What Do You Mean ‘No Inflation?’

When the Fed launched its aggressive monetary policy in the wake of the 2008 financial crisis, many free-market economists predicted it would result in massive price inflation. That never materialized. As a result, Keynesian economists like Paul Krugman love to finger-point and mock those who criticize easy money policies designed to ‘stimulate aggregate demand.’ They claim the lack of price inflation proves they were right all along. You can massively increase the money supply during a downturn to stimulate the economy without sparking inflation. Free-market people are wrong.
But just because we don’t see price inflation doesn’t mean there isn’t any inflation at all. After all, the new money has to go someplace. If we don’t see it manifested in rising prices, it’s because we’re looking in the wrong place.
In response to the Great Recession, the Federal Reserve plunged interest rates to near zero and held them at historically low levels for several years. It also engaged in three rounds of quantitative easing – in essence, printing money out of thin air. Over a span of nearly seven years, the Fed’s balance sheet increased 427%. With all of that new money entering into the economy, one would expect a significant increase in price inflation. And yet the rise in the consumer price index has been muted. In fact, officials at the Federal Reserve constantly fret about the lack of price inflation.
So where did all that money go?

This post was published at Schiffgold on NOVEMBER 2, 2017.