Social Question

Qingu's avatar

Since 2008, the Fed has tripled the monetary base: why is there so little inflation?

Asked by Qingu (21063 points ) December 15th, 2011

Since the financial crisis started, the Fed has tripled the US monetary base—what some call “printing money.” Most of the increase happened at the start of the crisis. Then “quantative easing” last year further added money to the system.

However, inflation since 2008 has been modest. In 2008 we actually experienced a short bout of deflation. Earlier this year there was a somewhat large rise in commodity prices. Overall, however, inflation has not been more than 4%, and is basically in line with inflation rates during the 2000’s. (A rate between 2 and 4 percent is generally considered healthy for growth).

Why hasn’t tripling the monetary supply caused much more inflation?

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51 Answers

wundayatta's avatar

Because the value of shit has tripled as well during that time. Currency equal value of stuff. = No inflation. If more currency than stuff, then we get inflation. If less currency than stuff we get deflation. As long as Fed prints enough currency to match the new stuff that we create, no inflation.

It’s probably more complicated, since I’m not exactly sure what the monetary base is—sounds like it’s the money actually out there as opposed to all the registered value in the economy (not sure of the technical words for this). But the principle is the same—as long as currency in all its forms is equal to the perceived value of goods and service in an economy, there should be no inflation.

Qingu's avatar

But why would the perceived value of stuff jump by almost a factor of three in just the course of a year?

judochop's avatar

I am only answering this like this because it is in the social section…

It is finally becoming apparent that the US government has just been “winging” it since the creation of the Constitution. It will continue to become more apparent that they undoubtedly have no clue as how to fix things in the near future.
The capitalist government is no more organized than a large scale Amway triangle. The citizens of America need to stop giving the government credit and just accepting their “word.”

Imadethisupwithnoforethought's avatar

When reviewing inflation rates you need to consider how it is calculated. Most industries used to do the calculations are heavily regulated and subsidized by the Federal government.

To really understand true inflation, you need to look at necessary or semi-neccessary expenses not included in the government numbers:

College Costs
Medical Care

Blackberry's avatar

Not to derail the question, because I have not the slightest idea what to do about the economy, but it really does seem like noone – except for a very minute group of people – knows what is going on and has an actual solution.

I am amazed that our species and society has created such a complex system, and it’s actually pretty good for some animals just floating on a rock. But how many people do you think really know what is going on? It may take some very deep research and infiltration to find this answer, in my opinion.

judochop's avatar

@Blackberry I believe that the only thing that has complicated the American system is loopholes. Loopholes were created to protect the asses of screwed everything up, then the lawyers stepped in and confused everyone by adding numbers to it and wording that really does not make sense unless you’ve studied it. The system was never flawed until the government started building walls to hide things.

incendiary_dan's avatar

Subsidies. Same reason why corn has been so cheap for years.

incendiary_dan's avatar

One of the main subsidies came in the form of Obama tapping the nation’s strategic oil reserve months ago, though I heard most of that didn’t go into the market, but rather to pay some of the debt to China.

Blackberry's avatar

@incendiary_dan Obama was giving money to China?!?!?! :P

Imadethisupwithnoforethought's avatar

@Blackberry China is only our enemy in crazy land. We owe them a jillion dollars. They want us healthy and happy and paying our loans.

Blackberry's avatar

@Imadethisupwithnoforethought I was being sarcastic lol. :D

SquirrelEStuff's avatar

Because the government has changed the CPI to no longer include food and fuel. And. You say its only 4%, but its 4% over and over again. That adds up.

Ron Paul talks about how the inflation measurements are rigged all the time.

Qingu's avatar

The inflation measures I cited include food and fuel. They also include other costs like medical care and colleges.

If you believe the inflation measures are somehow “rigged,” please explain why and provide what you believe to be the correct inflation rate measures.

Frankly a lot of what you guys have said appears to be just factually incorrect.

FYI: The Fed increased the monetary base quite a bit during the great depression too… and there was low inflation and even deflation for much of the great depression.

Imadethisupwithnoforethought's avatar

@Qingu I am looking at your link you posted. Perhaps I am missing the direct link to the components and the weighting thereof. Can you provide that please?

Qingu's avatar

To go into more detail about how inflation is calculated:

I cited rates based on the consumer price index, which includes food and fuel. Now, the Fed and many economists like to use another measure called “core inflation” that excludes food and fuel (and, iirc, a few other commodities). The reason they like core inflation is because food and fuel prices tend to be very volatile compared to other prices so during short periods they can give false readings, so to speak; core inflation tends to average out to CPI over time. But this is a moot point since I was using CPI.

@Imadethisupwithnoforethought, here’s the FAQ for CPI. It goes into detail about what it covers.

Imadethisupwithnoforethought's avatar

@Qingu so you read the part on that very page of the document that states the following:

Is the CPI a cost-of-living index?
The CPI frequently is called a cost-of-living index, but it differs in important ways from a complete cost-of-living measure…. It is very difficult to determine the proper treatment of public goods, such as safety and education, and other broad concerns, such as health, water quality, and crime, that would constitute a complete cost-of-living framework.

Qingu's avatar

I’m not sure what your point is, @Imadethisupwithnoforethought.

Has there been any significant change in public school availability and quality, crime, water quality, utility quality, and other public (i.e. free) goods that you think the CPI is leaving out?

The answer to that question by the way sure seems to be “no” to me.

Imadethisupwithnoforethought's avatar

@Qunigu, Now, I seem to have lost your train of thought. I believe you asked why inflation has not soared with a larger monetary base. I suggested, and others, that inflation has not been expressed well in the CPI. You suggested we were in error. In referencing the FAQ document, from the CPI, it seems to acknowledge that it is not a true cost of living indicator.

Why are you talking about availability now?

Qingu's avatar

There is no such thing as a “true cost of living” indicator.

One reason is that certain kinds of costs, like “lack of public safety” and “pollution,” are basically impossible to quantify objectively. The CPI does not quantify these costs. That is all that the paragraph you quoted said.

If you would prefer a measure of inflation that does include public costs such as this, feel free to provide one. Since I am not aware of any significant change in such costs whatsoever since 2008, I fail to see how it would differ from the CPI.

Imadethisupwithnoforethought's avatar

Then Qingu, I believe we are in complete agreement. No objective measure of cost of living exists. I cannot provide you with one.

Qingu's avatar

Again: I’m not sure what your point is. Let’s review.

You first said that CPI is not a good way to measure inflation, because it left out college and medical costs

You were wrong. It includes college and medical costs.

Then you copied and pasted something from the FAQ to the effect of “CPI does not include such intangibles as public safety and free schooling.”

I then asked what your point is since such things dont’ seem to have changed much at all since 2008.

You appear to be grasping at straws, and now you’re employing the ultimate copout: “nothing is objective so I don’t have to believe anything you cite.”

FYI: your other point was about how subsidies have corrupted the inflation measure. But to my knowledge subsidies have not increased much since 2008 either. Certainly not outside the auto industry.

bkcunningham's avatar

What’s happened to the money supply?

Qingu's avatar

They Fed has increased the money supply through what is called quantitative easing.

Some people deride quantitative easing as “printing money.” It’s a little different, though, but the effect is similar.

Qingu's avatar

The first one seems to have the cart ahead of the horse. Part of the reason for the Fed’s QE is to encourage banks to lend out money. And the advantage of QE (over “printing money”) is that once banks start to do this and the economy recovers, it’s relatively simple to reign in the resulting inflation through other Fed tools. But the author is basically arguing “I’m not convinced there won’t be hyperinflation because it’s only a matter of time before banks start lending money…”

And… that’s basically what the second article says, as it turns out. :)

JLeslie's avatar

My answer will not be helpful, but I wanted to say I just don’t get it either. I thought for sure by now inflation would be up at 7% or 8% at least. I keep thinking there is something very artifical going on, and when that ballon pops it’s going to be bad, really bad.

Qingu's avatar

Well, as Paul Krugman never tires of pointing out, what is happening is exactly what is predicted in standard Keynesian economics.

ETpro's avatar

Almost all the increase went into preserving liquidity in the financial system. In the Wild Wild West days created by the Gramm-Leach-Bliley act of 1999, Wall Street banksters realized they could, if they were big enough, make wildly leveraged bets on extremely risky deals (like that the real estate bubble that started in 2000 would expand forever) and because they were too big to fail, they could privitize the enormous profits of selling those wildly leveraged derivatives based on shaky mortgage debt, while socializing all losses. Because our political leaders saw fit (were paid to) make this possible—that’s just what they did. So the cash injection didn’t go into consumers pockets to drive inflation, it went into covering the losses in the $72 tillion per year derivatives market the Wall Street banksters invented.

zenvelo's avatar

There hasn’t been inflation because the money is not flowing through the system. The velocity of money is very low these days.

Money*velocity = GDP. So to keep the economy from contracting too much when spending (turnover of dollars or velocity of money) drops, the money supply needs to expand.

Qingu's avatar

I think @zenvelo has put it the most succinctly. :)

@ETpro, I think you’re leaving out something important: consumer debt. Though I agree with how you’ve characterized the primary cause of the so-called “liquidity trap.”

ETpro's avatar

@Qingu I didn’t bother to go into consumer debt becaues that problem is actually being resolved by the consumers themselves. Yes, they ran up using their home’s current value as an ATM. They too fell for the ridiculous idea that the party would last forever, But they have now cut back and the savings rate has skyrocketed.

Qingu's avatar

But the savings rate skyrocketing is a big reason why increasing monetary base doesn’t lead to inflation… because consumers are saving their money/paying down massive debt, not spending it.

ETpro's avatar

@Qingu So once again, although the GOP (Greedy Oligarch Party) trashes Keynes at every chance in favor ot Ayn Rand Objectivism, and Chicago School Milton Friedman economics that has never worked,

JLeslie's avatar

Oh, that makes sense. The consumers are not spending.

Ok, I have question then. Wouldn’t consumers start spending again if prices started to go up and up on goods? Buy now, because if you wait it costs more? Would that actually be a good thing at a moderate level?

Qingu's avatar

@JLeslie, yes, and it would lower the cost of debt too, and also businesses would start spending instead of hoarding cash as well. So in that respect high inflation (modestly high, not like hyperinflation) could actually be good for the struggling economy. The Fed could then set a target for GDP and unemployment, after which they would raise rates and sell assets to push inflation back down.

But there are also a lot of downsides. It would screw over the unemployed even more, and high inflation carries genie-in-the-bottle risks. Or at least that’s how the argument goes. I’m frankly not sure if I buy it since the same people who make it are the ones who have obsessed over inflation risks and bond vigilantes to stimulative actions like QE and deficit spending, neither of which have remotely materialized.

bkcunningham's avatar

@Qingu can you please show me data showing personal savings have increased during the period in question?

Qingu's avatar

Hrm. I think this is it?

http://research.stlouisfed.org/fred2/series/PSAVERT

btw I interpreted ETPro to mean savings as including “paying down debt,” not just racking up money in a savings account. Not sure if this is the best graph to illustrate what’s going on with debt but, well, I haven’t had my coffee yet.

http://research.stlouisfed.org/fred2/series/TDSP

Qingu's avatar

Oh, and in general about the household debt business, I’d really recommend reading this article from David Leonhardt in the NYT. It’s the clearest article I’ve read about the subject.

http://www.nytimes.com/2011/07/17/sunday-review/17economic.html?pagewanted=all

bkcunningham's avatar

You haven’t had your coffee? You must be in a different time zone. I’m ready to go play a round of golf.

JLeslie's avatar

@Qingu A little inflation would probably help my savings account interest rate also, which I would not mind.

WestRiverrat's avatar

How much of that money has actually been released to the public? If it is just sitting in Treasury dept. warehouses, it won’t make much difference to inflation.

Qingu's avatar

There is no physical money as in dollar bills sitting somewhere, @WestRiverrat.

WestRiverrat's avatar

@Qingu Not literally no. But what else do you call it when the Fed ‘buys’ up the newly issued Treasury bonds with imaginary money? Most people won’t notice until the bill comes due on those bonds.

incendiary_dan's avatar

Another factor: outright lying. It occurs to me that core inflation numbers are give as being low, while in the real world people are paying a lot more for food and gas. Anyone who can take the time to do basic math can see that these numbers are bullshit.

zenvelo's avatar

@incendiary_dan But housing costs, mortgage costs, and costs of high tech equipment have dropped. You have to look at everything.

Qingu's avatar

Nobody is talking about core inflation, @incendiary_dan.

Anyone who could take the time to actually click on the links I cited can see that it’s CPI not core inflation.

incendiary_dan's avatar

@zenvelo But even that isn’t true, or at least misleading. Real estate prices may be lower, but fewer and fewer people buy or own houses now. Rent prices in most places have either stayed the same or risen, mostly the latter (because landlords know there are plenty of people out there who want to rent). High tech equipment prices aren’t that important, because it’s not something that most people buy regularly, and companies are buying less of it too.

@Qingu Just because you decide to ignore pertinent data that doesn’t fit your argument doesn’t mean others have.

Qingu's avatar

What part of “I’m not using core inflation” don’t you understand, @incendiary_dan?

Maybe it would help if you actually told me what data you think I’m ignoring? Please be specific.

incendiary_dan's avatar

Fun fact: I don’t waste my time on people who are clearly belligerent and unwilling to listen to others. It’s a new thing I’m trying.

Qingu's avatar

I listened to you. You were wrong.

You said I was using core inflation. I wasn’t.

What’s the problem here?

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