Deflation with an Increasing Money Supply.

by Mitch Kronowit
(Orange County, California )

First off, I really wish the media would stop using this cliche', especially in the U.S. Our money supply is not determined by how many "Greenbacks" the treasury prints. Think about it, when is the last time the government paid for anything with cash?

Our money supply is controlled by the Federal Reserve. All that "printed" money just sits there until the Fed "monetizes" it, i.e., turns it into legal tender. It might be more accurate to say the government is printing "debt" (selling treasury bonds) rather than printing "money". When the Fed purchases that debt from the open market, liquidity is added to the system. That would normally be inflationary, but nobody is spending anything, hence the deflation. IOW, the money is out there, but it's not changing hands.

Imagine you had $1 million in the bank and I was trying to sell you my house for $500k. Obviously, you have the money, you can afford it, but you just don't want to spend that much. After a year of runaway inflation, your bank balance grows to $1.5 million. I try to sell you my house again for $750k (adjusted for inflation). But you still won't budge. However, I really have to sell this house now, so I lower the price to $350k before you strike. There you have it: Deflation with an increasing money supply.

The moral of the story? All the money added to the economy won't result in inflation unless that money is making into the hands of the spenders. That's not occurring now. People are losing their jobs, losing their home's equity, losing their credit, etc. etc. How can they afford to pay more for thinngs? I believe most of the money is finding it's way into bank coffers, where it sits and collects dust. Instead of getting lent out to consumers and investors, it's used shore up the bank's balance sheet.