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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