Money in the vault

Date posted: June 20, 2012

There’s been much criticism of the Federal Reserve and the money they’ve been printing in the past few years. Some worry all these new dollars will eventually cause inflation to skyrocket. Is there any reason why this wouldn’t happen? N.C. State University economist Mike Walden answers.

“I remember my very first economics professor, when we got to the part of the course on inflation, said, “[The] way to think about inflation is resulting when there’s too much money chasing too few goods and services.’ So people who have looked at what the Federal Reserve has done over the last four years — and the Federal Reserve has tripled … the basic money supply — I think have a justifiable reason to worry. There’s a lot more money out there that could potentially be chasing fewer goods and services.

“But I think the key word in what I just said is potential. What has happened is all that money that the Federal Reserve has printed has not gotten into the hands of people and has not been spent. In fact, most of it has not. Sixty percent … of the new money the Federal Reserve’s printed over the last four years is sitting in the vaults of banks. It’s not been deployed. And banks are saying, well, they’re not going to loan it out … unless they see good loans.

“The Federal Reserve actually pays them a little bit of an interest rate on those idle funds. So this may be one reason why we’ve not seen inflation skyrocket. But what it does suggest is, down the road, if all that money starts to be deployed, then we may be looking at inflation issue. My guess is at that point the Federal Reserve will start to pull that money back.”

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