Facilitating dialogue to promote open and multi-faceted discussion and awareness

Ran across this today in my studies and wanted to share how much of a recent phenomenon consistently rising standards of living are. This chart shows GDP per capita spanning from 1 A.D. our time. Now, many studies have shown the explosion of population, which have been apocalyptic in their conclusions, for the past several centuries. But none would have predicted such a rise in living standards, even within the past century. A century ago, the United States had a standard of living comparable to Kenya and Bangladesh now. Just look at what a rise in living standards can do now.

The study of economic development is a new and developing science! This is incredibly exciting for a student like me and many of my passionate friends.

I was listening to someone on the radio today talking about the ending of the Fed’s QE2 program this week, and how the Fed isn’t very likely to initiate a QE3. He put blame on the Fed for rising gas prices and inflation. Let me clarify this falsehood which may seem popular on the airwaves, and may have even backed Chairman Bernanke into a corner, but it’s not very close to the truth.

First off, let me explain what QE (quantitative easing) is. This was a program initiated by the Federal Reserve when it seemed like the economy was stalling in growth (much like it seems to be doing now). In this program, specifically the second round of it, the Fed purchased $600 billion worth of short term treasury securities in order to put downward pressure on short term interest rates. This is a roundabout way to stimulate the economy, providing incentives for borrowers to get loans and drive-up the ability to demand products (not necessarily stimulate the mental faculty of demand in uncertain economic times).

Now, this is technically pumping more money into the economic system. So the main economic idea is that the higher growth in monetary aggregates, the greater propensity for growth in inflation. (a *GENERAL RISE* in the price level, another point that has been misunderstood recently). But even Monetarists agree that the simple growth of money supply isn’t enough to tempt inflationary pressure. Rather, it’s the availability of this money and it’s increasing use throughout the economy that really initiates a rise in inflation: the money multiplier and the velocity of money. So what’s next? Well, as economists are infamous for saying, let’s look at the numbers:

First of all, for sure the money supply has grown since this recession began:

But remember, that’s not the only indicator of inflation. How is that money being used? Well, the answer is it’s not being used very much:

And why is that money not being used? Well, the savings rate and deposits are at some of their highest points over the past decade (at least):

And finally, gas prices:

So there has been in incredible rise in gas prices, but declining economic activity over all. Inflation rates are at a 3.5% rise since a year ago, but over half of that rise is due to two commodities that undergird many of the things we buy: food and oil. This indicates a rise in price due to exceeding demand, NOT due to inflationary pressures caused by monetary easing.

So, the treasure hunt continues for the source of this rise in gas prices. I buy into the idea that it’s increasing demand, with some middle-eastern upheaval in the mix…