Where’s the inflation?

Q. Considering we are TRILLIONS in debt, the government is printing money like there’s no tomorrow, and oil prices have risen significantly, why are we not experiencing 1970s style inflation? — Mike, from the internet.

A. Because the money has been created, but it’s not yet circulating.

The monetary base grown significantly in the past two years, as you realize:  “$870.9 billion to $1735.3 billion in just five months, with much more to come” — and that was more than a year ago.   However, we don’t seem to be suffering from obvious excess inflation…at least not yet. But is it coming?  I’d lean toward “yes.”

Here’s why:  As Dan McCarthy explained from an argument by Mish Shedlock on the @TAC blog a while ago:

[Deflationists may be right in the short term, but] the Fed is doing everything in its power to print its way out of deflation — which would actually be beneficial as a correction to the inflated real estate, stock, and other prices we’ve seen over the last 20-odd years — and into inflation. Shedlock argues that as long as the banks aren’t lending, we won’t see inflation, and Polleit notes that they have indeed massively increased their excess reserves (from $1.9 billion to $798.2 billion so far). Trouble is, eventually the banks will start loaning out that money again, which is when inflation explodes.

In other words, it’s like the Fed has created mass amounts of money and then hidden it in a hole.  While it’s in the hole (or rather, while it’s not being lent or spent), the money clearly isn’t circulating, so it really isn’t having any effect on the value of the rest of the money in the economy.  But once it’s in use, watch out.

Originally posted on my own blog here.

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