THE THREAT OF INFLATION 51This is just another game — another shadow play providing
a backdoor way of financing the FDIC premiums with printed
money so the banks don’t actually have to bear the cost. That’s
the reason they’re doing it.
Beyond that, the notion that, if they stop paying the inter-
est that, all of a sudden, the banks will say, “Well, we’ve got to
make some money. We’ll go out and lend all this money,” I don’t
agree with that at all. In fact, it’s not right.
The dynamic is different than these theorists suppose. The
real problem is that, to have inflation, you need two things:
Money supply and velocity.
Velocity is simply the turnover of money. If I go out tonight
and I buy a drink at the bar, then I tip the bartender, and the
bartender takes a taxicab home, and the taxicab driver puts
some gas in his car, that money has a velocity of three. You’ve
got the bartender, the taxicab, and the gas station. But, if I stay
home and watch TV or buy gold and leave it in a vault, that
money has a velocity of zero.
The nominal GDP, the nominal gross value of all the goods
and services in the US economy, is simply the money supply
times velocity. You need both to cause inflation.
You need money supply times velocity to be greater than
potential GDP. Then, the excess shows up in the form of infla-
tion. Today the Fed has taken the money supply to the moon
yet velocity is collapsing. That’s the problem.
More or less money printing or payment of interest on ex-
cess reserves won’t cause inflation. What would cause inflation
is the change in velocity, which is behavioral. It’s the change in
the psychology. That’s what you have to look for. It’s what the
Fed actually calls “inflationary expectations.”
And so I like to say, if you want inflation, it’s like a ham-
and-cheese sandwich. You need both the ham and the cheese.
Money printing is the ham and velocity is the cheese.
The thing to watch for is a change in inflationary expecta-