Hyper-Inflation or Excess Reserves?

You’ve seen one of these graphs before. It’s the monetary base. A lot of people saw this crazy spike in the monetary base and said, “Inflation!” I responded by hand waving and making the argument that this base money was not inflationary because banks were sitting on it. This satisfied some people because they trusted my analysis. This is better. This shows the bank reserves and the difference between the two graphs. The crazy feature can be entirely explained by the excess reserves that banks are holding (source: 1, 2).

Does this mean that we are all clear? No, not at all. As I mentioned before, this is a lot of rope with which we can hang ourselves in the future. If the banks actually start pulling their money out of the federal reserve banks, this money can be multiplied explosively through fractional reserve lending. The doubling of the monetary base could lead to a doubling of actual money, creating big inflation concerns. I do not believe that time is now, though.

For the same graph over a longer period, click here.