Ever since the Federal Reserve began its programs of quantitative easing, the doomsayers have covered themselves in sackcloth and lamented, as loudly as possible, the impending death of our economy, our way of life, baby seals and everything else we hold dear. The only problem is that after 3 years of increasingly frantic prophesy, financial Armageddon (at least of the inflationary kind) still seems to be on hold.
So are the doomsayers right and just have questionable timing or have they completely missed the mark?
Sorry. I tend to watch the financial news for a few hours every day so my frame of reference as to what is “common knowledge” is, shall we say . . . ‘distorted’. So thank you for pointing that out.
Thanks. Much appreciated. What I don’t understand is except for a microscopic blip in 2001 there has never been excess reserves since the start of the graph in 1959 until recently when those reserves exploded. I’m no economist by any means but I’m dumfounded where all this money came from, especially so because it appears about the time TARP started. I keep coming back to “lies, damned lies and statistics …”
Are these real reserves or paper reserves? Tell me this isn’t sleight-of-hand paper shuffling.
I ask because the doomsayers have said this excess (whether or not YOU would define it as such) would create inflation. The question is to determine whether or not they were wrong about the timing or just plain wrong.
They’re real. Look up QE2 (and ignore anything about ocean liners), and you’ll get plenty of information. Here’s the wiki on the general principle of quantitative easing.
Excellent question. Again - me, frame of reference, yada, yada.
At the beginning of the financial crisis, the problem was a lack of liquidity. The credit markets had frozen and banks couldn’t even get an over night loan from another bank. They tried to get credit flowing again by letting member banks borrow at essentially zero interest. They did this by buying securities from the banks. Normally the fed buys treasury notes and bills but later in the crisis they greatly expanded what they purchased to include things like the infamous MBS’s (mortgage backed securities).
When the fed makes a purchase, they do so by creating the money used ab nihilo - from nothing. So if I sell $1M in bonds to the fed, all they do is create a book entry saying that I have an addition $1M in cash.
So the spike you see in the chart is real. Also, it has nothing at all to do with TARP.
So based on your post, are you saying the Fed made a set of book entries to a number of banks to the tune of $1-2 trillion? Sorry to be picking nits but I’m trying to connect the dots.
It is indeed a mind boggling number. However one important point to note, perhaps THE important point, is that none of this money seems to have left the Federal Reserve. This is money held by member banks at the fed in the form of reserves that are over and above what their reserve requirements are. This is not money that has ever actually been in circulation. Zalakwe alluded to this fact earlier.
Because M2 has risen commensurate with the past several decades and M3 (no longer officially calculated) fell about $13 trillion during the crisis of 2007-08.
But your food prices are probably quite small compared to housing, even if you own your home outright there’s still property taxes which would make it almost equal to food prices. I both rent and own a home and neither my rent nor my property taxes have gone up in 5 years. My utilities, if anything, have gone down.
So pretty high inflation in some sectors of the economy (food) can be almost but not quite balanced by severe drops or non-inflation in other sectors (housing, rent) for an overall low rate of inflation.
I think that if anything, there was a negative rate of inflation until very recently due to the plummetting housing market. However, during the housing boom, the inflation rate was indeed officially lower than it should have been due to the opposite effect.
People always notice when prices go up. They’re not so good about noticing when they go down. For example, few people were panicking about massive deflation when food prices nose-dived in 2009.
As mentioned above, inflation over the last few years hasn’t been high at all, even including prices for food and energy, which tend to be more volatile than other goods.
According to Paul Krugman, the basic reason is that there is little demand for goods and manufacturers (and retailers) are over-stocked and in such a state, prices will not rise. Or: you cannot push on a wet noodle. Now put that trillion actually in people’s hands and yes, you will see much inflation.
Think of all these banks as Scrooge McDuck. They have all this cash, but they aren’t doing anything with it. Inflation happens when more money is chasing the same goods and services. Right now, there is more money, but is not chasing anything. As long as that money is not being loaned out or invested, it can have no effect on prices.
If you want think about if from another angle, pretend this happened to a different commodity, like corn. If thousands of new acres of corn farms were planted, corn prices would go down. But if the farmers just keep the corn in their silos and refuse to put it on the market, prices won’t fall.
BTW this is part of the real strategy of the DeBeers diamond cartel. Despite the fact that there are a lot more diamonds around than anyone thought a century ago, diamonds have become more valuable in part because DeBeers has been stockpiling them to keep them “rare”.
Supply side economics is not so much about pushing a rope so much as letting loose a rope that is being pulled by demand. When the pulling stops, letting go of the rope doesn’t really do much.
