2 replies to this topic

[abbyjoseph]

Is the Federal Reserve ignoring the very basic law of economics…the law of diminishing marginal utility? You remember that term from economics in high school. The law of diminishing marginal utility states that the more of something you have, the lesser its impact on you.

The Fed has been printing money in hopes of stimulating growth in the U.S. economy. As the Fed printed more paper money, its balance sheet grew to over $4.0 trillion.

Below, I’ve made a table that looks at gross domestic product (GDP) growth in the U.S. each year since 2009, and where the balance sheet of our central bank stood at the end of each year.

Will the U.S. Escape the Rapid Inflation That Usually Follows Massive Money Printing?

[salsabob]

Is the Federal Reserve ignoring the very basic law of economics…the law of diminishing marginal utility? You remember that term from economics in high school. The law of diminishing marginal utility states that the more of something you have, the lesser its impact on you.

The Fed has been printing money in hopes of stimulating growth in the U.S. economy. As the Fed printed more paper money, its balance sheet grew to over $4.0 trillion.

Below, I’ve made a table that looks at gross domestic product (GDP) growth in the U.S. each year since 2009, and where the balance sheet of our central bank stood at the end of each year.

Will the U.S. Escape the Rapid Inflation That Usually Follows Massive Money Printing?

At best, you're a little bit right on "diminishing marginal utility" but for the wrong reasoning, and that wrong reasoning leads to some pretty silly conclusions (e.g. inflation).

The FED does not print money. It issues bank reserves that never see the light of day outside of the inter-banking system, i.e., reserves are not injected into the economy and as such have nothing to do with inflation. The U.S. Treasury does issue money in the form of coins and currency but these days that is a tiny itty-bitty piece of what is money and what is 'printed.'

Commercial banks "print" most all money circulating in the economy and do so by lending, whether to the private sector or to the govt. That lending is not constrained by how much reserves they have; fractional reserve lending is a myth that is told to Econ 101 students to make things simple enough for them to past their mid-terms. Bank lending is ONLY constrained by a willing credible borrower (the US govt being the banks' best customer) walking in the door - if the bank decides they got such a creature, then they make money out of thin air - it's called lending and is simultaneously followed by a bank deposit created out of thin air - nothing more than computer keystrokes on a double entry accounting system - debt (loan) and credit (deposit) - that is how most all money is now 'printed' - the 'printing' has been outsourced to the commercial banks.

The only real impact of the FED increasing its balance sheet by issuing bank reserves is psychological - the target being the vast majority of people who cannot understand and/or accept (too scary) the previous paragraph. The "diminishing utility" of the FED increasing its balance sheet by 'printing' new bank reserves is a result of there being more and more people starting to grasp (but most probable still not understanding why) that such bank reserve 'printing' has no impact on actual commercial bank lending, no increase in credit in the real economy, no actual money being injected into the real economy, and no impact on actual inflation other than through those people prediposed to believing as religion that it does and bidding up assets or parking their real money somewhere since the FED has been making risk-free US Ts and MBS rare (i.e. QE).

On the other hand, belief, along with fear and greed, is what drives markets. So maybe your beliefs will make you some money... even with the wroing reasoning.

Edited by salsabob, 08 April 2014 - 12:53 PM.

[stocks]

Will the U.S. Escape the Rapid Inflation That Usually Follows Massive Money Printing?

The short answer is eventually YES. The same way we escaped it in 2008 and 1974.