By Dock Treece
Before we begin, a quick note that this week’s article is largely a continuation of musings from last week, entitled Ingredients for Inflation. In that article – which was widely circulated around the internet – we wrote about the coming wave of inflation that will result when the velocity of money accelerates in the US and all the new money printed by the Federal Reserve begins to circulate.
As many are aware, and as we discussed last week, the Federal Reserve has greatly expanded its monetary base over the past several years – mostly in an effort to shore up this nation’s banking sector in response to the financial crisis sparked in 2008.
However, despite the rampant printing of growth – which usually leads to inflation – the impact has been relatively small to date because all this new money has failed to permeate our economy. New dollars haven’t been used to buy houses or TVs or gasoline; but has instead been sitting in the Fed’s digital vault, supporting banks’ weakened balance sheets.
In other words, velocity – or a lack thereof – has kept inflation from running rampant. To borrow a phrase from one of last week’s readers: “If it doesn’t circulate, it can’t inflate.”
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