“Deposit institutions are holding over a trillion dollars of excess reserves (that is, over 15 times what they are required to hold given their deposits). These excess reserves create the potential for high inflation. Suppose that households believe that prices will rise. They would then demand more deposits to use for transactions. Banks can readily accommodate this extra demand, because they are holding so many excess reserves. These extra deposits become extra money chasing the same amount of goods and so generate upward pressure on prices. The households’ inflationary expectations would, in fact, become self-fulfilling.”
Narayana R. Kocherlakota – President of the Federal Reserve Bank of Minneapolis speaks to Minnesota Bankers Association.
Although he later says the risk that this occurs is small, we shouldn’t be complacent. Hyperinflation, much like the financial collapse of 2008, is what many would consider a black swan event. Unlikely, but catastrophic if it occured.
