Many analysts expect inflation to take off because governments around the world are monetarizing their huge debt loads/deficits in the aftermath oftheir gigantic bailouts of the financial sector andstimulus packages. So far, inflation is no where to be seen in the U.S. and elsewhere, despite huge jumps in the money supply.
Scott Phillips provides in his book Buying at the Point of Maximum Pessimism: Six Value Investing Trends from China to Oil to Agriculture (2010) some estimates on when inflation might appear. He begins by quoting monetary guru Milton Friedman, who wrote in Monetary Mischief(1994):
Over the past century or more in the United States, the United Kingdom, and some other Western countries, roughly six to none months have elapsed on the average before increased monetary growth has worked its way through the economy and produced increased economic growth and employment. Another twelve to eighteen months have elapsed before the increased growth has affected the price level appreciably and inflation has occurred or speeded up.
Going by Friedmans research, Phillips writesin his book: this would mean in general terms that unless demonstrative action is taken to reverse the monetary growth, inflation might be noticeable in late 2010 through 2011.
Phillips adds that Alan Greenspan wrote (in mid-2009) that inflation could emerge by 2012 if political pressures prevent central banks from reining in their inflated balance sheets in a timely manner and maybe even earlier if markets anticipate a prolonged period of elevated money supply.
Note that the above projections assume central banks do not move to withdraw liquidity from the financial system. Phillips appears to believe such an assumption may have some validity.
To draw cash out of the system, he says, the Federal Reserve has to sell the Treasuries it acquired during the stimulation phase. However, the selling of Treasuries by the Fed would interfere with the financing of the U.S. federal government deficit, which the U.S. Congressional Budget Office projects to remain above $500 billion annually at least until 2019. The government will be offering a large supply of Treasuries to cover its deficit, which makes sales by the Fed a rather tricky endeavour.
I could add further thoughts of my own on sterilization measures but that’s another post.