Where did all that inflation go?

Sure – the thesis is pretty straightforward, and can be demonstrated in essence by a simple thought experiment:

Imagine that Big Brother’s Anointed God of Money Printing goes to town and prints $100 trillion “worth” of the stuff, and puts it in a [big] vault, perhaps in their underground hidey-hole. And there it sits. They don’t even tell the WSJ about it.

There’s no OBSERVABLE inflation. Not at least until the Generally Dumb Public becomes aware of it, much less figures it out.

Richter’s analysis boils down to another (agree, cogent) explanation for “where it went”. (I’ve argued for 20 years now that if you can EXPORT dollars out of competition in the “goods and services market” — say, to China, where they still until the inevitable Rainy Day — that the inflation can be postponed for quite some time. But those fake bucks are still out there, and there are a lot of ’em.)

And he didn’t even mention “money velocity”.

Bottom line to my mind: Fiat is not “money”. And “dishonest weights” masquerading as ‘currency’ has always, without exception, resulted in the collapse of the fake, and destruction for those who trusted in it. Two questions remain, however:

1) Fire or ice? (Hyperinflation? or deflationary collapse?)

2) When? (and the corollary; if the tree has already fallen, was there sound?)

I agree with Mark’s analysis, as well as Richter’s as far as it goes. However, there really aren’t all that many dollars hiding under mattresses in China; most of them find their way back to the US through purchases of Treasury securities and other financial assets. As Richter says, all those printed dollars have found their way onto Wall Street and pushed up the prices of financial assets.

An important factor Richter misses is the extraordinary increase in the amount of excess reserves being held by banks. Banks are required to hold a certain amount of cash reserves on deposit at the Fed, but in 2006 for the first time the Fed stated paying interest on them (the law was changed that year to permit it). Overnight, excess reserves jumped by a trillion dollars, and have only gone up since then (they’re now at around $2.5 trillion). At present the interest rate the Fed pays on these unnecessary reserves is actually higher than the rate banks could get on Treasury bills. It’s really a (another!) hidden subsidy to the banks. If they actually lent out all that money (especially given the “multiplier effect”, which I won’t go into here) there would be a massive increase in the amount of dollars in circulation, and inflation (even as measured by the Fed) would increase dramatically.

Here is a graph of the total excess reserves of banks:

https://research.stlouisfed.org/fred2/series/EXCSRESNS

One important thing to keep in mind, though, is that price increases (and especially consumer price increases) are not “inflation”; at best they are a symptom of inflation. Prices can go up (or down) for a variety of reasons; inflation is only one of them. (In fact, under the right circumstances one can see the price of a consumer good go down in the face of inflation; computers are good example of this). Inflation, properly understood, is always and only a monetary phenomenon. Especially given all the games the government has played with it in the last decades, the Consumer Price Index is actually a rather poor proxy for true inflation.

As to Mark’s questions, my bet is on hyperinflation; there are too many dollars floating around, and no good way for the Fed to eliminate them. But I won’t hazard a guess on the time frame.

I have my own theory that applies here. IMO, there are actually two different economies at work in the USA. One is the traditional economy of goods and services which I will call the “Main St. economy”. The other is the monetary, fiscalized world of funny-money, gambling on commodities, and accounting hi-jinks. This I call the “Wall St. economy”. I believe the two began to separate when banking was deregulated, and that it was completed some time during Clinton’s administration. I’m just too busy trying to make a living to try to find the proof, but much of it is observable. And obviously, I believe that the economic oddities we see – like the ‘missing inflation’ – are caused by this split. It has permitted the wealth class to separate from the rest of us and feather their nests, without robbing us in an obvious fashion, but still robbing us by directing all wealth accumulation to themselves.

To wit, while our fedgov keeps trying to tell us the economy is improving and citing corporate profits as the evidence of that, we all know people (and sometimes ourselves) are either STILL unemployed, or employed again but at a lower wage than previously and often at a much lower level job than they could be working at. Reduced income in the Main Sr. economy means less disposable income, and since most are locked into payments that are not sensitive to circumstances (your mortgage doesn’t change when the economy or your income does), that means we buy less beef and more chicken (to use a textbook example), or we drink cheap beer instead of craft, or use range ammo instead of premium. So inflationary pressures are nil in Main St. because as a generalization we’re all still in ‘tough times’, and broke or worrying about it happening.

That’s my story and I’m sticking to it!

Furthermore, our need to pay taxes has increased in spite of the ‘economy in the honey-hole’ phenomenon that is Obama’s administration, due to so many more of us needing fedgov assistance and to things like Obamacare. Sure, Wall St. corporations are increasingly profitable – because they’ve laid off so many employees. Banks are rolling in the ‘funny money’ of the Wall St. financial markets, but most of that goes to the traders and execs, and is not lent out cheaply on Main St. as my traditional 70’s economics teachings said it would be. And yes, we’re paying our national debt with that ‘inflationary’ toilet tissue money the Fed prints – so there’s little inflationary pressure from that because it’s all going overseas or into commodities gambling. But every single one of those phony dollars will come home to roost like a diseased chicken someday.