More on Inflation

As promised, there will be more on inflation this week and maybe even next week.

For those of you who either flunked Money and Banking or never took economics in the first place, we live in a fractional reserve world, where banks are required to maintain a fraction of their liabilities in actual reserves to meet the demands of their customers. The rest of the money is available to be lent-out. So, if you’re a banker with $1,000,000,000 in deposits, you’d have to retain $100,000,000 in reserves if we had a 10% reserve requirement. Looked at another way, if the bank as $100,000,000 in capital, it can create $1,000,000,000 in assets. The bank can take the $100,000,000 of high-powered money and multiply it. This is the guts of the money creation machinery. But today, banks aren’t taking their high-powered money and creating even more money. If they did, the economy would be screaming, assuming the monetarist economists are right. Read more