First of all, let me explore a fundamental concept. Even before March/18, the Fed had already been expanding the money supply at break-neck speed. Austrians contend that that already is inflation. High prices haven’t arrived yet, but high prices is a symptom of inflation; not inflation itself. I understand, and agree totally with that. Here is where I’m not too clear.
Sure, the Fed has been buying bonds, trying to increase the money supply, but when this new money gets to the banks, these banks are sitting on it like an old setting hen. It isn’t being lent, spent, or sent anywhere. It might as well be stuffed under a mattress, buried or burned, right? In other words, for all intents and purposes, this new money doesn’t exist. Not in any real sense. So we haven’t actually had an increase in the money supply after all, and that’s why we haven’t had any inflation. Somebody shoot this theory down so I can gain some insight here.
Second dilemma: The trillion dollar expansion of the Fed balance sheet on March/18th. Some are saying this does not necessarily mean we are going to have inflation. They are using the familiar, famous last words: “this time is different.” Why is this time different? Well, the reason I have heard is that the Fed used a different vehicle this time, and because of the different nature of the vehicle used this time, the money injection can be quickly reeled back in, when prices begin to escalate.
Is anyone familiar with this argument? I don’t know of a better place to ask for the truth when, Keynesians are able to occasionally twist my head a little. I will be hoping for some thoughtful reaction.
I can’t help much on the second point, but on the first point I know that the Fed is paying a small amount of interest on bank holdings at the Fed. This is the first time it has ever done this, and this is why the banks have not injected this money into the general economy. As to whether or not this qualifies as inflation, perhaps we can view it as potential inflation, just as a rock at the edge of a cliff has potential energy.
I would also note that the interest that the Fed pays on these holdings will get into the economy.