Many Inflationist point out that there is very littel inflation in the US even though they admit that QE2 and the governments purchase of debt securities is essentially printing money (definitionof inflaiton). They, however, make the point that all QE2 and other printing has done is increase bank reserves. They argue since the reserves are not being lent out, the actual money in circulation or money supply has not increased. I do not have an effective rebuttal to this argument as I know there is inflation but cannot explain the effect of bank reserves that are sitting idle. I believe the Austrian business cycle points to imbalance when money printing and artificial Interest rate manipulation is used to inflate assets like stocks or homes. How does QE fit into the cycle when the reserves are not circulated in the economy? What are the banks doing with the reserves?
It comes down to your definition of inflation. If you define it as an increase in the money supply as Austrians do, then the act itself is inflation. If you define it as most do these days as a general rise in prices, then as long as prices remain stable by any of the various measures out there you can claim low inflation and be ‘technically’ correct.
The reason the second approach is BS is because all that new money gettting funneled into the system will affect people’s behavior in some way sooner or later. Depending on how they use that money, especially the people who receive it soonest, prices may go up or down depending the dominant factors of that particular time and place. And when the inevitable results of the increase in money manifest, which is usually higher prices in general but not always, and malinvestments, they can be plausibly blamed on other causes. Especially in the eyes of the largely ignorant public.
Which is kind of the poin from a central capital planner’s point of view.
good points. i’m wondering what the banks are doing with the reserves. are they using the reserves for treasury bond purchases getting short term yield and essentially reinvesting the created money from the fed? this would make sense and explain bond price stability and yields being held low. clearly some of these banks are making loads of profit, yet lending is still diminished. clearly qe2 is driving price inflation but its hard to determine a direct correlation…this is the part i dont get.
Since money is loaned into existence, doesn’t a downturn literally destroy money through for example loans defaulting? Wouldn’t that mean that the money supply took a huge hit during the recession and the governments money printing serves to bring the money supply back up?
very good question but if you look at the money supply chart under mises markets, we see that the money stock increased dramatically even during the recession. so either they printed so much money that the defaults were fully counteracted plus some or the defaults are not marked as a decrease in money supply? it makes sense that the reserves are there to help the balance sheets of banks but since the banks are not lending by and large I wonder what the reserve capacity (printing) does to price inflation?
