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In this country, first you print the money, then you get the inflation

December 9, 2010

At least that is how the story goes.  But nobody except me and a few other people seem to know how the money is printed.

But really smart people are starting to notice the obvious – that QE II won’t cause much or any inflation, because the money transmission mechanism seems to be broken.  Here is the One Chart: The adjusted monetary base.

For decades, the Fed diligently managed this number, trying to keep the monetary base secret and safe.   But then you see that huge messy spike, where the fed just said “Oh, hell with it” and increased the monetary base 2X overnight.  It looks like someone bumped the table while Bernanke was drawing with a marker to tell the desk guys where he wanted the monetary base, because that top is messy.

Inflation talk was rampant: We were told that the new name for the U.S.A. would be the Z.S.W.R. (Zimbabwe States of the Weimar Republic).  I almost started putting stacks of $100 bills in the tissue box.

Of course this didn’t happen at all.  Inflation has fallen to the lowest level in my lifetime.    Plus, even after the last few days, TIPS are still forecasting 2% inflation over 10 years.

If a 2X increase doesn’t increase inflation, why did those 3% YoY increases do anything.  Occam’s razor says this measurement of the Monetary Base is not the true measurement of the Monetary Base.  I sometimes wonder what it takes people to even consider MMT.

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