Money is also destroyed

The Federal Reserve System has systematically inflated the money supply since 1987, causing tremendous inflation. Along the way, money has also been destroyed, most memorably during the dot.com collapse of 2000-2003. This process of destruction is part of the reason why the economy has not experienced true hyperinflation.

In fact, a key point here is that the Fed is not really creating money, but credit. If the Fed had actually printed bills (rather than made electronic book entries) for each dollar it created, those dollars would still be circulating in the economy and inflation would be much higher. As it is, the Fed can create credit, and those closest to the source of that credit creation – banks and government contractors – reap the greatest benefits. As the credit works its way through the system, it 1) causes general inflation, and 2) finds its way into weaker, less experienced hands – the likes of Mr. Jones and his subprime mortgage, or the average investor chasing internet stocks. In these weak hands, it can easily be manipulated to destruction.

Through this process of destruction, runaway money supply growth can be controlled. But if the destruction process gets out of hand, it is possible that we could see the reverse of what we have seen over the past twenty years – a prolonged period of sustained deflation.

- This is the deflationist point of view. With Ben "Helicopter" Bernanke manning the cockpit, I'm not so sure about this hypothesis. The deflationist "lack of faith" in the printing presses disturbs me ... :)

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