Saturday, April 4, 2026 
The Money Trap
Through lower interest rates and other mechanisms, the FED is currently expanding our monetary base. (Here begins our ill-fated orb.) As the monetary base expands, more dollars are competing for the same amount of goods, causing prices to rise. Climbing prices of goods and services on a general scale is what we term “inflation.” Thus (and now we come full circle), the FED’s expansion of the monetary base is, by definition, inflationary.
Yet–there is no inflation.
There is deflation
.
In fact, The Producer Price Index is deflating at a 5.0% year-over-year (YoY) pace. We are in the thick of the worst deflationary spiral in 50 years. If the FED is expanding the monetary base at the most torrid pace we have on record, why is there no inflation? Why are we seeing the exact opposite effect?
Well, thanks to the diligent monetary expansion efforts, banks can now borrow at very low rates. This is typically an economic boon: as the capital is readily available to the banks, it moves through the system quickly and efficiently, flowing from the banks to businesses and consumers. The money flow is liquidity.
However, at present, the banks are not circulating the money. They are not loaning to businesses and consumers; they are not allowing it to flow in and out. They have dammed it up within in order to use it for their own institutional repairs. The liquidity, in essence, is clogged.
Peace
F the banks!
Comment by Su Kim — June 27, 2009 @ 1:53 am
[...] has not yet reared its unsightly head–it is still wading amidst the muck of the banks’ clogged liquidity–but it will spill over and saturate consumers soon enough. Until then, we sit high and dry in [...]
Pingback by The Risk Aversion Trade | Trade the Picture — July 5, 2009 @ 4:03 pm
[...] inflation. There are no signs of inflation as far as I can see. To the contrary, all signs point to deflation. If the inflation trade is on, why aren’t interest rates [...]
Pingback by Market Rap 03 September 2009 | Trade the Picture — September 3, 2009 @ 6:19 pm
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