Why There’s Little Inflation, In One Easy Graphic
Ex-food and energy, inflation is at 0.9% for the past twelvemonth. Even if you include those in the longer measure, annual inflation has been 1.7%. (Recall that we paid an average of more than $3.00/gallon for most of the Spring of 2010, for instance.)
There is a simple reason “everyone” expected higher numbers: they were looking at money supply, not circulation.
As Jim Hamilton notes, money is only supply when its being circulated.
The “intermediaries” aren’t intermediates; they’re SPOFs. Hamilton’s graphic tells all:
All that “extra” money is being kept in mattresses. Financial-Institution-shaped mattresses, but mattresses nonetheless. The velocity of monetary reserves is 0. So the weighted-average velocity of money is much less than the standard formula would imply.
There is inflation out there. For instance, China, whose “stimulus” was an impossible 17% of its GDP (h/t Susan of Texas, of course), is seeing inflation.
The U.S. needs to deal with financial institution mattress stuffing before it can have such problems.
I heard on the news that inflation for Dec was 0.4% and Jan. another 0.4%. But, I’m not sure those are the “official” numbers.
This goes to show you, it’s not just the quantity of money, it’s the distribution. The FED’s quantitative easing, giving all that money to the banks, was useless, and still is, in stimulating the economy. It just fattened the reserves. Now, if that money ever finds its way out of the banks and into circulation…Hmm. It can’t find its way into the circular flow, through buying goods and services. And fixed asset values are all depressed. Commodities are not, but they have a limited, ah, volume. But we should expect a nice big speculative frenzy there, soon. That will get some of the reserves into circulation. Foreign currencies?
And fixed asset values, once they start to recover, should segue into another nice big bubble. How much of those reserves will then pour into general circulation, with inflationary results? And who posesses those money reserves now, and who, with the next twist of the ratchet, can expect to profit, at the expense of the rest of us?
So, as I understand it, the administrations “stimulus plan” amounted to a stool softener when what was needed was a strong laxative. Now, government policy has turned to feeding the patient peanut butter.
Fed asset purchases useless? Um, no. Not very useful? Maybe, but not useless. The Fed’s problem at a time like this is that it’s tools are all financial. The Fed does not have a mandate for fiscal stimulus. It’s regulatory reach is limited to financial firms, and is mostly limited to inhibiting financial behavior, not inducing it. Only through the provision of reserves can the Fed stimulate bank actiivity, so that’s what it does. Take a look at what happened to the stock market and the economy in general when QE 1 ended before claiming that asset purchases are useless. We may not be happy with the result, but there is a result, and one that induces some increase in economic activity – just not much.
Good find Ken.
ah, kharris
so you are saying there is some value to pushing up a rope?
can’t help myself sammy
i pointed this out as a question right here on Angry Bear several years ago.
No, I actually had something more in mind than a decades-old metaphor with no analytic value. I had mind thinking about the impact of monetary expansion under extraordinary circumstances. I thought about maybe considering some of the well-understood channels for monetary policy transmission and seeing if any of them are at work. (They are.) But if you want to stick with comfy old metaphors, go ahead.
kharris
i wasn’t feeling comfy, and as far as i know i am the only one who uses the word “pushing” in the expression at hand.
but the comment was meant to be friendly. not that that ever works with you.
Let’s not forget foreign held dollars. More than $4 trillion and growing, growing, growing…