For quantitative easing to work, it must boost the broader money supply. The Fed’s monetary base (currency in circulation and reserve balances) has grown 28.8% per year since QE started. If banks had multiplied this high-powered liquidity, the broader M2 measure of money (all deposits at banks, including money market accounts and cash) would have grown at the same rate. But M2, the measure Milton Friedman told us to watch, has grown just 6.7% per year. If banks had lent most of this new money, M2 and inflation would have accelerated sharply. But excess (unused) reserves are now at $2.7 trillion. This is why inflation has not accelerated.
Posted on: Wed, 15 Oct 2014 13:46:24 +0000
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