Why QE Hasn’t Led to Inflation
He meant that the more money there was chasing goods and services, the higher the prices of those goods and services would rise.
So the logic goes that, if the Fed is “printing money,” prices should be rising…
What most folks struggle to understand is that there are two types of “money” in the system.
There’s the “money” the Fed creates when it engages in QE. This “state money” (aka the monetary base) is made up primarily of commercial banks’ reserve deposits with the Fed… plus currency in circulation. It accounts for about 20% of the money in the economy, as broadly measured.
Then there is “money” private banks create when they make loans. This “private money” makes up the other roughly 80% of the money in the economy. The Fed can boost the amount of “state money” in the system through QE. But only banks can increase – through new lending – the supply of “private money.” And due to its relative size, it’s private money that counts when it comes to consumer price inflation.