The money supply has increased by 300% since 2008. Yet we are only faced with 3% inflation. When would we even see an increase in inflation if it were to happen? It’ll happen by incredible amounts once the Fed stops paying banks for the excess reserves they have with the Fed.
As a side note, the Fed hasn’t paid banks for excess reserves for over 60 years. Why? Because there weren’t any to pay on since banks didn’t get paid if they held excess reserves. Fed is paying banks for excess reserves, which means they’re trying to delay inflation through fractional lending and its subsequent multiplier effect on the money supply. They don’t want the increased money supply that they printed and gave to the banks in form of bailouts to hit the market yet and that is why they’re paying banks to hold excess reserves.
Another reason banks are holding excess reserves is that the interest being earned on the excess reserves is guaranteed by the Fed, whereas a loan out to the consumer for a car or house runs the risk of default and with that risk the lender may not recoup the total cost lent out.
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