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PeakTrader said...

Three of the biggest components that affect inflation are technology or productivity, labor costs, and cost of capital.

All three indicate low inflation.

The U.S. is in a technological boom that began in 1982, while the 80 million Baby-Boomers began entering "prime-age."

Wage growth "crashed" in 1982, and has been slow since then, i.e. no wage-price spiral.

There remains a global savings glut, while U.S. firms continue to earn record-breaking profits, i.e. create huge amounts of capital through efficiencies.

The U.S. economy has been producing much more output with much fewer inputs, since 1982, and that trend accelerated even faster after 2000.

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In the production function Y = t(L, K, R, E,...X), i.e. real GDP, nominal GDP, or inflation is a function of technology or productivity on labor, capital, raw materials, energy, etc.


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Morganovich, you may want to look at the Fisher equation of exchange MV = PT

Chart of M1 Money Multiplier:

http://research.stlouisfed.org/fred2/series/MULT

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The steep drop in the money multiplier means there's less cash in circulation, because banks aren't lending much.

Here's a related article

M1 Money Multiplier Rolls Over – Again – Well South of 1.0
March 7, 2011

The M1 money multiplier monitors the amount of money individuals and businesses have to spend on consumption or investment… relative to the money available for banks to lend.

When the ratio is less than “1,” it implies banks aren’t lending as much as they could and/or folks have less to spend on things that would increase economic activity.

As you can see from the chart, the reservoir is low. Money is still not moving through the economy swiftly or broadly among sectors. You can take all the dire warnings of inflation and chuck them in the garbage right now.

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Morganovich, you can't create money in a fractional reserve banking system when the money multiplier is 1 (unity) or less.

If the reserve ratio is 10%, then a $1 increase in the money supply creates $9 of new deposits.

However, if the reserve ratio is 100% or more (which is a money multiplier below 1, because MM = 1 / reserve ratio), then no money is created.

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Bart and Morganovich, you're assuming each $1 increase in the money supply is being lent.

If each $1 is added to excess reserves, then no money is created.

The reality is banks built-up excess reserves:

Money Multiplier - Wikipedia

"This described growth in excess reserves has indeed occurred in the Financial crisis of 2007–2010, US bank excess reserves growing over 500-fold, from under $2 billion in August 2008 to over $1,000 billion in November 2009."

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And there is no multiplier effect when the money multiplier is below 1.

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Bart, 1 X 1 = 1

There's a difference between providing liquidity and creating money.

There's a difference between printing money and creating money.

Moreover, it should be noted, old loans that are paid-off and defaults destroy money, while there's no multiplier effect to create money.

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There are at least two ways to create deflation:

1. Decrease the money supply.

2. Increase the quantity and/or quality of goods & services.

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Chart of excess reserves: EXCRESNS fred (since 1950, it's off the chart).

http://research.stlouisfed.org/fred2/graph/?s%5B1%5D%5Bid%5D=EXCRESNS

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