I looked at a recent graph of the monetary base. That thing looks like a hockey stick. In decades past the monetary base was often referred to as “high powered money”, because it only took a little change in it to produce tremendous changes in the money supply. That isn’t the case today. With all the outrageous growth in the monetary base, the money supply has remained relatively tame.
Some say it is because the banks are not lending the money that has been created by the FED, and injected into the monetary base. Others say the banks are lending, but not to private businesses; they are lending to the government by using the newly created money to buy government bonds. Why does lending to the government this way not produce the same effect on the money supply as lending to private businesses? And since the whole process has not caused a large increase in the money supply, why should we expect it to cause inflation? Or maybe the growth in the monetary base is equal in size to what used to be growth in M2, or some other money supply aggregate? I have heard some explanations that claim the difference is that the velocity of money is very slow now, but I don’t buy that for a minute. I think Hazlit is right, and velocity is neutral to prices. I hope to find an answer that will help me make sense of what is happening.
The monetary supply has increased, there is no way around that. However, mainstream economists totally ignore monetary inflation and instead focus on price inflation. In that sense, until recently there had not been much price inflation, but Austrians don’t really care about that as much as they care about price inflation. Only focusing on price inflation ignores the very real damage created by monetary inflation (a distorted structure of production that is suited to the first-receivers rather than being decided by demand).
So while while graphs of the velocity of money and other such price inflation indicators do not show much change, the monetary inflation is a real and undeniable issue.
Think about it like a big game of musical chairs, where the last one holding the dollar when the music stops is the loser. Everyone knows all those bonds will mature at some point in the future, and must still be paid with real currency - where will that currency come from? In the meantime, the value of bonds will diminish because of the loss of confidence and the over-supply of bonds issued. Furthermore, simply giving banks money to buy bonds does not erase the bad debts from the banks’ balance sheets the bad debt is still there, and must be digested by the system at some point. The problem is structural, and can’t be fixed with a pain-killer like QE. The question is will it be sooner or later? Once the bond sell-off starts, bond values should decrease rapidly, perhaps even in a matter of hours or days, because none of the sellers will want to be the last one holding the dollar.
Is it a graph of M3? Do you have a link?