Is Inflation caused by the Federal Reserve Increasing the Money Supply?
Well maybe. I don't want to say straight-out, "no" or youn's won't listen to me anymore.
But first, we must divide up the question. I'll discuss the main point in some other post.
1. Temporary increases vs. permanent increases in money supply.
This is the temporary credit money vs. the permanent "hard money" question. It's not clear that the Federal Reserve has ever intentionally made any new hard money, as to quantity, as their target has always been interest rates--though perhaps they used to target current (i.e., temporary) money quantity--and not, or so it seems to this arm-chair expert, long-term permanent money quantity. Suppose now, this is the case. It may be we have no more money, excluding Treasury Notes, just in terms of Federal Reserve Notes and unborrowed money in Federal Reserve accounts--which corresponds one-to-one, by the way, with all un-borrowed money (in my reasoning)--than during the gold standard. Under the gold standard, the government could at least issue money, could it not, in some ratio to purchased gold. But if we have discontinued that system, by what means is money increased? Under the current system, without increasing money by buying gold and using that as an excuse to issue new currency, it would seem we likely have less Federal Reserve Notes and, permanent Federal Reserve Notes and non-borrowed balances than during the gold standard era as a ratio to the size of the economy, though the gold standard being the gold standard, that would be the case anyway if it still existed today. So how? Perhaps, bit, by bit, as seems to be needed in open-market operations. But whence the 31 trillion? And how much of that is held by the Federal Reserve, and hence actually "monetized?" Research alarm ringing here--I didn't do my research, don't know my... How much?
2. Major inflation vs. two percent "target" inflation.
Does the Fed cause the inflation or follow the inflation? My guess is contrary to what the Fed thinks, it is only following not altering the inflation rate. But if so, then why is it a constant two percent? Maybe my guess is wrong.
My working hypothesis is this insidious constant two percent inflation is the result of the constant accumulation of pricing power that accumulates in every trade between any two parties to trade: because while trade may be fair, no trade can ever be equal. Yet, why the two percent? Maybe I am wrong here? But explain the mechanism, then? Ok, ok, you say it is the Fed. "printing money." Yet is it the Fed. or the Treasury that "prints" money? It seems to be a combination, a two-stage process, for any long-term money "printing," with the control over and timing of each stage divorced one from the other.
The Treasury, stage one is responsible for ultra long term "money printing." I put money printing in quotes because we are not talking literally paper money. It prints money in the form of Treasury Notes--yet, yet--we can hardly say that anything, at stage one has happened yet, as it is but an exchange of extent money in the economy for savings accounts with the Treasury we call, Treasury Bonds, Notes, and Bills. The central bank is prohibited in participating directly in Treasury Auctions and all Treasury auction sales are to the public.
Stage Two: the Federal Reserve buys some Treasury Notes, Bonds, Bills, from the public in Open Market Operations. Yet the goal, generally, is not printing money, but, you know, Open Market Operations--fiddling around with interest rates such as the inter-bank lending rate between, private, Federal Reserve Member Banks and other Reserve account holders, if there are any--I think there are, for instance, Treasury auction Primary Dealers are mostly non-banks, and certainly their customers are.
It seems to be from very specific causes. And hence, one's first assumption is not from "printing money" in the abstract. This happened three times, four if you count since when--April of this year? But you can hardly count that since gas prices have gone down again and have returned to, compared to 2008 highs, mildly deflationary levels. Where's the two percent, or is that insidious two percent just some residual result of leaving the gold standard? Well, no, it's something that with a few short exceptions of zero average price changes, happened throughout the twentieth century outside of the major inflationary episodes. The nineteenth century was generally deflationary, no? Ok, those episodes: World War I: reversed after a price-stable roaring twenties during the Great Depression. World War II reversed the Great Depression price drop to the post World War I level. Then, when America went off the gold standard (all of you breathe a collective, "ah hah!), during the nineteen-seventies. Each of these episodes constituted a doubling of average prices. The Great Depression, a halving. Or so goes my analysis of some chart I found somewhere.
What of boom bust? The booms of boom bust haven't generally been periods of large-scale inflation. Ok, please don't quote me this nonsense period we have been in, as obviously one can't make a rule out of pure bull. What there is in the boom bust is the "relative value story" of financial asset price increase, but not a general major price increase. You say, what about the boom time of World War II? I say: where's the bust part of the cycle after World War II? You say, ah, what about the Great Depression? It followed the boom of the roaring twenties, which followed the inflation of World War I. I say, but the chart I found somewhere says the ten year long Roaring Twenties, the actual contiguous time period to the G.D., it was a period of absolutely stable average prices. You say, what about the seventies? I say, that's not a boom bust cycle--where's the sudden financial crash? It just went on and on with stagnation, albeit one imagines with healthy wage increases--unlike the jobless "recoveries" that became famous later.
So we seek for the boom bust cycle elsewhere. I would argue the boom bust would happen anyway, but that the extremities, of this rolling, every growing in scale and intensity, boom bust is the result of deflationary credit bubbles. I think generally people would agree with that, although the truth may be somewhere else, someone might turn up and explain to me--I don't pretend to be an expert. But I think on top of that basic idea, there's the question of sectoral balances. Why does--my idea--the bust happen suddenly and at the height of the boom? Sectoral imbalances due to the high savings rate of the boom. And the high taxes paid by a booming economy. These two--in my current working hypothesis--albeit theorized here in my armchair.