Money and prices

Date posted: June 15, 2011

There’s an old saying in economics that inflation results from too much money chasing too few goods and services.  With the Federal Reserve having printed almost $2.5 trillion of currency in the last three years, is this the reason we’re starting to see the inflation rate jump? N.C. State University economist Mike Walden says there’s been a lot of debate about this.

“People who are critical of the Federal Reserve say yes to that question.  They say, “Yeah, that’s the reason we’re seeing inflation go up right now is because the Fed has printed all this money and it’s out there circulating the country. And you’re right that cliché too much money chasing too few goods results in higher inflation is exactly the reason why.’

“Others say, ‘Well, not so fast.’  They say that of that $2.5 trillion in currency printed, the majority of it has not been spent. It’s sitting in the vaults at banks, because banks have been reluctant to loan that money out because they’ve been concerned about the economy. So, they say, ‘Hey, we don’t have that situation yet of too much money chasing too few goods and services.’

“Now the Fed critics would retort and say, ‘Ah, but remember markets anticipate the future.  So, even though that money’s not been deployed and spent yet, it probably will be in the future. And therefore the markets are responding to perhaps not inflation now, but the inflation is yet to come.’

“So obviously there are different sides to this debate. But I think the important point here is that we potentially do have a problem of too much money floating around in the economy.

“It’s important to realize, though, that the Fed can undo this. They can very rapidly in essence go in and pull that money back. And Mr. Bernanke and his colleagues have hinted they may do just that.”

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