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Nobel Prize winning economist Milton Friedman famously said inflation is and everywhere a monetary phenomenon.
His point was simple access money printing generally result in inflation.
Which means higher prices for you at the store our next guest says this time it might be different that the lessons of the seventies might help us avoid inflation today.
Like dupers -- economist Russell investments and joins us now was Milton Friedman wrong might.
No it was -- wrong but.
You know one thing the Fed has been doing with this -- up balance sheet it has now.
Is -- it's been replacing the shadow banking system to some extent so that overall credit growth in the economy is not excessive.
There's really overall credit growth and economy if that were excessive that would lead to inflation.
The Fed balance here right now is relatively benign if you look at broad money growth like M -- growth is is very low and it's not in inflation signal at all.
So even if we have some money growth.
But no growth of credit -- risk of inflation is no or or very low.
That's right the the Fed balance -- right now is is puffed up -- do this special circumstances going right now with the the shrinkage of the shadow banking system.
And again if you look at broad money growth against -- growth it's down in this 3% range on a year over year basis.
And that is certainly not an inflation.
Symptom at all.
-- I am I guess I'm confused about this because when you look at history whenever we have money when you go back to the Weimar Republic of Germany and of course everybody talks about Zimbabwe now.
Generally we have this kind of an increase in money supplier or maybe you're arguing we don't.
We've tended to always have inflation but but again people say this time it's different is it really different.
Look -- look at those -- those.
Very high inflation episodes that's where money growth is high in it and it's increasing.
Right now we've had a sort of a big a level shift in the end.
Fed balance sheet.
But it is no there's no I'm going increase in the growth rate of money have a high powered money.
There right now the Fed balance -- stands at about 2.3 trillion dollars and that's that's and that's not growing at a tremendously fast rate and we don't expected to impact.
The Fed is practically screaming at us right now.
That it has four tools ready to shrink the balance sheet when he wants to.
So the Fed is really setting trying to send out signals that it's ready to shrink the balance sheet at any time and one of those signals is that.
The treasury has resuscitated its supplementary financing program.
That means that the treasury is -- to -- 200 billion dollars above and beyond its financing needs and it's going to deposit those funds with -- with the Federal Reserve.
And the Federal Reserve will not buy anything when he receives those deposits so that -- it's a step that would shrink.
The Fed -- -- by 200 billion dollars very very quickly if it wants to.
And that's the signal that if you think about what total excess reserves than that banking system right now.
There -- a little over a trillion dollars.
So -- that step alone could remove almost 20% of the excess reserves and -- but that it might -- be ultra right and shrink the Fed's balance sheet.
Maybe that's good for the Federal Reserve and for inflation but won't that also stymie a recovery.
The Fed has increased its balance sheet in particular because it says we need to do this so we can have an economic recovery.
Yes that's just have to they're ready to take if they think that they need -- to control inflation.
It doesn't mean -- they're trying to do to stop the recovery.
All of these steps are things of the Federal Reserve saying we're ready to do this when the time comes.
We have the tools that we need to reduce the balance sheet when the time comes so that's it's a signal they're trying to send.
They're not saying that there's in immediate need to do this in fact.
-- Russell investments are forecast for some time.
Going back to last fall as a member of the blue -- panel our forecast has been of the Federal Reserve probably won't raise the federal funds rate at all in 2010.
Mike given the tools -- rather than you idea none is finished understatement because it's a big issue.
Whole idea we're trying to say that.
The Fed is trying to -- -- -- that is that is ready to take these steps -- doesn't mean that there imminent in -- isn't too much emphasis I think right now in the marketplace on this question of wind will Federal Reserve sell securities are right these mortgage backed securities -- it has acquired from Fannie and Freddie in the past here I think -- too much emphasis on that question.
Given that V.
Fed is also preparing to do reverse repose so just this morning that New York fed reiterated.
That it is ready to do reverse repose directly who have money market funds right now.
And they could do reverse repose -- these mortgage backed securities being.
Get them off -- balance sheet without selling them out right in the marketplace.
When a reverse repo I think about a guy a big burly guy -- tow truck returning the card of the house.
But I know us know what you talking about like.
Like you are gathered ourselves but thank you very much -- appreciated sir thanks very all right.
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