State of the Economy Robert P. Murphy Mises Academy August 12, 2011 Robert P. Murphy Mises Academy August 12, 2011 I. Monetary Policy A. The Bubbly Stock Market B. The Stock Market & the Fed C. Interest Rate Signals?! D. Fed & Housing Bubble E. Unprecedented II. Puzzling Price Inflation? A. Has Money Supply Exploded? B. Reserves Sitting At Fed C. Official Consumer Price Inflation D. But Producer Prices 12-month Price Change, June 2011 Source: Bureau of Labor Statistics Finished Goods7.0% Intermediate Goods11.0% Crude Goods26.2% E. Dollar Resumes Free Fall F. Dangers of Aggregation VS. G. Time Bomb? If lent out all excess reserves, commercial banks could create ~$16 trillion in money held by the public, about a 9-fold increase. Even if this didnt affect demand to hold USD, would mean gas prices in ballpark of $30/gallon. H. Feds Exit Strategy? III. The Fiscal Mess A. Digging In Fast B. Accrual Versus Cash Accting Present-value of long-run shortfall in total government obligations (Social Security, Medicare, etc.) versus projected receipts runs anywhere from $60 - $100 trillion. C. CBO Baseline Projections D1. What About Tea party Deal?! D2. Tea Party Deal (Contd) IV. The Future A. Batten Down the Hatches Expect sluggish real growth (high unemployment), with sharply rising consumer prices eventually. Stock market may crash again, but in long run (after Eurozone implodes) U.S. bonds leave holder vulnerable to price inflation. B. Dont Despair!