Where`s the Hyperinflation?

The Fed has created an enormous pool of ‘money’ since the credit crisis began; it has more than tripled monetary reserves, and it stands to reason that price levels should inflate accordingly. Even allowing for slower circulation of money in a slow-moving economy, it seems as though inflation should have taken hold by now.

But: Monetary Base does not have to turn directly into newly created money; newly created money does not always circulate domestically; and economic growth lessens the impact of excess money creation.

Bowyer explains that there is a clog in the system (the credit system is jammed with, among other things, too many regulations), but also a leak (some dollars go for extended stays overseas in what is called the ‘euro-dollars’ market).

The world is hoarding dollars until the euro-situation comes to a resolution, but currencies are only hoarded so that they can be spent at some point in the future. So there’s a mountain of money out there, and foreigners decide when it is going to come back to the US. When it does come back, it will be inflationary. The euro crisis cannot protect America from its monetary sins forever.

Lack of growth, too, has a strong suppression effect on inflation, because inflation is too much money chasing too few goods. If money increases at the same pace as the increase of goods and services, prices remain relatively stable. You can even have monetary inflation and price level reduction when the supply of goods and services exceeds the supply of money.

But the US hasn’t had much growth. During the past five years M2 has increased by about 7½% per year; the US economy certainly isn’t growing at that rate. Growth can squelch inflation, but in America’s current policy environment, another boom is unlikely. In time, therefore, inflation is likely

source: BMG