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posted on 30 December 2015

If Money-Printing Equals Inflation, Why Don't We Have Any?

by Michael Haltman

The global central banks have injected many trillions of dollars into their given economies to create jobs and some inflation!

In the United States it's those items, job creation (maximum employment) and controlling inflation (stable prices), that are basically the Federal Reserves two primary mandates.

And, if inflation were to raise its ugly head, the tool that the Fed would use to swat it down it would be to raise interest rates.

Inflation: 'The rate at which the general level of prices for goods and services is rising and, consequently, the purchasing power of currency is falling. Central banks attempt to limit inflation, and avoid deflation, in order to keep the economy running smoothly.' (Source)

Or for a simpler description of inflation that we learned in Economics 101, it is too many dollars chasing too few good.

But truth be told, despite the massive money-printing by the Fed, the economy has been chugging along at a very low and disappointing level (3rd quarter GDP +2.0%) and inflation is running well below the Feds target rate of 2.0%.

And, while the headline unemployment rate looks good, if one were to poke around under the hood the underlying statistics this far into an economic 'recovery' are not where they should be (i.e. U-6 unemployment rate in November at 9.6%).

Meanwhile the Fed, with the economy out of the post-financial crisis 'danger zone' for some time, had opted to keep fed funds at a crisis level rate of 0%. That is until this month when the FOMC raised rates .25% in the face of less than sterling global economic data ('Federal Reserve Gradualism: A Dangerous Game?').

So with that description of where the US economy currently stands, is the Fed between a rock and a hard place vis a vis interest rate policy? It most certainly is but in many respects it is a situation of its own creation!

Now back to the original question of why, with all of the money that the Fed has injected into the system, inflation (other than in certain sectors such as college and healthcare) is not running rampant?

Here is some logical rationale from an excellent article at Wolf Street titled...

'I was asked: Whatever Happened to Inflation after all this Money-Printing?'

So where's my free lunch?

I was asked once again why all this central-bank "money-printing" along with global zero-interest-rate or even negative-interest-rate policies haven't caused a big bout of inflation, considering how currencies are getting watered down.

It's a crucial question that baffled many minds for a while, but now, as this thing has been dragging out for seven years, bouncing from one major central bank to the next, without end in sight, the answer is becoming clearer.

This chart by NBF Economics and Strategy shows the growing pile of assets, expressed in dollars, that the "four big central banks" - Fed, ECB, Bank of Japan, and Bank of England - have heaped on their balance sheets: nearly $11 trillion. This does not include what China is doing. The forecasts for 2016 and 2017 assume that the Fed and the Bank of England will stay away from QE, that the BoJ will add annually ¥80 trillion (with a T) to its pile and the ECB €60 billion, with exchange rates unchanged:

Consumer Price Inflation v. Asset Price Inflation

So this global binge of QE has caused inflation, a lot of it, but not consumer price inflation. It has caused rampant asset price inflation, with stocks, bonds, real estate, classic cars, art... all skyrocketing over the years.

Just about the only major asset class that didn't experience gains is the commodities sector. There, prices have collapsed. And we'll get to that in a moment.

So why has QE caused rampant asset price inflation but little consumer price inflation? Because the money never went to consumers - in form of wages. They would have spent most of it, thus driving up demand that could have created some inflationary pressures in consumer prices. But they never got this money...' Read the rest of the article at Wolf Street here.

Michael Haltman is President of Hallmark Abstract Service in New York. He can be reached at mhaltman@hallmarkabstractllc.com.

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