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Busch: The Great Inflation Experiment


With former chairman of the Federal Reserve Alan Greenspan saying that inflation is a great future concern, my thoughts turned towards global reflation. It appears that almost every nation's central bank is engaged in supplying emergency funds or funding to their respective financial systems to stabilize the economy. It appears that almost every nation is engaged in re-regulating their economic and financial systems. It appears that every nation has enacted a stimulus program of tax cuts and government deficit spending.

Everyone wants to arrest the risk/credit/economic crisis and everyone is risking inflation to do it.

In this vein, we have several interesting economic experiments simultaneously occurring. The United States is deficit spending on a level that never been seen or attempted in our lifetimes. $1.85 trillion deficit for 2009 and likely $1 trillion for 2010. This is before new legislation is enacted for health care which could add another $100 a year on to the pile. At the same time, the Federal Reserve has indicated it will keep interest rates at essentially zero while they manage a massive balance sheet expansion and buy US government securities and agency securities.

China is also engaged in unusual financial activities. They enacted a 4 trillion yuan ($585 billion) stimulus plan. Also, they have engaged in a massive loan deployment program via their banks. According to the China Securities Journal, Chinese banks have already extended over CNY1 trillion in new loans this month and are on track to dole out CNY1.2 trillion. "If confirmed, that would bring new lending for the year so far to a record CNY6.84 trillion and result in a staggering CNY7.04 trillion for the first half of this year, based on the CNY5.48 trillion lent out during the first five months."

As a final example, the European Central Bank on Wednesday announced the results from a one year refinancing operation that allocated a larger than expected 442 billion Euro. The offer was at a flat rate of 1.0%. This was the largest refunding ever done by the ECB and the first time the ECB did a 12 month operation.

During the Bernanke testimony yesterday on the BofA/Merrill deal , a curious question popped up about money supply growth. I'm not sure what was more surprising the fact that this question came up or that a House member asked it. Bernanke said that the massive supply of money into the system was mainly being held by banks as reserves. Since banks are not lending much, this growth in money supply wasn't a problem at this time. At this time.

We know the Chinese are lending aggressively. No one knows exactly when the US will see reserves switch from being held to being lent. We do know that the global monetary and fiscal conditions are so extremely easy that Alan Greenspan may actually be correct.

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Andrew Busch
Andrew Busch

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Andrew B. Busch is Global FX Strategist at BMO Capital Markets, a recognized expert on the world financial markets and how these markets are impacted by political events, and a frequent CNBC contributor. You can comment on his piece andreach him here and you can follow him on Twitter athttp://twitter.com/abusch .