Rapid money supply growth with no consumer price inflation can only really occur within the confines of an asset price bubble, or else, where does the money go? Interest rates are low at such a time because of the incredible liquidity, and complacency of lenders that they will get an equal amount of purchasing power back. Perhaps another possibility is when a country’s currency is being used more and more as a shadow currency, like the US in the Third World. But even that will come home someday.
I wrote this sometime prior to 2003. But can it be more relevant than today, aside from my comment about being a shadow currency? Alas, the US Dollar is not a store of value anymore. It is only a unit of exchange, like trading cigarettes in a prison camp.
The Federal Reserve may pretend that it is the guardian of stability, but it is not so with respect to asset values. The Fed stays within its mandates: labor unemployment and goods price inflation. Those are not much affected by Fed policy at present. But asset values are inflated.
What should we expect of monetary policy? Additional creation of money or credit should affect the prices of something. If the Fed does not intend on affecting a price somewhere, what is it up to? The economy is prices. What is the Fed if it does not affect prices? Next press conference, ask Ben what set of prices he is trying to affect. If he mumbles, as he usually does, you can know that he is without knowledge, or lying. All monetary policy affects prices, and it is either dishonest or stupid to say otherwise.
That’s all for now. We are in a rough situation because of errors in government and central bank policy, as well as cultural errors that have favored spending over saving. Ignore the idiots who talk of the paradox of thrift. They rely on short-term models which are not relevant in the real economy. Saving is a good thing, but maybe save in currencies that are not subject to government discretion, like gold.