bank. You can repeat that argument indefinitely, and in the end, it’s highly likely that 90 cents is going to be deposited in a bank somewhere, and that bank will go and lend 81 cents.

When you do the math, you discover that if the banks only keep 10% of the deposits in their vaults and lend out the rest, for every 1 dollar that is deposited in a bank, an extra $9 shows up in the money supply. So if you’re trying to single-handedly prevent inflation, putting the money in a bank is about the worst thing you could do.

I don’t think the OP is trying to do his part to prevent inflation for everyone; I think he’s just trying to insulate himself from its effects. Of course, putting it in a bank account is still a bad idea, unless he can find some magical bank somewhere that offers more than 10% interest. Much smarter to invest directly in something tangible (pretty much anything, really), since inflation decreases the value of money, not things.

The hypothetical offered by the OP is that if inflation should be 10%, how much money would he have to remove from the money supply to lower it to 1%, and where should he put the money to actually remove it from the money supply.

You don’t have sufficient leverage-as the replies have pointed out. But you can deal with the problem. Just get a job as the Chairman of the Federal Reserve. Then the leverage works for you! When the Fed starts withdrawing money from the banking system (or if-I don’t work there and can’t predict the future), the multiplier will work in reverse and the money supply will shrink. As has been pointed out, money will always seek it’s own path, and broad money will attempt to expand as will velocity. But the Fed does have more power than anyone else to steer the money supply. So that is the simple answer to your OP, just get the right job. :slight_smile:

Another possibility is to be elected president with a compliant congress, and balance the budget through spending cuts and not tax increases - this year. The anti-stimulus effect of this action would no doubt throw the country into a deeper recession or depression, but it sure as heck stave off inflation.

Of course, the question is whether the stimulus money is simply replacing assets (housing) whose value has seriously deflated, thus keeping the money supply up and staving off deflation. Banks issued mortgages based on exaggerated property values, thus increasing the money supply over the last decade. 2 years ago, the supply shrank as banks stpped lending, the value of their secured assets went down and reduced money avalable for loaning, etc. Stimulus just replaces some of this lost capacity to stave off deflation and recssion (to some extent).

If everything were just fine and the government added trillions to he money supply, then expect problems.

Your problem will be different. The government pays for these stimuli with bonds sold, many abroad. With too much of this flooding the markets, their value goes down. Foreign goods (i.e. oil and everything else) cost more, thus creating price inflation. Prices g up, but can your wages afford to follow?

To prevent this scenario, take your paycheques and buy a few trillion of government bonds.

That is how I read the OP as well.

Ok, here’s a mathematical attempt, just to get some analytics discussion kick-started.

-If natural inflation is 10%, the ending money supply will be 110% of the current. (Assuming money supply increases and productivity stays flat)

-If the goal is 101% of current, then 1.01/1.1 = 0.92 rounding.

-So the OP needs to round up 8% of the current money supply, put in the burn barrel, and hope it doesn’t adversely affect productivity in the meantime.:slight_smile:

Buy things on credit. Take out a lot of loans.

That’s how you would do your part.

Someone in the US government did a study that suggested Wal-Mart was responsible for reducing inflation by approximately 1% through their business practices. So the answer for the OP is to start by getting 10 times as big as Wal-Mart. $2 trillion, give or take.

More seriously, I don’t think we should expect inflation as being so inevitable. While there are plenty of inflationary influences (as cited by the OP), there are also deflationary influences. It’s like swimming against a strong current - the fact that you’re going all-out as fast as you can doesn’t always mean you’re moving forward. Also like the current analogy, I don’t think we should convince ourselves that inflation is fully under control either. The goal of most modern governments is to moderate inflation between certain targets; nobody pretends that they can fully control it.

I think he really does want to control inflation overall.

If you just want to protect an individual from inflation, TIPS (Treasury Inflation-Protected Securities) are US Treasuries where the interest is paid at a guaranteed rate and the face value of the item increases to compensate for inflation. So $1000 of 2% TIPS in a 10% inflation year would pay $20 in interest and become worth $1100. The next year of 10% inflation and you’d have $22 in interest and $1210 in value.

Interest rates are the most powerful way to control how much cash is in the flow. If you borrow money and pay interest, you are working with the Feds to control how much cash flows, which is the most direct and powerful way to control cash and inflation without causing some other problem (e.g., cash depletion from saving too much, slow growth, etc).