State of the Economy

Robert P. MurphyMises AcademyAugust 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 2011Source: Bureau of Labor Statistics

Finished Goods 7.0%

Intermediate Goods 11.0%

Crude Goods 26.2%

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 didn’t affect demand to hold USD, would

mean gas prices in ballpark of $30/gallon.

H. Fed’s Exit Strategy?

III. The Fiscal Mess

A. Digging In Fast

B. Accrual Versus Cash Acc’ting

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 (Cont’d)

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. Don’t Despair!