13 October 2011

This Does Not Bode Well

As can be easily seen from this chart (source), the money stock as measured by the Federal Reserve has grown by approximately 6.67% in the last five months!  Since real GDP is projected to grow by only 1% (and will likely be revised downwards ex post), this means prices are going to rise fairly dramatically in a short period of time.  And just in time for the holidays!
Anyway, there are a couple of ways this will play out, at least in the short-term.  Either consumers will face higher prices or manufacturers, suppliers, and/or retailers will face lower profit margins (or some combo of these possibilities).  I doubt that retail prices will rise much in the short term because most people can’t afford price hikes in lieu of relatively stagnant income over the past year.  Instead, I think businesses will eat the increased costs in the short term, most likely through the holidays and the post-holidays stock liquidations.
After the new year begins, though, I think prices will begin to rise.  And when that happens, it won’t be pretty.  Thanks, Bernanke!

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