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When you pump massive amounts of money into an economy, as the U.S. Federal Reserve has done with QE1 through QE3, you're supposed to get some measure of inflation.
And yet despite some $2.3 trillion of quantitative easing since 2008, the core inflation rate has actually fallen over the past year from about 2.25% to 1.7% as of May.
It defies both common sense and monetary theory – or at least until you find out where all that QE3 money ended up.
Here's a chart that illustrates the growth in the U.S. money supply, mostly as a result of QE1 through QE3:
Now here's a chart of the amount of excess reserves sitting in private banks. See any similarities?
Note that until the 2008 financial crisis, those bank reserves were close to zero. Now they have swelled to nearly $1.9 trillion, almost all of which is the money produced by QE1 through QE3 and beyond.
In other words, more than 80% of the hundreds of billions of dollars that the Fed created supposedly to stimulate the U.S. economy never made it to the U.S. economy.
This is why some critics have derided QE3 as "pushing on a string."
About the Author
David Zeiler, Associate Editor for Money Morning at Money Map Press, has been a journalist for more than 35 years, including 18 spent at The Baltimore Sun. He has worked as a writer, editor, and page designer at different times in his career. He's interviewed a number of well-known personalities - ranging from punk rock icon Joey Ramone to Apple Inc. co-founder Steve Wozniak.
Over the course of his journalistic career, Dave has covered many diverse subjects. Since arriving at Money Morning in 2011, he has focused primarily on technology. He's an expert on both Apple and cryptocurrencies. He started writing about Apple for The Sun in the mid-1990s, and had an Apple blog on The Sun's web site from 2007-2009. Dave's been writing about Bitcoin since 2011 - long before most people had even heard of it. He even mined it for a short time.
Dave has a BA in English and Mass Communications from Loyola University Maryland.
Velocity is calculated V= GDP/M Since M is increased rapidly by QE, V must fall equally rapidly. GDP simply cannot grow as fast as the Fed is printing money so the more money is printed the more V must collapse. QE can only grow asset prices. It cannot increase economic activity. It may or may not cause an increase in consumer prices depending on whether there is slack in economy's productive capacity. An economy with excess labor and productive capacity will not experience inflation in the conventional sense, but it will, and has, experienced asset inflation. I have written more… Read more »
As long as the government is paying the banks more, to borrow money (money that the Fed has lent the banks), then that money will never see the light of the free market. The only thing that can change that is if the government stops borrowing money. Then the banks will have no choice but to lend money to the private sector. So it all boils down to one thing: The government must stop its proliferate spending. In the end, all of the economy's woes boil down to this simple truth of economics. Government spending (socialism) eats up the capital… Read more »
AMERICA WON'T GET AWAY FROM OBAMAONOMICS "SCOTT FREE" Germany in the 1920's was not a "core" economy. The United States is a core global currency and economy. No core economy has ever experienced true hyperinflation in the history of the world and its said it never will. However, that does not necessarily mean we will get off scott-free. There could easily be future bouts of serious double digit inflation like we had during the Jimmy Carter Years in the late seventies. I think the choice of the next FED chairman will have alot to do with how much inflation we… Read more »
Obviously not au fait with the fate of that greatest core economy of them all – Rome -Mr Bradley!! It will take a lot more than a savvy Fed Chairman to save the world this time round
The USA is mixing populist government policies, political games, and printing money without a clear plan of the future.
So everyone in the world is going to experience what the old axiom "If anything can go wrong, it will go wrong" really means.