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Recently I heard from Richard Koo's video, that central banks have injected so much money to the banking system. There is enough reserves in the U.S. banking system to increase money supply 16 times. In other words, according to Richard Koo, the inflation should have been around 1600% over the last 10 years. However, as per the inflation reported by the federal reserve, it is still under 2%.

I understand that the asset prices have gone up in the last 10 years in terms of stock prices and housing prices. But why is inflation still low?

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  • $\begingroup$ I'm voting to close this question as off-topic because it seems better suited for economics SE. $\endgroup$ – LocalVolatility Mar 31 at 11:16
  • $\begingroup$ Can you point to a place where Koo says that inflation should have been 1600%? $\endgroup$ – dismalscience Mar 31 at 15:34
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    $\begingroup$ Koo believes that monetary policy is ineffective in this situation. His views are interesting. But he is making a straw-man argument when he says this statement. No one seriously believed that the price level would rise in direct proportion to the size of the Fed balance sheet in response to QE. He is debunking a claim that no serious economist ever made. $\endgroup$ – Alex C Mar 31 at 19:45
  • $\begingroup$ Also note that his data is factually wrong: "From November 2008 to November 2014, successive QE programs added \$3.6 trillion to the Fed’s balance sheet, nearly 25% more than the \$2.9 trillion expansion of nominal GDP over the same period. " So 1600% would really be 25% even if QE had the effect he claims. $\endgroup$ – Fizz Mar 31 at 22:48
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There's a pretty simple answer to that. The money injected into the banking system does not acquire any velocity- it just gets redeposited at the Fed. If they had spent the same amount of money into the general economy in the form of goods and services, then you would have seen higher inflation.

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  • $\begingroup$ So (to play the devil's advocate), if [this] money always stays at the Fed, why not do QE continuously forever? (I.e. I think your answer is missing some conditionality.) $\endgroup$ – Fizz Mar 31 at 21:36
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    $\begingroup$ The purpose of QE was to control long term interest rates by buying Treasury bonds and mortgages. If there’s no need to do that, they will stop. In fact they have stopped and are now reducing the Fed balance sheet. $\endgroup$ – dm63 Apr 1 at 2:57

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