Jeff Miller asks (and I paraphrase to avoid an awkward poop joke): The Fed created a lot of dollars that are sitting on the banks’ balance sheets. Sure, that money may not be circulating through the economy, but we can all see it. It looks like a giant, coiled spring. Doesn’t that impact inflation expectations? Aren’t inflation expectations enough to drive prices (Friedman, 1968 and Carlson, 1975)?

Well, Jeff, I’m glad you asked. That’s a difficult question (Mankiw, 2003). Let’s suppose, hypothetically, that you (or less hypothetically, Mankiw) compared four different surveys that measured inflation expectations and compared them to each other and to either the GDP deflator or to CPI. You would probably find that the surveys were fairly well correlated and also were decent predictors of price movements. Unfortunately, you would find that there were deviations in all of the correlations and that it was hard to determine which survey was going to be the best predictor at any given time. Nuts. You’d probably then propose a “sticky-information” model and defend it as the best explanation.

So what does this tell us? Largely, it tells us that a complete picture of what feeds inflation expectations and how actors react to their expectations eludes us. Certainly, if you see the coiled spring, you are tempted to buy hard assets to hedge yourself. It is a factor, of potentially many factors. But let me ask you:

1. Do you have the money to buy said assets?

2. What do you buy?

If you are one of the millions of unemployed, or the one in ten mortgage holders missing payments, or one of the millions of recently bankrupt, or one of the millions living paycheck to paycheck, you might not have the money to buy said assets. If that’s the case, your inflation expectations don’t move prices.

But let us assume that you do have a pile of cash. What do you buy? Milk? Beef? Rental properties? Gold? What if you don’t have the cash? Do you sell one asset to buy another? Do you borrow money to lever up (since you expect your debt to be easier to repay in the future, post inflation)? Do enough people in your situation arrive at the same conclusion? Is it enough that your group moves from being a price taker to a price setter? All of these can be individually measured, with varying levels of accuracy. There’s significantly more lag on the data for purchases of rental properties than for Gold. We can even track whether people are borrowing more or less. Of course, those are coincident indicators, not leading indicators.

Unfortunately, I’m not much help. I can say that it has not yet been a huge problem. Could it become a problem? Theoretically, there’s not an obvious yes or no. Certainly it is plausible, but you should try to find a trigger. If it were to happen, why hasn’t it already happened? Perhaps you don’t need to answer that question. Perhaps your response is that it already has happened. After all, why the heck did oil prices shoot back up that high when the inventory data was screaming surplus? Why did silver have a quick move higher? My counter-response is that most hard assets are now financial assets. Big players are moving money around quickly, looking for whatever returns they can get. There was a lot of correlation between historically non-correlated assets. Treasury yields stayed low during this time. That tells a different story than just “inflation hedge.” That story reads, “Time bomb.”