by James L. Caton
The American Institute for Economic Research
There is, understandably, a lot of talk about inflation lately. Much of this talk is rooted in a naïve interpretation of the quantity theory. An increase in the quantity of money is thought to surely lead to a proportionate increase in the price level. Yet, the monetary base has increased from around $850 billion to over $5.8 trillion in just over the span of a decade. Despite this nearly 600% increase in the quantity of money, the price level has increased by just 26%. The Fed’s balance sheet stands at nearly $8 trillion today. Where is the inflation hiding?
The answer is by no means simple. Monetary policy is more complicated than it has ever been. Whereas, in the past, one need only look at the rate of monetary expansion and interest rates to develop a sense of the stance of monetary policy, Fed watchers must now consider: