Over the period running from Sept. 2008 to the present, the Federal Reserve added $1,400 bn to its balance sheet. The net change in consumer prices has been precisely nil. Since the recovery began in June of 2009, the Fed has added $250 bn to its balance sheet. The increase in consumer prices has been all of 1.27%. In the circumstances we have been in (so many underwater mortgages), some inflation would be beneficial.
Well, the problem remains that no matter how much "high-powered money" is injected into the system, the velocity of money is still darn near zero.No one is using any of this money. It's not circulating. So, no, at present there is still no evidence that this is causing inflation and we're still staring at the possibility of serious deflation.But should that change, should the banks, corporations, and persons sitting on the money in the system, and do so all at once, the Fed could get flat-footed with rampant stagflation.On the flip-side, there's an argument to be made that if you destroy the dollar, the "global economy" will suffer far more than the domestic economy will. And that what Bernanke is about is economic warfare (a game of beggar thy neighbor) rather than just being an incompetent fool.But my money, for what it's worth these days (not much), is still on incompetent fool.
The velocity of money is the ratio of the nominal domestic product to the money supply. It cannot equal zero unless your nominal domestic product is zero (it is not). (IIRC, the value of this ratio varies between 3.5 and 6.5). As to whether Dr. Bernanke is an incompetent fool or not, the trio of Paulson, Geithner, and Bernanke were criticized by Charles Calomiris and Nouriel Roubini for disregarding established protocols for handling banking crises and just improvising. I do not think either one apportioned the blame between the three, and if I recall correctly, tossing the TARP money around like confetti was Mr. Paulson's doing and the non-plan to recapitalize the banks unveiled in the Spring of 2009 was Mr. Geithner's. Drs. Roubini and Calomiris are among a fairly select group who can evaluate the performance of our central banker in real time. I recently had occasion to read a brief squib by Stephen Spruiell of National Review, who is (apparently) a j-school product whose background in economics and finance is limited to a stint as a research assistant at the Cato Institute that some individual on the staff there fancied he merited. Mr. Spruiell thought it apposite to offer tips to the chief of our central bank as to how and when he should expand the monetary base. I am sure Dr. Bernanke was grateful for the input. The quantitative easing Dr. Bernanke is planning will increase the monetary base by about 30%. I do not think that will 'destroy the dollar'
Soooooo, so much for Dale's return to blogging.