What am I missing? I keep hearing people on financial TV say things like “The Fed keeps pumping out the dollars,” “The Fed keeps monetizing the debt.”
Then I go look up money-growth charts. I can’t find all this excessive money creation that is monetizing the debt and is about to create a breakout in inflation. Not M1; not M2.
In desperation, I went to the Fed’s H-6 money supply series and committed some arithmetic. As of April 2010, the seasonally adjusted annual rate of M1 growth was 5 percent over the past 3 months; 3.1 percent over the past 6 months and 6.8 percent over the past 12 months. The seasonally adjusted annual rates of M2 growth were respectively -3.1 percent, -0.2 percent and 1.6 percent.
These are hardly excessive growth rates in normal times, much less in an economy with almost 10 percent unemployment, with capacity utilization down from the 80s to the 60s, and with nonbank credit sinking, productivity growing rapidly, and with unit labor cost declining.
Where is all this money we keep hearing about?
Surely all these people don’t mean the monetary base, which spiked as the Fed grew its balance sheet, primarily during the crisis period at the end of 2008. The most common measure of the Monetary Base is bank reserves plus currency outside the banking system. The monetary base used to be called “high-powered money” because bank reserves normally support bank deposit money equal to a multiple of itself. The monetary base has been treated, not as money itself, but as the raw material from which money is created.
But everybody knows that banks have been holding reserves as “excess reserves” as an asset on their balance sheets. The Fed’s asset expansion, resulting from its loans to financial institutions and purchases of securities, mainly mortgage-backed securities, have been matched by growth in monetary liabilities, but those liabilities have not been used by banks to create deposit money through bank lending and investing.
As I was looking for an explanation for why people keep talking about excessive money growth and its inflationary potential, I ran across someone defining inflation as money growth—not inflation caused by money growth, but inflation defined by money growth. I’ve heard that occasionally on financial TV as well. Go figure.
To repeat the obvious, because others won’t, money growth is almost flat. Flat money growth does not cause inflation—especially when we have enormous slack in the economy along with rapid productivity growth and declining unit labor cost. We may get inflation in the next few years, but, if so, it will be based on money growth yet to happen. It hasn’t happened yet.