Why isn’t inflation higher?

Excess reserves held at the Fed are down from their peak of about $2.8 trillion, but still close to $2 trillion, massively higher than their long-run historical average.

Inflationary pressures are modestly higher than they had been, but still in the range of roughly two percent.

The liquidity trap is gone, with 10-year rates around 3 percent and short rates at around two percent.  In fact, from these rates there is significant pressure on emerging market currencies.

Since the liquidity trap is gone, and inflation remains well under control, the liquidity trap does not seem to be the reason why inflation did not explode post-2008, following the Fed’s stabilization measures.

No one is admitting this simple reality, which is staring us in the face.


The demand to hold money is low.

What I meant is that the demand to hold money is high.

Yes, and money demand is high because the Fed pays interest on excess reserves, thus driving the opportunity cost of holding excess reserves to zero or nearly zero. I think Scott Sumner has made this point many times.

Maybe, that is Tyler's point. He says "no one" is admitting that liquidity trap explanations don't seem to be the reason why inflation didn't explode post-2008, but I think he means that liquidity trap theory proponents aren't admitting that. Others, like market monetarists, don't need to "admit" that because they were already advancing alternative explanations.

That's part of it. Another part is that people have fresh memories of the dangers of swimming naked when the tide goes out.

If the Fed stopped subsidizing banks via IOER, we would see some inflation and credit expansion.

Perhaps stagnant wages for average people reduce demand for goods and services. Then there is income inequality, returns to capital but not to labor, and a shrinking (shrunk? non-existent?) middle class.

We do have inflation in higher education and medical care. What does that mean?

If the middle class is (almost) nonexistent, why can I drive for hours in the Chicago suburbs and see nothing but middle-class housing? Who lives in it? How did they pay for it? What are you talking about?

Daniel Kahneman calls this common bias "what you see is all there is".

Maybe you haven't heard about the declining middle class.

You should drive further.

The middle class is disappearing into higher income groups...


"What you see is all there is?" Maybe you have the same problem.

Wages for "average people" have not been stagnant recently.

Paging Scott Sumner...seriously, I would love to see him respond. To the Sumner-signal!

My guess is probably the continuing globalization/China shock keeping inflation low globally.

Inflation is always and everywhere a monetary phenomenon......

There were 2 barbers in my town. One of them cut hair for $10 and got most of the business, the other cut hair for $100 and got very little business.

When the former died, the latter became the only barber in town, and the median cost of a haircut rose from $10 to $100.

What information has been gleaned about the monetary policy of my municipality?

The information that's been gleaned is that the twit who signs himself 'Right Wing House Music' doesn't know the difference between inflation and price dynamics in particular industries.

Pro-tip: cost-push inflation is a real thing.

RWHM - sorry to be rude but you obviously don't understand what inflation is - it is a general rise in prices across the board, not an increase in the price of one commodity. Remember that in the gold standard, for centuries in the UK there was no inflation when averaged across the years, despite increases in prices of various commodities during that time.

The notion that the UK did not experience inflation in the past is poppycock (to be polite). There was very high inflation in the late 1200s, in the aftermath of the Black Death and during the later Tudor era. to name three such periods-- and yes, money was all metal back then.

One thing I think Scott would say is that 'liquidity trap' theory is plain wrong, and that monetary policy CAN be effective even at the ZLB. A fair amount of evidence for this can be gleaned from our recent lived experience.

Hint: money demand.

The other explanation is that the Fed's assets expanded in pace with the Fed's liabilities (i.e., Fed-issued money). We can observe this on the Fed's balance sheet. But there's no place where we can observe money demand.

By the way RIP John McCain. He was a good man.

"His life was gentle, and the elements mixed so well in him that Nature might stand up and say to all the world, “This was a man.”"

I sure hope Trump will crash McCain’s funeral and bumble through a few words, they both deserve each other.

John McCain WAS a good man before the 2016 election. I don’t think his wavering support or lack thereof of the President in the last few years was particularly admirable.

Seems extremely admirable to me.

No, I think it was after his own run he became pretty peevish. He spent more time sticking his finger in people's eyes than doing anything constructive. Give him props for everything he did before that though - and overall - one of the good guys.

Indeed, the constitution says the Senate is there to support the President.

So glad that piece of sh!t is dead.

I am hearing that on his deathbed Mr. McCain received the light of Islam and unhesitatingly recited the Shahāda. Even now he looks down on the Ummah from the gardens of Jannah.

Truly there is no god but God, and Mohammed is his prophet!

And consider making a donation to the American Sharia Fund in Mr. McCain's memory! Alhamdulillah.

No, he was a mixed bit of business with good points and bad points.

Every person has good points and bad points. But in the final accounting, McCain was a good man. You, unsurprisingly, continue to be a cranky douchebag.

Not you, though. You are all sunshine and rainbows!!

As for McCain, he was indeed a good man, and absolutely beloved by Democrats nationwide. Except for that strange period of several months in 2008, when he somehow became a deeply racist Hitler fan who was going to strip women of all their rights. Thankfully that phase of his life ended the first week of November!

Don't worry, we'll get past the McCain-a-thon in a few days but first we must face the sanctimonious deification of McCain.

It’s easy to feel great respect and admiration for John McCain as long as you believe that Vietnamese, Iraqis, Yemenis, Syrians and the like aren't human.

Well since you opened it up: Thanks John for Sarah Palin, Iraq, campaigning with Ukrainian Neo Nazis, and always reliable advocate broader endstateless wars in the Middle East: funding moderate head choppers, "bomb, bomb, bomb, bomb Iran."

How many countries has McCain NOT wanted to invade?

He does not deserve to be memoralized as such and as a public figure should be open to criticism for all the lives he affected negatively whether foreign or domestic.


...and I'm still waiting for Kissinger.

Perhaps slightly off topic, this makes me wonder two things:

1) How much can the fed buy and hold without seeing inflationary pressure. $3T? $5T? $10T!? (Not that we'll see QE4 anytime soon ... right?)

2) How much can the fed raise interest rates until debt held by "emerging markets" (read: central-south America/Africa/Middle-East/etc.) starts defaulting on dollar-denominated debt en masse?

3) Is the threat of a liquidity trap really gone?

... and by wondering two things, what I meant, of course, is three things ... ;-)

SEE the inflation's been hiding there!

1) $5.2 trillion
2) To about 5%
3) It never existed in the first place except for in our minds, the fed has the power to control the money supply, it was just afraid in 2008.

How did you come up with these figures?

Regards 3), you've certainly been correct to date.

Maybe, just maybe it has something to do with them changing the formula for calculating inflation back in 1991....
Would love to see what it is using the old formula.. heck it might be eye opening.. or better yet let's compare grocery shopping carts 1980 vs. 2018..

Let me guess, you think ShadowStats is something other than complete fiction.

'No one is admitting this simple reality, which is staring us in the face.'

What, that deflation can be put off for a while, but in the longer term, it is as inevitable as inflation?

Inflation has moved to assets like real estate. Medical and education costs too. Anything that can be bought via a loan is up in price

The price of energy and water is going up, as are state and local taxes and fees, mostly to cover exorbitant defined government pension plans.

Bend over ...


Except that's already built into the inflation indexes.

Because the Fed is paying interest on reserves, as it unwisely started doing on the middle of the crisis to try to limit the size of the balance sheet, and banks don't see a lot of investment opportunities whose risk-adjusted return is above that hurdle rate. The current interest rate posture is much less expansionary than the headline rate would suggest given the interest on reserves.

Growth of online shopping (Example: Amazon) causing the pricing of goods to remain competitively low and stable regardless of the buyer's location.

I will speculate that Cowen, the contrarian, is alluding to the theory (or is it the experience?) that higher interest rates will promote inflation, an idea offered by John Cochrane that resulted in much ridicule. The contrarians may be right (even if for the wrong reasons). I've expressed many times that reliance on rising asset prices for prosperity is a gamble that will not turn out well. Remember how we got here: Congress blocked further stimulus (Keynesian fiscal policy), leaving the Fed to deal with the deep slump on its own, which meant monetary stimulus in the form of zero interest rates and QE. And it worked! But at what price? I've referred many times to Larry Summers's Okun lecture, delivered in 2008 as the crisis was unfolding. In the lecture, Summers referred to the "inflation" that was lurking in the background that the Fed ignored. What he meant by "inflation" was rising asset prices, bubbles. Rising asset prices are the opioid of the financial sector investors: once hooked on rising asset prices, alternatives, such as productive capital, have little or no appeal. Indeed, most of the tax cut has been applied to further increase "inflation", as corporations have used the windfall not to invest in productive capital but to stimulate rising stock prices. So I say give Cochrane his due, and raise interest rates. Sure, it will deflate asset prices, but in doing so will stimulate investors to shift resources to something besides the "inflation" lurking in the background.

Oh, there are a lot of realities out there.

How about the Bank of Japan buying back 45% of that nation's huge outstanding debt---and they are still fighting deflation. They pay negative interest on some reserves and hold 10-year JGBs at 0% interest. Have sub-3% record-low unemployment. Mostly likely, it is time to go to helicopter drops. Why tweetybird around anymore?

Back in the US, the CPI core sans housing is around 1%.

While people are screaming about labor markets, housing markets are worth some deep thought. As in un-zoning. You know, free markets.

Also, read up on Singapore. There are two Singapores: The one where the government runs the economy in minute detail (as described by local Singapore scholars writing for the Singapore Economic Review ) and then the free-market nirvana described by Western scholars.

How does zoning act to prevent me from selling your house at a lower price than you the owner would demand if you were selling willingly, or in a forced sale by eminent domain?

That you think the 50% single family homes in LA, SF, NYC, DC, that you and your friends don't live in, should be multifamily 50 unit apartments is not free market. It central planning.

What about when I want to tear down my single family home in DC to put up an apartment complex (and fund an early retirement for myself by making myself a multimillionaire in the process)? There are an awful lot of restrictions on property development that have nothing to do with real externalities. And by real externalities I mean things like toxic pollution, which should be heavily regulated.

It's not thinking that they should be multifamily units. It's thinking that the owner of the property should be able to make them multifamily units of he or she wants to. The idea that without zoning restrictions zero of those owners would choose that path, that is what is crazy.

The obvious "helicopter" would be the Bank of Japan just issuing currency directly to the government. You can just keep increasing the flow until either the level of desired inflation is reached, or the government refuses to spend any more money.

From today's NY Times, addressing this question:

Are Superstar Firms and Amazon Effects Reshaping the Economy?
The biggest companies may be influencing things like inflation and wage growth, possibly at the expense of central bankers’ power to do so.


"Mainstream economists are discussing questions like whether “monopsony” — the outsize power of a few consolidated employers — is part of the problem of low wage growth. They are looking at whether the “superstar firms” that dominate many leading industries are responsible for sluggish investment spending. And they’re exploring whether there is an “Amazon Effect” in which fast-changing pricing algorithms by the online retailer and its rivals mean bigger swings in inflation."

You may call them "Excess Reserves" because they are accounted as "Reserves". But economics --and therefore inflation-- is not about accounting. Most or all of the so-called "Excess Reserves" refer to funds borrowed by a central bank to be used to purchase bonds or other assets. You should read the details of each account on the balance sheets of the central bank, all banks, and other financial intermediaries before making claims about what may be regarded as "money". Yes, if you want to be a good monetary or financial economist, you must study Accounting in addition to Economics.

Anyway, there is no "monetary" aggregate that meets simultaneously the two conditions of monetarism as defined by MF: an aggregate whose demand is stable in relation to nominal income (as defined in National Accounting) and whose supply is well controlled by the central bank. The exceptional situation of high inflation (variable inflation well over 20% per year as in Argentina pre-1982) or the rare phenomenon of hyperinflation (variable inflation over 50% per month, a la Cagan, as in Argentina during some months after 1982) are examples that sometimes it doesn't matter the definition of money (and therefore which "monetary" aggregate is used) because governments are partially financing their expenditures with the inflation tax. When measured inflation is low (say, less than 10%), it is highly unlikely that one can define a clear relation between any "monetary" aggregate and inflation, much less one aggregate that meets MF's two conditions.

Did the Fed create or actually borrow the funds used to swap for bank debt paper?

Borrow. The best way to understand US money and banking is to assume that currency is supplied by the Treasury and the Fed is just a Bond Board, that is, one that buys and sells bonds to regulate the amount of currency in circulation by manipulating their prices (and therefore their yields). Mandatory reserves of US banks usually are at the level they would like to hold for their financial intermediation business. If excess reserves were accounted separately from mandatory reserves, then we'd be able to see that banks are not different from other financial intermediaries.

In order to turn excess reserves into M1 you need to make loans. Households started borrowing again in 2014 but they are still deleveraging. Liabilities as a % of total assets continues to fall – from 20.7% in 2009 to 13.4% today.

Money velocity is way off. M1 from 10.7 in Q4 2007 to 5.6 today. M2 from 2.0 in 2006 to 1.4 today.

It appears that household behavior has changed since the recession and that is playing a part in keeping inflation in check.

Another win for market monetarism, which says we don't have inflation primarily because investors don't believe Fed will inflate. Always and everywhere a monetary phenomenon.

Not sure the Fed's holding are all that unusual as % of GDP, though. https://www.stlouisfed.org/~/media/Publications/Regional-Economist/Image-Issues/January-2014/fig2_balancesheetL.png?la=en

Lars' Fed tour may leave some lasting consequences, like the pebble that starts an avalanche. Although really, MM isn't that far off of the Volcker/Greenspan/Bernanke path. We'll see what happens next time the NGDP trend seems to at major risk like in 2008. I think there's a growing understanding that while they didn't repeat the terrible mistakes of TGD, they left some money on the table.

BOJ should just keep buying gov't bonds while urging spending restraint and tax cuts. The interest payments may be significant to the national budget before markets start to believe them. Great opportunity to reduce gov't debt and empower consumers.

Not a lot of good options for ECB, short of disbanding. Germany and Greece have no business sharing a monetary policy. Of course unless the periphery completely falls apart, it's hard to imagine that happening.

Bears repeating, though... there are no liquidity traps, except in the sense that sometimes CBs are reluctant to inflate. But that's a policy decision, not a lack of ability. CBs can always inflate.

Interest on excess reserves (IOER) was introduced as a contractionary (or "non-inflationary") measure in October 2008; and as long as the Fed's "floor system" remains in place, with IOER above comparable low-risk rates, its influence will continue to be non-inflationary, whether one chooses to refer to the situation as a "liquidity trap" or not. In short, any attempt to account for banks' massive holdings of excess reserves that fails to mention the role of IOER is overlooking the most obvious suspect.

FWIW: I addressed the specific topic some months ago: https://www.alt-m.org/2017/09/19/the-two-per-cent-solution/

A variety of interesting answers to this provoking post. Typical Tyler does not reveal his cards.

What ever happened to the inflationists of 2008-10? Wasn't Tyler predicting inflation back then?

Your assumption that Tyler has cards to reveal is wrong. He has nothing to reveal. The Mercatus Center opted to go with Scott Sumner to explain QE but Scott is an old monetarist that cannot distinguish between systems of payments and systems of financial intermediation. QE has nothing to do with systems of payments, it was just a simple type of financial intermediation but conducted through a central bank (I relied heavily on the experiences of other central banks that long ago were used for financial intermediation).

Scott's paper
is a compendium of what most monetary economists have been repeating for decades. MF was wrong about money because he wanted to integrate it into Keynesian macroeconomic analysis by assuming the existence of a monetary aggregate that meets the two conditions I mentioned in a previous comment to this post (Don Patinkin attempted that integration in a very long book used in the 1960s and MF's short 1971 paper is better viewed as a summary of the DP's book). MF, Scott and other monetary economists have taken different positions with respect as to how the central bank should control the monetary aggregate that meets those two conditions, but that aggregate doesn't exist. We know that if our systems of transportation and communication are hit by earthquakes or by a government's nuclear bombs, we will not able to use them --that is what happens to systems of payments when a government pay its bills by printing huge amounts of paper currency or crediting the demand-deposit accounts of their employees and suppliers (in Argentina 1962, the government paid bills by issuing a large amount of a tradable gold-backed bond that was paid in 1972, but none considered it a money --thanks to Nixon, it was a good investment for their holders).

MF's program of monetary studies at Chicago U was good to learn about high inflation and hyperinflation (see my previous comment to this post), but not to learn about systems of payments (by working on the reform of China's central bank in the 1990s, I learned about the problems of separating systems of payments and systems of financial intermediation when commercial banks are huge state-owned banks).

Now in reply to Tyler's post, Scott Sumner has circulated this post


in which he says

"Here’s what Tyler should have said:

In December 2015, the US exited the liquidity trap. At that moment, all “old Keynesian” discussion of problems allegedly caused by the liquidity trap should have immediately ceased. These problems were no longer being caused by a liquidity trap. For instance, Keynesians had blamed the liquidity trap for the slow recovery, and the undershooting of the 2% inflation target. They argued that fiscal austerity was contractionary due to the liquidity trap. They argued that big trade surpluses in countries like China and Germany tended to reduce AD in the US, because of the liquidity trap. All of these are arguments that only apply in an actual liquidity trap, where the Fed cannot cut rates further. And even that ignores the possibility of negative IOR. Even if correct (I don’t think they were), these Keynesian arguments should have ended in December 2015, but they didn’t."
After December 2015, we were no longer at the zero bound. The Fed had control of interest rates and monetary offset was fully operative. The Fed was clearly in control of monetary policy. Yes, the decision to pay IOR made monetary policy somewhat ineffective, but that was the Fed’s choice, not a “trap”. That’s the reality that was starring us in the face after December 2015, and which many old Keynesians ignored." END OF QUOTE.

Yes, Scott is still very much a believer in MF's monetarism and the liquidity trap. That means that he believes that there exists a demand for money with the Keynesian characteristic of being extremely elastic at some low-interest rate (certainly at a zero-interest rate, meaning that at that rate any increase in the supply of that "money" is hoarded). There is no empirical evidence of the existence of such a demand for any monetary aggregate that can be controlled by the central bank. We can explain low inflation and what happened in the past 10 years with the Fed's response to the crisis as an attempt to assure that the banks were going to lend the inflow of funds from the repayment of past loans to the private sector, in particular, to lend them to finance the large fiscal deficits. Its response has a typical example of financial intermediation rather than a new monetary policy.

Also: it's only very recently that the IOER rate has not kept pace with some of the shorter term Treasury rates. That may explain the recent uptick in some inflation measures. But next month's rate decision could restore the status-quo ante. For much of the post-crisis period you had to go out to 2-year maturities before Treasury yields matched the IOER rate.

I have a book coming out on all this next month.

"No one" is not true. Dozens of papers are devoted to understanding why inflation remains muted. Mine is titled "Michelson Morley, Fisher and Occam." And why not? As others have commented, all those reserves pay interest -- more interest than treasuries. They are just overnight interest paying debt. They are not "money" in the traditional sense. We are living the Friedman rule -- awash in interest-paying money held as an asset, and thus not causing inflation. Interest rates are low, and in all rational expectations models, steady low interest rates lead to steady low inflation. The only slight puzzle is the one raised by fiscal theory -- why is inflation low given large debt and deficits? But there the real puzzle is that the real interest rate is low. r-g is questionably positive, and as long as that remains true, debt is not a problem.

So your prescription is? Raise interest rates, correct (assuming you are the John Cochrane)? Investors aren't sitting on low interest rate bearing deposits, they are sitting on assets whose prices are rising for no apparent reason other than the passage of time (and the low interest rates that promote rising asset prices). When the inevitable financial crisis hits, are you willing to follow the Austrians to the depths of asset price Hell?

My godson is a rising junior at the Univ. of Chicago, and I'm a firm believer that Chicago is America's best university. Fluent in Mandarin and gifted in many ways, he is a rising star.

Steady low interest rates making a steady low inflation mixes up cause and effect. The Fed only controls one short term rate. If people think the Fed is printing money like crazy, long term rates will not stay low and if the Fed tries to print more money to force them down then that will just increase inflationary expectations. If this wasn't the case then hyperinflations wouldn't exist in history. All a collapsing state needs to do is print money and buy it's own long and short term bonds keeping rates low forever.

Pinning the blame on interest on excess reserves seems to make more sense to me. After all, if the gov't printed a $100T bill but told me I have to keep it in my mattress then it wouldn't have any effect on inflation. But then wouldn't that act to increase interest rates? A bank wouldn't want to loan me money at a rate lower than what they could get just by keeping it in the Fed, no?

Anyway, I never really got any response to my simple point about monetary stimulus back in the days of the crises:

1. Print money/stimulus.
2. Check, is inflation increasing?
3. If no goto 1. If yes stop.

Couple this with what Krugman (horror alert!) said about Keynesian economics if a gov't failed to properly stimulate. Over time depreciation wears away the capital stock of the economy raising the return on investment. Eventually the economy will return to full employment.

To me this explains the lack of inflation. The economy was not properly stimulated hence instead of the long term becoming short, it became medium. We grew into recovery slowly but not as slow as if we did nothing.

Maybe, just maybe, population size is stagnant and therefore, there is no heavy pressure on inflation. Look at Japan economy that has not had inflation for decades. So inflation has limitations on the stagnant populations of the developed world.

What is the one variable that effects both AD & AD curves? Population size and population growth (especially population entering adulthood at 20) effects the AD first.

And does this reality put a different spin on the 1970s that it was growth of the Boomers entering the workforce that engine of inflation. (Note the 1970s on a percentage basis created more jobs than any other post war decade and even above 60s, 80s or 90s and especially the 1950s.)

How so? Shouldn't that be the opposite? If your population is stagnant then you can't expand supply by adding more workers. If you're giving out more printed money that increases demand thereby that would seem to set the stage for inflation.

Here are my 2 cents:

1. The CPI measures increase in consumables and some services, versus "investments" (e.g., real estate, equities, etc.).

2. Although inflation in CPI (i.e., growth in the CPI) has been relatively low since 2008, the implied inflation in investments has been much higher.

3. Much of the items comprising the CPI are imported. The implied inflation of the imported items (e.g., electronics, oil, etc.) have been low or negative. The inflation of the domestically produced goods and services (e.g., medical care, cost of education, etc.) have been much higher.

4. The cost of imported items are affected by the international flow of funds. Because we are running a trade deficit, this must be offset by a capital account surplus (i.e., the net investments by foreigners in U.S. assets). While there are other factors that can also affect this equation, such as foreign currency reserves held by the central bank, these are relatively small.

5. Although a trade deficit could cause an account surplus, it is not necessary that the causality flow in this direction. My suspicion is that, since 2008, the causality has mostly flowed in the opposite direction, that is that foreigners and foreign countries have been increasingly seeking to buy U.S. assets. This in turn has caused an increase in our capital surplus and led us to import more foreign goods (and some services) than we otherwise would have, and at cheaper prices. This has thus caused the relatively low rate of CPI inflation. This is speculative and I suspect there have been other forces at work (e.g., lower real oil prices?).

I don't really buy into the idea that 'inflation is hiding in assets"....i.e. home prices, stock prices, etc. It seems to me to be mixing up some important concepts.

First, the economy produces goods and services each year plus 'real investment'. Assets represents ownership of those things. To say inflation is showing up in assets means the central bank printed too much money but instead of buying stuff people compete with each other to own stuff at higher and higher prices.

Second, asset prices don't really represent a flow variable. Let's say the market closes at 5PM and a single share of Facebook trades hands for $1000. That indicates a huge price increase, Facebook's market value will jump over 5X! But it is still just one share that traded hands, not all of Facebook trading at $1000. Same for home values, Zillow says your home is worth 10% more this year, that's all based on a few homes actually selling in your area for higher prices. In contrast when the price of gas goes up 5% every gallon pumped from that point on is sold for 5% more than it was before.

Third, I'm not getting the economic theory here at all. So the central bank prints too much money, but people take that 'too much' money and everyone decides to buy assets but not stuff? They buy existing homes at higher prices but not build a new home at the old cheap price? Somehow higher prices in assets keep people buying but people ignore flat prices in stuff? Why? How?

I'm not saying that because people are overpaying for "assets" and thus underpay for "stuff". Perhaps a simpler way to express my Item 5. above would be to say that certain foreign countries are effectively exporting their disinflationary tendencies to the U.S. For example, if the government and citizens of China wish to over invest in assets, they could finance this by producing unusually inexpensive items and export these items, thus causing disinflationary trends in countries that export these items. I think evidence bears this out because the relatively low inflation rates are not unique to the U.S., but rather to most of the developed world.

Sorry, meant to say "that import these items" in the second to the last sentence.

But some assets add to GDP and others don't. If a Chinese investor buys a US house, that doesn't add to GDP by itself as no goods and services were produced (disregard the real estate agent, title companies, and lawyers). If, however, a brand new house was built and sold to a Chinese investor, that would be an increase in GDP.

Yet it would be very strange if a surge in home buying refused to consider new houses so only the assets not directly tied to GDP went up in value. Same for any other type of investment. You can buy a company's stock, which doesn't boost GDP, but if a company sells stock directly and uses the money to build new facilities, that does boost GDP.

But here is where printing 'too much money' must come into play. If home prices inflate or stock prices, sooner or later that is going to show up in real demand. Home builders will get more orders, there'll be contracts to build the new factory etc. Facebook could split it's stock over and over to feel a bubble's demand for shares but the real economy has finite resources so the expansionary activities would end up producing inflation.

My hypothesis is that the natural trend is for technological advancement to drive significant price deflation, and that this is what is hiding broad-based monetary inflation.

For example,

- algorithms are massively optimizing long-haul trucking routes
- biological advances are markedly improving agricultural efficiencies
- software in general is reducing the labor costs for small businesses
- and how can we forget the impact of fracking on energy prices

These effects are happening in medicine and education as well, but they are not enough to keep up with all of the other (largely government-driven) inefficiencies in those fields.

So, the - perhaps testable, but not by one as unskilled as me - hypothesis is that prices should be significantly declining, but the Fed's policies are preventing this. I'm guessing that there is a strong incentive for the Fed to keep going at about this rate, using stimulus as much as possible as long as the gross metrics stay within expectations/targets.

If this is correct, I'd much prefer sound money policies that let the price drops happen, but I can live with the status quo - as long as other policies do not interfere with the technological advancements.

Except I would say that this is not happening in medicine. New technology in medicine does not by and large reduce costs. More likely increases them.

Because the Fed's balance sheet has two sides, and when they blew up the liability side by issuing new money, they blew up the asset side by an equal amount--exactly enough to buy back any excess money, if need be.

Some possibilities:

A. Keynes was right. We didn't stimulate enough so what should have been a fast recovery ended up becoming a medium length recover (if we didn't stimulate at all it would have been a very long recovery).

B. Missing productivity is hiding like 'dark matter'. The supply curve got shifted outwards so we can demand a lot more goods and services and the economy can supply them. Perhaps they are hiding in vast armies of workers who are listed as not participating in the labor force but will come out of 'retirement' when gigs or jobs are available. Perhaps they are millions of Chinese who are still in rural areas who will make the move to new cities should orders for more iPhones pick up.

C Somewhat related is perhaps our demand has changed to a different supply curve. Steven Pinker noted our consumption is 'dematerializing'. A soda can used to be 3.5 ounces of metal, now it is 0.5. In 1999 more demand for books meant Amazon would pull from more printing and shipping...today more demand means more bits get beamed to tablets. Our demand is shifting to stuff that has no constraints or constraints that we are nowhere near hitting.

The answer is that a high level of reserves held at the Fed does not cause inflation. In other words $2T in excess reserves is not a big number because historical comparisons are not interesting. The fact that it went from $2.8T down to $2T without causing a recession provides support for the idea that these numbers are not interesting.

Spending on consumables and services and "spending" on real assets or "spending" on the services to create real assets are what cause inflation. NGDP has been rising at rates seldom above 5% the entire expansion (thus far, on the FRED chart to 2018 April) which makes the current expansion unusual. The population growth rate has been below 0.8% almost the entire expansion (thus far, on the FRED chart, not-seasonally-adjusted, since 1960, POPTHM series) which makes the current expansion unusual.

The wealth effect hasn't generated higher inflation because people haven't been sufficiently tempted.

Just to be clear, the level of reserves held at the Fed is interesting in respect to the level of reserves held at the Fed but it is not interesting to me in respect to inflation when the yield on reserves is positive and similar to the yield on short term Treasury bonds.

Fed: What me worry?

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