Academic journal article ABA Banking Journal

Tons of $$, Low Inflation. Why?

Academic journal article ABA Banking Journal

Tons of $$, Low Inflation. Why?

Article excerpt

Over the past four years, the U.S. monetary base has grown from roughly $850 billion in 2008 to more than $2.6 trillion. The primary driver has been implementation of quantitative easing as the Federal Reserve tried to breathe life into the economy. If prices were exclusively a function of the money supply, the near tripling of the monetary base between late 2008 and 2011 should have given way to runaway inflation, but that has not been the case. Barring the run-up in gas prices and a few other commodities, price growth has been in check with consumer price inflation averaging nearly 2.5% for the past two years. Clearly, something else has to be at work.

[GRAPHIC OMITTED]

When it comes to the impact of the growth of the money supply on prices, a key factor is that if the banking system simply holds money in deposits on reserve and makes no loans, then the growth in the monetary base does not affect the money supply. When banks make loans, however, the net effect is essentially an increase in the money supply. In a fractional-reserve banking system, banks create money through lending. When a small business gets a loan from a commercial bank, it may use that money to purchase a piece of new equipment. The seller of the equipment now has cash that she may place in another bank. That new deposit provides the second bank the funds necessary to make another loan, which creates more money, and the cycle continues. This money multiplier is limited by the reserves a bank is required to keep by the Federal Reserve.

Bank lending has a tendency to slow in the immediate wake of a recession. …

Search by... Author
Show... All Results Primary Sources Peer-reviewed

Oops!

An unknown error has occurred. Please click the button below to reload the page. If the problem persists, please try again in a little while.