Thorsten Polleit on real inflation and its dangers:
In an attempt to fight the international credit market turmoil and its effects on economic activity and overall prices, the US Federal Reserve (Fed) keeps increasing the supply of base money — which is cash in circulation and commercial banks' money balances held with the Fed.
From August 2008 to May 2009, the monetary base in the United States more than doubled. The bulk of the expansion reflects an unprecedented rise in banks' excess reserves — that is, banks' base money which is available for additional credit and money creation.
People are being told by governments, central bankers, and leading mainstream economists that such a policy wouldn't be inflationary — because the money would remain in the portfolios of banks and would not spill over into the hands of firms and private households.
This is, to put it mildly, an uninformed view. To show that a rise in base money is inflationary — that it either lowers the purchasing power of money or, what basically amounts to the same, prevents money's exchange value from rising — let us start right from the beginning.
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