My subscription to Gary North's newsletter just paid for it self in one commentary. His analysis of this article helped improve my understanding of their conclusion: prices could decline in the near future.
I subscribe to John Mauldin's free newsletter which today consisted of an outlook by two other very bright guys, Lacy Hunt and Van Hoisington. I have read both of them. And Mauldin used to be a partner of Gary North. Confused? Don't be. This is just to say that they have immense credibility with me and I would automatically be sympathetic to their point of view.
But with North's analysis I now have a better understanding:
The Fed is deliberately driving down the velocity of money (how fast money circulates) by keeping the banks' excess reserves with them rather than letting the banks lend them out. They do that by paying interest on those reserves. Look at it from the bankers' perspectives: why would you loan your precious reserves to risky customers, even those with excellent credit ratings, when you can make risk-free loans to the Fed and earn interest there? True, it's less interest than you might get from a customer, but with them you run the risk of not getting your money back. You don't have to worry about that with the Fed.
So North thinks it's a deliberate policy to keep the banks from lending, which keeps price inflation from hitting the grocery stores. He says it's the best of all possible worlds for the Fed: they can continue to finance the government deficits with digital money without price inflation.
If, however, the Fed decides to stop paying interest on those reserves, or worse, decided to start charging interest on those reserves, this action would force the banks to take back those reserves and start lending them out. This would result in price inflation almost immediately. North thinks that if the Fed does that (reverses course), we could see prices double in a matter of months. For the time being, however, the Fed has no interest in doing that. I'm not sure why the Fed would ever start charging interest on those reserves. So price inflation is highly unlikely, and we might even see some small decrease in the overall price level. This is helpful information. It agrees with the conclusion by Hunt and Hoisington but I have a better understanding, thanks to North.
Here's the link to North's analysis. You'll see that it's a paywall. I pay $9.95 a month to get over that wall and read his stuff. This single analysis of a well-written article which could have misled me and my understanding of the world has paid for my subscription for a least a year. I think North is way undercharging. Don't tell him I said so.