first tuesday insight:
Of the 297 readers who participated in our recent poll, 74% (220 voters) believed the Federal Reserve’s (the Fed’s) aggressive expansionary measures will lead to hyperinflation.
Those who warn against future hyperinflation cite the simple mathematics that adding more money to the market (via QE3) will devalue the dollar, causing inflation to increase exponentially.
However, one must consider how much and at what rate the Fed’s newly printed cash enters into circulation. Cash sitting on the Fed’s shelves will not lead to inflation any more thana cloudy sky will water your crops; first, it has to rain. Due to the lesser-known fact that the Fed has paid interest on bank reserves since 2008, providing a mechanism for total control over circulation, the Fed is able to easily rein-in any threats of hyperinflation by simply paying more interest on bank reserves than lenders are fetching on the open market. A daring strategy – but one that provides greater freedom for the Fed to stimulate demand in the labor market (jobs!) all while keeping prices stable for years (decades) to come. Jobs plus price stability means real estate sustainability.
To read more about hyperinflation or put in your two cents, see the September 2012 first tuesday article, Hyperinflation – yesterday’s news
Graphic created with Infogr.am