A Little Inflation Would Do Us Good | Dr. Vernon L. Smith | Big Think

TL;DR

The Federal Reserve's actions to increase excess reserves could lead to inflation, and a small amount of inflation may be beneficial to rebalance home prices, but controlling inflation is challenging. The proposed auction strategy for disposing of toxic assets was not practical.

Transcript

well the FED has already I think and taken actions in the last roughly the last year to increase excess the excess reserves have risen by about a trillion dollars and that has huge inflationary uh potential depending on how the what kind of endgame strategy the the FED fall follows and getting us out of this uh huge potential uh expansion uh in cre... Read More

Key Insights

• 🖤 Excess reserves have the potential to cause inflation, but the lack of loan demand has prevented credit expansion.
• 👪 A small inflationary boost could help bring down inflated home prices and stimulate demand for housing.
• 🛩️ Controlling inflation to achieve a desired small amount is challenging and may require extensive experimental examination.

Questions & Answers

Q: How have excess reserves impacted inflation potential?

Excess reserves have increased by about a trillion dollars, which could lead to inflation. However, since there is currently no demand for loans, these reserves have not resulted in undesirable credit expansion.

Q: Why might a small amount of inflation be beneficial?

A small amount of inflation could help rebalance home prices, which have increased disproportionately during the boom. By inflating the rest of the economy, the relative price of homes can come back to historical levels, potentially stimulating demand for housing.

Q: What are the challenges in controlling inflation?

Controlling inflation to achieve only a small amount is difficult. Once inflationary forces are unleashed, it becomes challenging to rein them in. Designing an auction strategy for treasury disposal of toxic assets can also be complex and requires extensive examination.

Q: Why was the proposed auction strategy for toxic assets not practical?

The proposed auction strategy faced challenges because the toxic assets were heterogeneous. Unlike homogeneous treasury securities, valuing a mix of dissimilar assets in a multiple unit auction is challenging. The treasury lacked experience in running such auctions.

Summary & Key Takeaways

• Excess reserves have increased by about a trillion dollars, potentially causing inflation, but the lack of demand for loans has prevented credit expansion.

• A small amount of inflation could help bring down inflated home prices, but controlling and preventing excessive inflation is difficult.

• The proposed auction strategy for selling toxic assets faced challenges due to the heterogeneity of the assets and the lack of experience in running such auctions.