Why price inflation remains low?

Dr. Allan Meltzer, brilliant economist and professor and founder of several think tanks and centers, answers the question: “Why inflation remains low?”  in “When Inflation Doves Cry”

He argues “The Fed has printed new bank reserves with reckless abandon. But almost all of the reserves sit idle on commercial banks’ balance sheets. For the 12 months ending in July, the St. Louis Fed reports that bank reserves rose 31%. During the same period, a commonly used measure of monetary growth, M2, increased by only 6.8%. No sound monetarist thinks those numbers predict current inflation.  Indeed, almost all the reserves added in the second and third rounds of QE, more than 95%, are sitting in excess reserves, neither lent nor borrowed and never used to increase money in circulation. The Fed pays the banks 0.25% to keep them idle.  With $2 trillion in excess reserves, and the prospect of as much as $85 billion added each month, banks receive $5 billion a year, and rising, without taking any risk. For the bankers, that’s a bonanza, paid from monies that the Fed would normally pay to the US Treasury. And, adding insult to injury, about half the payment goes to branches of foreign banks.  In normal times, there are valid reasons for paying interest on excess reserves. Currently, however, it is downright counter-productive. Bank loans have started to increase, but small borrowers, new borrowers, and start-up companies are regularly refused.”  Read more at http://www.project-syndicate.org/commentary/why-us-inflation-remains-low-by-allan-h–meltzer#r7jTsvHE5V63kqeB.99

Dr. Meltzer is current president of the Mont Pelerin Society

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