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What’s Happening Next?

Posted By on February 8, 2009

Bloggers and other pundits are pretty sure we’re about to experience crippling deflation, or hyper-inflation, but they’re not sure which.

According to the Quantity Theory of Money, the actions of the Fed, and of the US Treasury, ought to create a huge amount of inflation.

As a visual aid, this chart represents the total borrowing of US banks from the Fed, through December 2007.

Total Borrowing Through Dec. 1, 2007

Total Borrowing Through Dec. 1, 2007

This chart represents total borrowing through December of 2008.

Total Borrowing Through Dec. 1, 2008

Total Borrowing Through Dec. 1, 2008

As you can see, they’re not on the same scale.  The Fed is has loaned exponentially more money into the economy than it ever has before.

Meanwhile, the Treasury prepares to finance a trillion dollar deficit, and the Fed threatens to monetize the debt.

According to Monetarists, this ought to lead to inflation.

On the other side, Nouriel Roubini, among others, continues to predict deflation.

What does it say about the state of economics when economists can’t agree on something so fundamental?


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