July 13, 2010

Merk Analyst Sees Inflation Risk When Lenders Loosen Strings

Unprecedented bank reserves waiting to be deployed

Currency experts at Merk Mutual Funds have an interesting point of view on the inflation-deflation debate. In an outlook article posted on their Web site on Tuesday, July 13, "Inflation: The Runaway Train,"analyst Kieran Osborne notes that because there are currently, "$1.1 trillion of bank reserves just sitting on the sidelines waiting to be deployed," due to banks' unwillingness to lend right now, and that once they become less afraid to lend, this liquidity would pour into the U.S. economy and create an inflationary environment.

The environment would be caused by an increase in the "velocity of money" in the economy, "which slowed down considerably throughout the crisis (a key reason why all the additional money printing has not yet been inflationary)," according to the article.

Comments? Please send them to kmcbride@wealthmanagerweb.com. Kate McBride is editor in chief of Wealth Manager and a member of The Committee for the Fiduciary Standard.

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