INFLATION AND THE MONEY SUPPLY
Dec 20th, 2012 by Conor McCabe
?”Over the past four years, the Federal Reserve has more than tripled the monetary base, a key determinant of money supply. Some commentators have sounded an alarm that this massive expansion of the monetary base will inexorably lead to high inflation, à la Friedman.
Despite these dire predictions, inflation in the United States has been the dog that didn’t bark. [In fact], it has averaged less than 2 percent over the past four years. What’s more, as the figure also shows, surveys of inflation expectations indicate that low inflation is anticipated for at least the next ten years.”
the Federal Reserve branch of San Francisco president John Williams, 2 July 2012.
Where does all the money go? With interest rates low in the US and opportunities for return limited, does it flow to other countries where return is potentially greater? Persistently high asset inflation would suggest it might.
I have just finished The Volatility Machine by Michael Pettis, which covers the flow of capital from developed to developing economies, and how sovereign capital structures can amplify shocks. Although it relates to developing countries and is slightly dated (2001), the similarities with what happened in Ireland and the euro are instructive. Thoughts on the relationship between economic growth and capital inflows, rather than any domestic reforms, are also interesting.
It barked in the Middle East big time. Western countries have largely excluded their (non property related) inflation abroad via outsourcing. As outsourcing comes to an end, inflation will spike, and you can expect employers to immediately begin demanding wage freezes. And regardless of the outcome, the banking crisis will still not be solved.