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More tenured members will remember that the last time we discussed quantitative easing[1] the conversation that followed, dubbed "...don't worry be happy..."[2], left many with more questions than answers.

Fortunately, Richard Koo has released an excellent piece on the topic that further explains misconceptions and the program's impact thus far . Here is a snip that you'll hopefully agree or disagree with strongly enough to follow the link at the end to read the rest:
Money supply has shown little change despite sharp increase in liquidity

What actually happened, however, is quite different. Market liquidity in the US and the UK almost tripled. But the money supply,which represents funds actually available for use by the private sector, has increased little if at all since the financial crisis in2008.

Figure 1 shows the US monetary base (ie liquidity) along with the money supply and commercial bank loans and leases outstanding (ie private-sector credit), rebased so that August 2008 = 100. The graph confirms that these three indicators moved in unison, as the textbooks predict, until the Lehman-inspired financial crisis. Since then, however, liquidity has surged to nearly300, yet the money supply stands at 115.

As explained above, growth in the money supply should entail a corresponding increase in bank lending under ordinary conditions. Yet lending had fallen to 90 by April 2011.

In other words, the money supply—which supports consumption and investment—has exhibited little growth during this period.We cannot expect an expansion of the economy or an acceleration of inflation without an increase in the money supply. There is no reason why inflation—apart from imported inflation—should increase at a time when the money supply is not growing.

The inflation currently being reported around the world is of the imported variety, typically involving oil and food. “Home-grown”inflation, like the core deflator for personal consumption expenditures shown in the bottom portion of Exhibit 1, remains subdued


[1] My thoughts:
[2] The conversation:
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