The Phaserl


How Inflation Could Be Caused in 15 Minutes

by Jim Rickards, Daily Reckoning:

OOne of the conundrums of monetary policy over the past eight years is the Federal Reserve’s failure to cause inflation. This sounds strange to most. People associate inflation with misguided monetary policy by central banks, especially the Fed.

So-called “money printing” is seen as a certain path to inflation. The Fed has printed almost $4 trillion since 2008. Yet inflation (at least as measured by official statistics) is barely noticeable. With so much money around, where’s the inflation?

This conundrum has several answers. The first is that the Fed has been printing money, but few are lending it or spending it. The banks don’t want to make loans, and consumers don’t want to borrow.

In fact, the private sector on the whole has been deleveraging — selling off assets and paying off debt — even as public debt expands. The speed at which consumers spend money (technically called velocity) has been sinking like a stone.

This divergence between money creation and money use can be seen clearly in the two charts below.

Chart 1 shows the increase in Federal Reserve base money since 1996. From 1996-2008, it increased at a steady pace, exactly as Milton Friedman and other monetarists had recommended since the 1970s.

Beginning in 2008, the money supply “went vertical” with three successive quantitative easing (QE) programs of money printing. These are highlighted on Chart 1 as QE1, QE2 and QE3.

Chart 2 shows declining velocity over the same period. In effect, the money printing from 2008-2015 was cancelled out by the declining velocity over the same period. The result was practically no inflation.

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4 comments to How Inflation Could Be Caused in 15 Minutes

  • Ed_B

    There is no conundrum for those who pay attention. ALL of the inflation that the Fed has created via their policies is in the US stock market. How else would we have had the stock market at an all time high while at the same time the US economy was lagging badly? While the US stock market has pulled back from its 18,200 high on the Dow 30 Industrial Average, there was absolutely no economic justification for that high a level given the shrinking US economy. There still isn’t, even now that the market is nearly 2,000 points lower. We still have a way to go before this market is fairly priced. My guess is that this will occur somewhere around 9,000 on the Dow 30. Whether we get to that or not is completely up to the manipulation masters at the Fed.

    • Eric

      It’s going to be interesting to see how they keep this together and keep investors calm. tee hee.

      Dow 9000. It could be Dow 5000. But a 1 to 1 Dow to Gold ratio is no doubt coming in my mind.

      Actually I bet you are pretty close Ed. If I had to bet “a dollar,” I would bet on Dow 10,000; Gold 10,000; and Silver 1,000 within 5 years.

      • Christine

        5 years is a long time. I’m hoping for something to blow so that we can pick up the pieces, bury our deads and start anew. That “slow burn”, as Catherine Austin Fitts calls it, is more nerve wrecking than one big explosion. Interestingly enough, everyone I meet seems to feel the same way… There is definitely an increasing, general unease despite TV’s hunky-dory, let’s play picture. Even among the TV addicts.

        Something in the water… or a new recipe in the chemtrails?

        • Eric

          Do you really want the stores to close for weeks or months Christine? Do you really want to see absolute panic in the streets and desperation everywhere?

          I would rather see the slow burn. It gives people more time to wake up and to prepare.

          I have a buddy who keeps saying he is “waiting for the flash of light.” But that’s not really a plan.

          It will accelerate no doubt, but what’s nerve wrecking about it? I think it would be nerve wrecking if all of a sudden everyone was in full blown panic mode trampling over each other like Black Friday everywhere all at the same time.

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