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Is the U.S. Resorting to Old Fashion Inflation?

In Money Supply on June 5, 2011 by CQCA

Since the start of the 2007 financial crisis, the Federal Reserve has reacted by printing money on a scale that has never been seen before. Most of that, though, has been digital inflation. The bailouts, TARP, the deficits, and quantitative easing have all just been numbers on a screen, mostly flowing into bank reserves held at the Federal Reserve, which are not calculated in the money supply. That is a sign of our digital age, but it seems like the Federal Reserve is also taking us back to the kind of inflation in a horse and buggy era.

M2, the broadest money supply indicator that the Federal Reserve publishes, increased 27% between January, 2007 and April, 2011. The monetary base, which represents digital inflation, has increased 213.8% over the same period. M0, which represents bills and coins in circulation and is an indicator of printing-press inflation, increased 26.5% over the same period. (It is a coincidence that they expanded at about the same rate, and an increase in M0 does not directly lead to a proportional increase in M2. M0 is only 10% of M2, so a 26.5% increase in M0 should have been a 2.65% increase in M2, all other things being equal.)

A quick look at the U.S. Bureau of Engraving and Printing’s annual production figures shows that more $100 bills were produced in 2010 than ever before.

In 2002, Ben Bernanke gave a speech titled “Deflation – Making Sure ‘It’ Doesn’t Happen Here.” He stated: “Like gold, U.S. dollars have value only to the extent that they are strictly limited in supply. But the U.S. government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost. By increasing the number of U.S. dollars in circulation, or even by credibly threatening to do so, the U.S. government can also reduce the value of a dollar in terms of goods and services, which is equivalent to raising the prices in dollars of those goods and services. We conclude that, under a paper-money system, a determined government can always generate higher spending and hence positive inflation.”

It looks like the Federal Reserve has been using both its printing press and its electronic equivalent.

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