YOUR MONEY

Oops!!!  M1 or M4?

Sorry.  My  regular outcries on upcoming,  massive inflation -- as a result of Ben Bernanke’s money printing machine for the last 4 years—has not come true. 

The lack of U.S. inflation has perplexed me and most analysts as it is not consistent with standard economic theory.  Flooding the marketplace with cash (and near zero interest rates) to the tune of $3 TRILLION should trigger massive consumer spending -- after all, the money is almost ‘free’ – and result in supply shortages and increased prices.  That’s basic supply and demand theory.

But for 4 years there has been barely any inflation, let alone rampant inflation, in the U.S. (or piggyback Canada).  Inflation has stayed below 2%!

Why?

Because, as an article in the Globe and Mail, February 22, 2013 “Awash with money, where’s the inflation?” points out, we have all been focussing on the Bernanke’s ‘Inputs” or M1, but not the M4 ‘public circulation’ numbers.

What has actually happened is most of that cheap money has been ‘absorbed’ by the financial institutions who are still gun shy for lending out cash.  Instead, they have used the M1 as a windfall to shore up their own reverses and meet new, more stringent government regulation requirements while simultaneously (and from their perspective, more importantly) protecting their stock prices.

In short, the public is not getting much ‘cheap money’ but the banking sector is ‘healthier’ as a result. Quantitative Easing has been a windfall for financial institutions (M1) and a bust for the general public (M4).

And I and most analysts have messed up in our forecasts, because we only used the M1 crystal ball and ignored the M4 ball.