Regular readers would know I am not the biggest fan of looking at the money supply and trying to work out inflation or indeed almost anything else from it. I am also not in the habit of getting specific about anything other than banks and regulators. In the US, though, the Fed is both a bank and a regulator and the position they have adopted with regard to the US money supply over the last 6 to 12 months, though, has become ridiculous.
A look at this graph, from the St. Louis Federal Reserve, makes the situation plain.
This cannot be a good thing. Measured money supply has almost doubled over the last 12 months – almost equalling the entire growth over the period covered by the graph in the space of less than a year. It just seems to be experimenting with the entire US economy.
Not being an economist I have no real idea of the effects – but it just looks wrong. I hope most of that is just sitting in bank vaults and not being spent. If so, it should not do too much damage and can be soaked back up by the Fed next year. We’ll see.
I have been pointed at this post, which suggests that the reserves are, as I thought, just sitting in bank vaults – or, possibly, on deposit with the Fed itself. If so then this is less likely to affect the real world. Either way, though, it is very, very, unusual. I am sure there will be whole books written on this period for decades to come – along with some serious revision of economics texts.