{"id":36806,"date":"2010-11-09T01:01:01","date_gmt":"2011-05-19T00:20:33","guid":{"rendered":""},"modified":"2011-05-19T00:20:33","modified_gmt":"2011-05-19T00:20:33","slug":"inflation_deflation_and_qe2","status":"publish","type":"post","link":"https:\/\/www.rushlimbaugh.com\/daily\/2010\/11\/09\/inflation_deflation_and_qe2\/","title":{"rendered":"Inflation, Deflation, and QE2"},"content":{"rendered":"
\n

RUSH: Sherry in Winston-Salem, North Carolina, it\u2019s great to have you on the EIB Network. Thank you for waiting, and hello.<\/p>\n

CALLER: Hi, Rush. Great show as usual.<\/p>\n

RUSH: Thank you.<\/p>\n

CALLER: I\u2019m learning something. I wanted to do my small part to try to clarify things about the Federal Reserve buying bonds and how that might lead to inflation.<\/p>\n

RUSH: Please do.<\/p>\n

CALLER: Oh, good. Well, firstly, when the Fed purchases bonds, the only way that leads to an increase in the money supply is if the Fed creates deposits to pay for those bonds. So I think people mistakenly hear the Fed goes on a big purchasing program, that means the money supply is gonna go up by that amount. I think that it probably —<\/p>\n

RUSH: Wait a minute. Isn\u2019t that the objective? Isn\u2019t that what the Fed wants? Doesn\u2019t the Fed want inflation?<\/p>\n

CALLER: Well, I believe that Bernanke is fine with inflation. I think that what he is deathly afraid of, being a student of the Great Depression, is deflation. I think he feels powerless to calm that deflation. So he\u2019s merrily going on his way holding the bag to the Treasury and allowing the money supply to skyrocket, and that will, in fact, I believe cause inflation. But Bernanke is excessively confident that he\u2019s going to be able to combat inflation. It\u2019s deflation that he\u2019s catatonically afraid of.<\/p>\n

RUSH: I\u2019m gonna get back to inflation in a second. Whether they\u2019re inflating the money supply or not, whether or not they\u2019re actually making deposits or not as you said, the fact is commodity prices are already rising. Look at oil. Look at gold. They\u2019re already going up just on the plan to do it. They haven\u2019t even made the first purchase yet of these bonds — the stocks, the securities — it\u2019s gonna happen over eight months. It hasn\u2019t even happened yet, and it\u2019s already the prices are going up because the people doing this, the investors know the dollar\u2019s gonna be weakened.<\/p>\n

CALLER: That\u2019s correct. That\u2019s right. That\u2019s right. And the real economy — you know, mom-and-pop businesses — are working as hard as they can to keep being productivity to keep the real interest rate up there. So our dollars are strong for a reason, that they\u2019re not being inflated down in value.<\/p>\n

RUSH: Now, what is deflation? I always struggle to explain this to people. I\u2019m sure when you say that what Bernanke is really worried is deflation, some people who have not heard that before say, ‘What?\u2019 Please explain that, would you?<\/p>\n

CALLER: Well, just imagine the economy shriveling up, that everybody wants to put their money under their mattress. Nobody wants to spend anything today because they think prices are gonna go down tomorrow, which is what deflation means, and why buy it today for $10 if I can wait \u2019til tomorrow to buy it for nine? And in the meantime, production falls, employment falls, and it\u2019s a vicious downward cycle that the federal government, that the policy makers do not have a tool to combat.<\/p>\n

RUSH: Exactly right.<\/p>\n

CALLER: All they can do is increase demand.<\/p>\n

RUSH: That\u2019s exactly right, because what happens is when producers can no longer charge what it costs to manufacture or provide a service, then they\u2019re outta business.<\/p>\n

CALLER: That\u2019s right.<\/p>\n

RUSH: You\u2019re not even talking profit. If they can\u2019t even make the nut back —<\/p>\n

CALLER: That\u2019s correct.<\/p>\n

RUSH: — and that\u2019s what deflation does, among many other things.<\/p>\n

CALLER: That\u2019s right. The federal government, with fiscal policy and monetary policy, are absolutely powerless to combat it. They wouldn\u2019t have a tool kit to play with, and they would have to just trust the private economy to get us out of the mess, and they don\u2019t trust the private economy to get us out of this mess.<\/p>\n

RUSH: And why not? Why do they trust the private economy?<\/p>\n

CALLER: Because they\u2019re policy makers. They want to create a demand for their own services because they think they know better than all of us.<\/p>\n

RUSH: Yeah.<\/p>\n

CALLER: I think Bernanke blinked in \u201908. I think he blinked at the beginning of the financial crisis, and Geithner and the Treasury are the ones that are really calling the shots. I think the Federal Reserve has kind of lost its way, and they\u2019re trying to get it back to a point where they\u2019re autonomous, but they\u2019re absolutely not there yet.<\/p>\n

RUSH: Right.<\/p>\n

CALLER: So we basically lost whatever benefit the Federal Reserve could do for the economy, which is basically be predictable and insert liquidity into the economy. That\u2019s all the Fed can do anyway.<\/p>\n

RUSH: And it hasn\u2019t been working. This is not the first attempt at it.<\/p>\n

CALLER: No, but they\u2019re shooting themselves in the foot. Do you know that they\u2019re complaining about commercial banks not lending but they\u2019re paying banks to not lend? They\u2019re literally paying banks interest to hold onto their deposits and not lend them out. They\u2019re very disingenuous on the part of the Fed right now.<\/p>\n

RUSH: Now, that\u2019s true, but you\u2019re gonna have to explain this in lay terms. I\u2019m gonna take a break and I want you to formulate your answer here, but what happens when the banks borrow money and then turn around and keep it rather than re-circulate it and lend it, why is are they doing it. Because they\u2019re making more money by not lending it —<\/p>\n

CALLER: That\u2019s right.<\/p>\n

RUSH: — because it\u2019s not costing them anything to get the money. Money is free right now. It is a vicious cycle. Look, hang on. This is an economics professor, Sherry from Winston-Salem, North Carolina.<\/p>\n

BREAK TRANSCRIPT<\/line> <\/line>RUSH: All right, Sherry, we\u2019re back, and I\u2019ve got about four minutes here. I just wanted to give you some idea of the brevity we need to engage in here, but I have been hearing from economics friends of mine, economists, experts and so forth since the late eighties about deflation. I have been hearing about this paranoia of deflation, and yet to me this talk that there\u2019s no inflation going on is a crock. Go to the grocery store and tell me there isn\u2019t any inflation. I mean prices are going up. The idea that we\u2019re heading for deflation I think is partially a myth.<\/line><\/p>\n

CALLER: It is a type of paranoia. I believe that. But the scholars, and Bernanke considers himself one of those, on the Great Depression, a lot of them link that to the failure of the Federal Reserve to step in and provide liquidity. <\/p>\n

RUSH: Yeah, yeah. Well, that sounds like Obamaism. FDR didn\u2019t spend enough.<\/p>\n

CALLER: Well, no spending is one thing. That\u2019s, you know, the government whipping out its checkbook and paying for things with tax dollars. The money supply is something completely separate. Just think of it as liquidity, the grease that goes around in the engine. It\u2019s not, you know, moving money through time, like debt does.<\/p>\n

RUSH: Right.<\/p>\n

CALLER: It gets confusing. You were asking before the break about why banks are doing what they\u2019re doing right now. On the one hand they\u2019re being criticized for not lending to private industry like they used to, and that is how they earn their profits, you know, they charge interest income for loans, but loans are just deposits to the bank that are not used as cash on hand to cash checks and reserves that they\u2019re required to hold by the Fed. So you got deposits on the one side of the balance sheet, that\u2019s their liability, and then you got currency and reserves and loans on the other side. So whatever money the banks take in that they don\u2019t have to keep as currency and don\u2019t have to keep as reserves, they should theoretically lend out in order to make money. But why they\u2019re not lending right now is two reasons. One is because the Federal Reserve for the first time in my memory are paying the banks interest on their reserves. So a reserve is a dollar not lent. And secondly, they\u2019re afraid to lend because the policies coming out of Washington are so oppressive and risky to private industry that the banks can\u2019t be really sure of getting their money back until we know that private industry is gonna be allowed to be productive and allowed to make long-term plans.<\/p>\n

RUSH: Makes total sense.<\/p>\n

CALLER: So they can\u2019t be sure of getting interest from private industry, it\u2019s very risky, and they\u2019re absolutely sure of getting interest from the Federal Reserve right now today. So why not just hold onto that money and —<\/p>\n

RUSH: If the Fed is essentially paying them to keep money —<\/p>\n

CALLER: They are paying them.<\/p>\n

RUSH: That\u2019s what paying them interest is, then why should they take the risk of lending it to people who may not be able to pay it back because existing policy or future policy coming out of Washington may make it increasingly difficult to stay in business or to be productive? And all of this is — folks, if I may interrupt here — all of this is creating mass confusion and leading to an absence, a total lack of confidence. When you have a lack of confidence at the institutional level, from the Fed on down, the money people, when you have a lack of confidence in the economy, and you got a president overseas applauding the notion that America\u2019s economic dominance is over, you\u2019ve got not only a lack of confidence, you have confusion, which is gonna cause paralysis, which is essentially where we are. You throw in this fear of deflation, and that means everybody\u2019s sitting on what they\u2019ve got, pure and simple. It\u2019s not circulating, ergo let\u2019s flood the market with printed money. Vicious cycle. They\u2019ve been trying it, and it hasn\u2019t worked.<\/p>\n","protected":false},"excerpt":{"rendered":"

RUSH: Sherry in Winston-Salem, North Carolina, it\u2019s great to have you on the EIB Network. Thank you for waiting, and hello. CALLER: Hi, Rush. Great show as usual. RUSH: Thank you. CALLER: I\u2019m learning something. I wanted to do my small part to try to clarify things about the Federal Reserve buying bonds and how […]<\/p>\n","protected":false},"author":25,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_et_pb_use_builder":"","_et_pb_old_content":"","_et_gb_content_width":"","ngg_post_thumbnail":0},"categories":[],"tags":[],"yoast_head":"\nInflation, Deflation, and QE2 - The Rush Limbaugh Show<\/title>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/www.rushlimbaugh.com\/daily\/2010\/11\/09\/inflation_deflation_and_qe2\/\" \/>\n<meta name=\"twitter:card\" content=\"summary\" \/>\n<meta name=\"twitter:title\" content=\"Inflation, Deflation, and QE2 - The Rush Limbaugh Show\" \/>\n<meta name=\"twitter:description\" content=\"RUSH: Sherry in Winston-Salem, North Carolina, it\u2019s great to have you on the EIB Network. 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