Next week Federal Reserve is expected to end it’s large ‘asset purchasing program’ (money creation program) called QE3 (Quantiative easing 3). At the same time, private banks have started to grow the active part of the money supply at an increasing rate, currently 6,3 percent per year through credit expansion, the highest inflation rate since the stock market crash in 2008.
While a lot of people believed that the QE-programs that started back in 2008 would create massive inflation, this has not been the case. Why? Because money created through asset purchases by central banks do not enter the economy, it’s money out of circulation deposited at the central bank. I can prove this easily, the majority of all money created through asset purchasing programs since 2008 are still hold as excess reserves at the Fed. See excess reserves in the chart below:
Here we have almost §2,8 trillion in cash at the Fed, the majority of the ‘QE-money’ created since 2008 still not used at all. This chart explains why inflation has been relatively low despite massive money creation by the Fed. The creation of money by central banks is not causing inflation in itself, only when private banks expand credit used for transactions inflation will show because this money directly is used for transactions and therefore pushes prices higher. In other words, to measure real inflation we must focus on credit creation by private banks. How much money banks in the US creates through credit creation can be seen here.
Not surprisingly, the person who invented the term ‘QE’ explained that the purpose of such program was to expand money in circulation, not out of circulation: BBC: QE has failed, says quantitative easing inventor
Prof Werner’s argument was that, because more than 95% of the money supply in a modern economy is derived not from cash or reserves, but from private bank lending, it is essential to get banks to lend.
The Bank of Japan’s version of QE, in contrast, involved creating money out of nothing at the central bank.
”That’s absolutely not what my policy was about,” says Prof Werner. ”In my original article, I specifically argued against either lowering interest rates or expanding central bank reserves. That was my whole point – traditional solutions weren’t going to work. Actually, it was a bit upsetting.”
No wonder QE failed in doing what it was intended to, it has taken more five years for the US economy to come out of the collapse. For the first time since then, active money is now expanding and this is what drives economic activity in a inflation-based economy. A new credit bubble is emerging with a inflation rate of 6,3 percent per year already, big inflation is with high probability coming since the banks hold about 2,8 trillion in execsses today ready to be used for further balance sheet expansion (credit creation), credit expansion will most likely continue to accelerate. Protection against this stupidity is real assets that cannot be created out thin air (for example gold, silver and bitcoin).