The adjusted monetary base has shot up like a rocket since the beginning of 2013. This is all part of QE3 or whatever number we’re on now. Assuming the Fed doesn’t “taper” too much before the end of the year, it will have created about $1 trillion in 2013 alone. The monetary base was well under $1 trillion before the fall of 2008. It was just over $800 billion less than 5 years ago. Now it is about $3.4 trillion. The money supply has more than quadrupled in under 5 years.
This has still not resulted in high consumer price inflation. The stock market has benefited from this Fed policy. Housing has somewhat benefited, even though housing prices in general are still far below the values in 2006/ 2007 at the peak of the bubble.
Most of the new money created by the Fed has gone into excess reserves in depository institutions. In other words, most of this new money is not being loaned out by banks. This lack of fractional reserve lending has helped prevent high price inflation. In addition, many Americans are still fearful of the economic conditions and many are even paying down debts. There is a high demand for money. This low velocity, or reduced spending, has helped to counteract the increase in the money supply, thus keeping price inflation in check.
If expectations change and velocity picks up, then price inflation could pick up quickly too. On the other hand, if velocity stays low and the Fed reduces its rate of monetary inflation, we could easily see another severe recession. But this just may lead to the Fed upping the ante again and creating even more monetary inflation.
I am repetitive on these points, but only because they are important. It is crucial to realize that we are living in unprecedented times. I seriously don’t think Fed members even understand what is going on and what to expect. Despite what they say in public, I think they realize that there are a lot of dangers lingering out there because of their policy of massive monetary inflation.
We will see how this whole thing plays out in the next few years. I expect it to be a wild ride. We might be in the calm before the storm right now.