Inflation is not as high as it “should” be. In spite of the fact that the Federal Reserve has pumped $4.5 trillion dollars of non-existent money into the economy and has held its interest rates at zero percent for six years, money just isn’t moving around much. And the Federal Reserve thinks it knows why:
Banks have put away close to $2.8 trillion in reserves, and households are sitting on $2.15 trillion in savings—about a 50 percent increase over the past five years.
“So why did the monetary base increase not cause a proportionate increase in either the general price level or (gross domestic product)?” economist Yi Wen and associate Maria A. Arias asked in the St. Louis Fed paper. “The answer lies in the private sector’s dramatic increase in their willingness to hoard money instead of spend it. Such an unprecedented increase in money demand has slowed down the velocity of money.”
I see. So I can thank “money hoarders” for the fact that my groceries aren’t as expensive as they could be. But what happens if people decided to spend?
Factoring in the growth in the money supply against output, inflation should have grown at a whopping 33 percent annually, when in fact it has been rising less than 2 percent.
The reason that inflation hasn’t kept up with gains in the money supply simply has been that people are sitting on cash rather than spending it, which has kept money velocity at historically low levels.
So, over six years, prices should have increased by a third every year. That’s just mind-blowing. Do you think minimum wage would have grown by a thrid every year to keep up? Doubtful.
Just who is being benefitted here? Certainly not the poor and middle class. If the Federal Reserve accomplishes its desires and achieves “monetary velocity,” we’re all screwed. Well, all of us but the Federal Reserve—a private institution that would make billions and billions on our losses.
And I remember a time when we used to call “hoarding money” something very different: savings. Have the people that control our monetary system completely lost their minds? Yes. Yes, they have.