Wednesday, July 7, 2010

Where's the Inflation?

In case any of us forgot, below is a graph from the St. Louis Fed's FRED of excess bank reserve levels.

We are quickly approaching the 2 year anniversary of these levels going straight up by over $1T. Two years ago, the prospect of such a phenomenon would have sent shutters through many a monetarist inflationista...where are they now? Does 2 years a trend make? At this point is it safe to say that these balances are meaningless to price stability?

Recently, there have been some rumours that the Fed is considering a "QE2", that is a second round of Credit Easing if the economy stumbles; the Fed will utilize additional new reserve balances to purchase some other class of financial assets (Mike has suggested stocks/equities here, they have previously bought MBS) in an effort to support these asset prices and economic conditions in general.

What will be outrageous will be the stated opposition to this policy. Even in light of the factual outcomes dictated by the graph above, there will be those who will appear in the media to boldly proclaim that the Fed is "printing money" and risking inflation! This we will get from them while they are saying nothing about (or being completely ignorant of) the fact that the European CB is currently buying E20B per month or so of European Govt bonds "on the down low".


googleheim said...

again we are seeing elastic currency management.

it's elastic and fantastic

we're not euro boys stuck in the rut

Matt Franko said...

I think with these ECB govt bond purchases the ECB is doing what Mike & Co. advocated for the Fed to do in the Lehman situation here in 2008...lender of last resort to prevent a systmeic catastrophe.

Bernanke and Paulson were criminally negligent in 2008 imo.