Aftershock: Protect Yourself and Profit In The Next Global Financial Meltdown, Second Edition

The Arguments against Future Inflation Don’t Hold Up

Although at this point, it may seem obvious to many readers that we will eventually have dangerously high inflation that will drive up interest rates, which will help burst the remaining bubbles, many more people do not believe that future inflation is a real threat. A few of their most important arguments and our rebuttals are presented in the sections that follow.

Why No Inflation Now? Understanding Lag Factors

Inflation doesn’t immediately occur after an increase in the money supply, even after very large increases in the money supply, because of what economists call “lag factors.” These lag factors normally delay inflation for 18 to 24 months. In fact, our own Ben Bernanke, along with several other authors (Laubach, Mishkin, and Posen), wrote a paper in 1999 that examined past periods of inflation and determined that about a two-year lag was the most common estimate among the research they examined.

The delay between the time of increasing the money supply and the onset of inflation can exceed two years in certain situations, such as in a bad economy. It can also be delayed if the Fed takes measures to reduce inflationary pressures, such as paying interest on excess bank reserves to keep banks from lending money, which it is currently doing. All those actions create more lag time. This is discussed in more detail later in this chapter.

Interestingly, the positive impacts of increasing the money supply occur much more quickly ...