Fed Fumble: Lots of Cash, No One to Spend It

With the Federal Reserve seemingly hell-bent on inflating its way out of this recession -- pumping an additional $1 trillion into the market -- the specter of hyperinflation necessarily looms large.

But not so fast: While the Fed’s announcement might seem alarming, Chairman Ben Bernanke is fighting a forest fire with a water weenie.

Back in reality, the ongoing debt destruction and shift back toward savings is having a far greater effect on the American economy than a paltry few hundred billion dollars of “liquidity.” The Wall Street Journal reports that, although M2 money supply has increased 10% in the past year, the cash isn’t really going anywhere.

The more significant number -- what’s known as the “velocity of money” -- fell to its lowest level since 1991. The velocity of money simply means how quickly money is spent: It measures the amount of gross domestic product, or GDP, generated for each dollar of cash sloshing around the system.

So even though the Fed is injecting more money into the system, consumers are socking it all away in savings accounts or paying down debt. Banks, for their part, aren't doing anything with the money, either..