Today’s article is Where did inflation go? by: Joe Light. The story is basically that the government now has $2.2 TRILLION dollars in assets, and, as most of us already know, they have given a bunch of money to the banks. What that means is that the banks have money to lend now, which usually leads to more money in the economy and that drives prices up, aka inflation. Interestingly, though, that isn’t what’s happening.
Prices are staying the same, and, in some cases, the prices are even going down. So, what’s the deal? Unemployment, for one. People don’t have jobs, and so they can’t spend as much money, so the inventory in stores doesn’t move, and the prices don’t go up, i.e., no inflation. Also, the lenders’ balance sheets (how many assets and liabilities they have, and their net worth) are still in a place where they are fearful of a too low cash flow, so they aren’t lending as much. They are trying to keep as much money for themselves as possible, and so that means companies and individuals aren’t getting loans.
So, what happens in the near future could help or hurt the economy. When the unemployment rate goes down (hopefully), the banks might lend more. This will prompt the Fed to try and take some of that money, and depending on it’s timing, we could end up with higher prices, another recession or inflation. Gee, doesn’t that all sound fun?
