Between Sept. 2008 & June 2014, the Monetary Base Has Increased by OVER 440% As Excess Reserves Sit at the Fed Earning Interest

What was the Federal Reserve’s response in the face of the busted bubbles its own policies helped to create? Between September 2008 and June 2014, the monetary base (currency in circulation and reserves in the banking system) has been increased by more than 440 percent, from $905 billion to more than $4 trillion. At the same time, M-2 (currency in circulation plus demand and a variety of savings and time deposits) grew by 35 percent. 

Why haven’t banks lent out more of this huge amount of newly created money, and generated a much higher degree of price inflation than has been observed so far? It is partly because, after the wild bubble years, many financial institutions returned to the more-traditional creditworthy benchmarks for extending loans to potential borrowers. That has slowed down the approval rate for new loans.

But more important, the excess reserves not being lent out by banks are collecting interest from the Federal Reserve. With continuing market uncertainties about government policies concerning environmental regulations, national health-care costs, the burden of the federal debt, and other government unfunded liabilities (Social Security and Medicare), as well as other political interferences in the marketplace, banks have found it more attractive to be paid interest by the Federal Reserve rather than to lend money to private borrowers. And considering how low Fed policies have pushed down key market lending rates, leaving those excess reserves idle, first under Ben Bernanke and now under Janet Yellen, has seemed the more profitable way of using all that lending power.

—Richard M. Ebeling, “Federal Reserve Policies Cause Booms and Busts,” in Austrian Economics and Public Policy: Restoring Freedom and Prosperity (Fairfax, VA: The Future of Freedom Foundation, 2016), Kindle e-book.

The Essence of Say's Law of Markets Is: Unless We First Produce We Cannot Consume; Unless We First Supply We Cannot Demand

The more complex the network of exchange, the more difficult the direct barter of goods one for another. Rather than be frustrated and disappointed in not being able to directly find trading partners who want the goods they have for sale, people start using some commodity as a medium of exchange. They first trade what they have produced for a particular commodity and then use that commodity to buy the things they desire from others. When that commodity becomes widely accepted and generally used by most, if not all, transactors in the market, it becomes the money-good.

It should be clear that even though all transactions are carried out through the medium of money, it is still, ultimately, goods that trade for goods. The cobbler makes shoes and sells them for money to those who desire footwear. The cobbler then uses the money he has earned to buy the food he wants to eat. But he cannot buy that food unless he has first earned a certain sum of money by selling a particular quantity of shoes. In the end, his supply of shoes has been the means for him to demand a certain amount of food.

This, in essence, is the meaning of Say’s Law. The nineteenth-century French economist Jean-Baptiste Say called it “the law of markets”: that is, unless we first produce we cannot consume; unless we first supply we cannot demand. But how much of our supply others are willing to take is dependent on the price at which we offer it to them.

—Richard M. Ebeling, “The Myth of Global Gluts and the Reality of Market Change,” in Austrian Economics and Public Policy: Restoring Freedom and Prosperity (Fairfax, VA: The Future of Freedom Foundation, 2016), Kindle e-book.