The Fed Monetary Bubble

In 2008, the Federal Reserve held $800 billion on its balance sheet. For the last few years, it has purchased over a trillion dollars in U.S. debt. The Fed has been creating a 100-year supply of money every year for the last few years. It currently holds a 400-year supply of money. The last times I saw something like this (late 90s stocks and mid 00s housing prices) they were later called "bubbles". Just wondering. 

The Fed and Money Velocity

The media (even the financial press that ought to know better) keep scratching their collective heads wondering why with all the money that the Fed keeps creating there hasn't been much "inflation" (not the true definition of inflation, but the CPI measured one).  The very simple answer is that the velocity of money (the rate at which money circulates) has been plummeting.



The more important question is "why"?

The Fed figured money-printing would boost the price of assets such as stocks and houses. It has. They also thought -- like all good Keynesians  -- that this asset reflation would create a wealth effect by which people would start spending more, increasing demand for all sorts of products, leading businesses to invest and hire more people. Banks would start lending again, providing further boost to the economy. That hasn’t happened. Instead of borrowing, households are paying down debt. Businesses are accumulating cash because they don’t feel confident enough to invest (in part due to the specter of Obamacare). Banks are just sitting on excess money and enjoying the fact that their depositors are getting a negative after tax/inflation return.

So with velocity in free fall, shouldn’t we expect the Fed to keep on creating even more money? And what happens when they eventually stop doing so and interest rates and CPI inflation rise precipitously? Those who lived through the 1970s can tell you that answer.