Inflation?

Thanks to Ming, who basically asked, "If the Fed is printing all this money and buying $300B of t-bonds, then why don't we see inflation?"

Also thanks to the John Mauldin blog, which I read religiously at http://www.2000wave.com/gateway.asp. He tackled this same idea a week or so again and I am going to use the equation MV = PQ, which he reminded me of, to explain the answer.

M is the supply of money
V is the velocity of money [the speed at which it moves through the economy]
P is the price level [this is what we consider inflation or deflation as it moves up or down]
Q is basically GDP, or gross domestic product -- the quantity of what we produce

All else being equal, an increase in M should either decrease V, or increase either P or Q. The increase in P is usually what we encounter, as Q is hard to change short term and V isn't necessarily something affected by Fed actions.

In our case however, all else is NOT equal. V has slowed down dramatically -- banks aren't lending as much, either retail or commercial. Q has also dropped significantly -- cars and houses aren't being built, suppliers are afraid to make too much, etc.

Therefore, the increase in M is being more than offset by decreases in V and Q. So much so, in fact, that we'd have quite a severe case of deflation if the Fed had not taken action -- Mauldin argues that he expects to see much MORE Fed action just to keep us where we're at.

Regards,
Trond