Mass price inflation coming soon?


Is mass inflation on the horizon? Something remote is happening on June 5, 2014 that might have serious impacts to your daily life…

Rumors continue to surge about the European Central Bank penalizing banks for storing their excess reserves. Right now, the ECB pays interest on excess reserves that banks store with them, so the banks have incentives to not make loans.

This has not been the case in the past, but since 2008 there has been much fear and uncertainty in the world of finance, on both sides. Banks have not wanted to take on the risk of lending money for fear of being caught in a similar flood that drowned the financial economy in 2008. Not only that, but demand to borrow money by entrepreneurs and small business owners has been low too, for the same reason.

Under this new policy (rumored to be discussed at their meeting on June 5), the banks would be charged for storing their reserves instead of lending them. They would pull that money out of the bank and start spending it into circulation because they would go looking for opportunities to earn a percentage on that money, no matter how small, instead of paying a fine for storing it.


The status of banks in America is the same. They have over $2.5 trillion stored in excess reserves at the Federal Reserve (see the chart posted at the top of this article). This mechanism of piled-up excess reserves has served as a damper between the Fed’s monetary inflation and the manifestation of mass or hyper price inflation that typically results from such a policy.

If they start lending that money, it will multiply in the fractional reserve system by (a theoretical limit of) up to ten-times: $25 trillion dollars. Historically, the multiplier seems to have been approximately three times. Prices could surge, and not at the same rates uniformly across the economy.

The central banks of the Western world do not do anything in a vacuum. They typically move together. What the Fed does, you can look to Europe for the ECB to do something similar. And vice versa.

It just seems like an unlikely policy for the Fed to pursue at this time. They can expand the monetary base now without any negative consequences — high price inflation which would bring about a political outcry and a restraint upon their independence and power. The economy isn’t yet in crisis again, though it’s certainly barely limping forward.

Paying negative interest seems more suitable as a crisis tool. We aren’t in a visible crisis. The last visible crisis in 2008 resulted in a departure from all previous central banking policy (the rapid and massive expansion of the monetary base). We would expect a move like this to come during a similar crisis, but not before.

Have motivations inside the central banks changed?

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