In an article that I first saw on June 28th, Martin Feldstein asserts that quantitative easing is NOT money printing, and suggests that is the main reason we have not seen any price inflation.
The link between Fed bond purchases and the subsequent growth of the money stock changed after 2008, because the Fed began to pay interest on excess reserves [which] induced the banks to maintain excess reserves at the Fed instead of lending and creating deposits to absorb the increased reserves, as they would have done before 2008. As a result, the volume of excess reserves held at the Fed increased from less than $2 billion in 2008 to $1.8 trillion now, effectively severing the link between Fed bond purchases and the resulting stock of money. The size of the broad money stock (M2) grew at an average rate of just 6.4 percent a year from the end of 2008 to the end of 2012.
Yet, this is all wrong: every bit of it, except for the fact about paying interest on and the increased quantity of excess reserves after 2008. That may have diluted the significance of the Fed Funds rate as a policy tool, but it has absolutely not severed the link between open market purchases of securities and the resulting stock of money. Feldstein’s analysis starts out with making an incorrect observation, and then proceeds toward a rationalization…….To Read More…..