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     Apr 23, '14

Inflation's broken link
By Martin Hutchinson

Where's the link to inflation broken?

Monetary economists around 2009-10 were sure of one thing: the Federal Reserve's unprecedented creation of "narrow money" in the form of bank reserves would show up fairly quickly in a burst of inflation. Clearly, they were wrong.

The Fed has created US$2.7 trillion of bank reserves, increasing

the monetary base by $3 trillion, or 319%, since September 2008. Yet inflation remains very subdued, indeed, at 1.5% in the past year, according to the US Consumer Price Index statistics. So why aren't we suffering from incipient hyperinflation?

The leading monetary economist Allan Meltzer of Carnegie Mellon University last August identified the route by which the monetary base should increase inflation. Banks have $2.7 trillion in excess reserves, so they should lend them out to companies, which in turn would redeposit them with the banks, creating more broad money and leading to economic expansion. With the amounts involved, we would pretty soon have inflation advancing at a brisk trot, and not just in asset prices.

Since this isn't happening, there are two possibilities to explain it. Either monetary theory must be wrong or, even though monetary theory is generally correct, the recent extreme monetary policy, far outside the normal range, must be producing pathological behavior in the banking system. More ...

Martin Hutchinson is the author of Great Conservatives (Academica Press, 2005) - details can be found on the website www.greatconservatives.com - and co-author with Professor Kevin Dowd of Alchemists of Loss (Wiley, 2010). Both are now available on Amazon.com, Great Conservatives only in a Kindle edition, Alchemists of Loss in both Kindle and print editions.

(Republished with permission from PrudentBear.com. Copyright 2005-14 David W Tice & Associates.).




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