Why haven't we seen hyperinflation?

Quantitative easing increased the monetary base, but it didn't increase the money supply enough to cause hyperinflation

By , Guest blogger

  • close
    A street money exchanger, counts US dollars, in downtown Tehran, Iran, Thursday, June 9, 2011. When the Fed implemented quantitative easing, why didn't it lead to hyperinflation, as some feared it would?
    View Caption

Some readers have asked me what I think of Robert Higgs post about why the large increase in the Fed balance sheet hasn't caused hyperinflation.

I think that most of the arguments that Higgs made are correct. The most important factor is that the increase in the monetary base hasn't increased money supply very much. And the monetary base is irrelevant for price inflation except to the extent it changes money supply.

There are several reasons why it has had only a limited effect on money supply, including the two that Higgs mentions, that interest that the Fed pays on bank reserves now unlike before (that interest payment BTW makes no sense at all given the Fed's pro-inflationary policies otherwise, unless you assume that the Fed's purpose is to maximize bank profits), and the fact that banks are more reluctant to lend. Another factor that Higg didn't mention is that households and companies are probably also more reluctant to borrow.

Recommended: Business

Another factor that Higgs overlooks is that the reduction in real interest rates has increased money demand, and as higher money demand has a similar effect as a lower money supply, this has limited the effect of the money supply increase that has in fact taken place.

I disagree with Higgs that it will inevitably lead to hyperinflation or even greatly accelerating rate of price inflation. It would eventually, if the Fed didn't reverse their asset purchases once banks becomes less reluctant to lend and households and companies becomes less reluctant to borrow, but since that would likely be associated with a real recovery as well as higher price inflation, the Fed will be able and likely to reverse them at that point.

Add/view comments on this post.

--------------------------

The Christian Science Monitor has assembled a diverse group of the best economy-related bloggers out there. Our guest bloggers are not employed or directed by the Monitor and the views expressed are the bloggers' own, as is responsibility for the content of their blogs. To contact us about a blogger, click here. To add or view a comment on a guest blog, please go to the blogger's own site by clicking on the link above.

Share this story:

We want to hear, did we miss an angle we should have covered? Should we come back to this topic? Or just give us a rating for this story. We want to hear from you.

Loading...

Loading...

Loading...