Comment: Banks may well cause

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Banks may well cause

Banks may well cause inflation. But not because of the excess reserves. Bank created inflation is of the credit bubble variety, like during the housing bubble. An infusion of credit pushes up asset prices; sparks consumer and investment demand... but it collapses, and prices fall back down if the government does not intervene with measures to sustain spending.

More likely is the inflation caused by runaway deficits that can't be corralled due to politics; interest groups demanding their chunk of the federal budget. Both are possible in tandem.

But these are somewhat separate issues from this description of how our banking system works. The point is that excess reserves are not inflationary because reserves are not loaned out by the banks at a multiple, as the story goes. Reserves are just balances held at the Fed by member banks, and don't factor into their lending decisions. They make loans if they have a credit worthy borrower (in their judgement) and sufficient capital. If they are short of reserves, they go borrow them on the market at the rate the Fed has set. Whether they have 1 trillion excess reserves or zero reserves, their loan decision would be the same.