As of March 20, 2013 the Ben Bernanke Federal Reserve has added $2.101 trillion dollars to the base of the U.S. money supply since September 2008 when the financial crisis erupted. That is a 240 percent increase. The Bernanke Fed, that has sole control over the nation's monetary base (currency, coin and private bank reserves), is continuing its money explosion by adding $85 billion a month.
A time bomb amounting to fifty-four percent of the monetary base, $1.616 trillion, sits idle in the nation's private banks. These are excess reserves that the banks are not required to hold. This mountain of idle reserves began one month after the September 2008 financial crisis when the Bernanke Fed began paying banks a risk free quarter of one percent interest on their reserves. These payments reduced the banks' incentive to lend to consumers and businesses, as I have previously described. (Huffington Post, September 13, 2010 and August 29, 2011).
Former Federal Reserve Vice Chairman, Alan Blinder, suggested one solution: the Fed should reduce the interest it pays private banks to hold reserves and sell securities to offset the rise in the money supply. (Wall Street Journal, March 12, 2013) I agree as a first step. There would be an increased incentive to make loans to businesses, helping to reduce unemployment. The recipients would deposit the money received and the banks would then hold required reserves behind these new deposits.
There is a long history where countries use fast money growth to spur their economy. Eventually substantial inflation starts and decimates the economy, especially for those on fixed incomes. The Fed used faster money growth (currency, coin, checking accounts and consumer savings accounts, a money composite called M2) that caused inflation to rise over 13 percent in 1979 and 12 percent in 1980. A great chairman, Paul Volcker who took the Fed's top position in 1979, stopped the inflation at a cost of a double dip recession with unemployment reaching over 10 percent.
The introduction of the internet in the 1980's and 1990's, with nearly instant payment systems for money and credit, eliminated any simple association between small money supply changes and prices. In addition, the Alan Greenspan Fed further diminished the role of the money supply by changing from primarily controlling money to primarily targeting short-term interest rates.
Greenspan told the Congress he was fighting inflation in the first half of the 1990's with a doubling of interest rate targets. At the then secret meetings of the Fed's policy committee (the Federal Open Market Committee) he repeatedly said that he really wanted to "prick the bubble" in the stock markets. This bubble was caused by the 1990's tech boom.
At a House of Representatives banking committee hearing, Congresswoman Carolyn Maloney asked Greenspan about an article I had written (Barron's, July 24, 2000) questioning the Fed's authority to target stock market prices. Greenspan said that he had changed his mind during the last three years. During that period, the Fed had allowed the money supply (M2) to grow by over $1 trillion until March 2000 when the stock market bubble collapsed. That monetary stimulus for the stock market was much smaller than the present Fed's monetary base explosion.
Today business owners and operators face higher taxes and many more regulations that began with two 2010 laws: the Patient Protection and Affordable Care Act called Obamacare and The Dodd-Frank Wall Street Reform and Consumer Protection Act. Government regulators had written 8,843 pages of regulations and explanations by October 26, 2012 for the Dodd-Frank bill and the pages "continue to grow." ("Loopholes in the Dodd-Frank Act," San Francisco Chronicle, December, 7, 2012) The Affordable Care Act's major taxes hit businesses and consumers in 2014 amid bipartisan Congressional support to eliminate some tax funding (on medical devices) and numerous other problems.
Employers properly adjust to these increased costs by reducing current employees and new hires, a primary cause for the current period of mass unemployment years after the recession ended. The rising labor productivity figures that use output divided by the number of workers are misleading. The correct measure of labor productivity is the value of what can be produced by a an increase in labor, holding the effects of other inputs constant. The unemployed can make a large contribution to the nation's output if employers face fewer taxes and regulations for hiring the unemployed.
Despite these conditions, Bernanke and most of his colleagues say they are fighting unemployment and see no inflation. They actually may be targeting stagflation: high unemployment and high inflation. If rapid inflation and its accomplice, high interest rates, occur it is unlikely that the Fed can pull the over $2 trillion explosion out of the economy without causing an economic downturn and unemployment.