Nobel laureate Paul Krugman took a victory lap on the pages of The New York Times
 in front of all who warned of impending runaway inflation from the Fed’s massive monetary expansion. He did more than pronounce them wrong. He (a) labeled their analyses “unprofessional derp,” (b) identified himself as one of a few who “correctly predicted” the Fed was not causing runaway inflation, and (c) identified the Keynesian liquidity trap as the culprit that has kept inflation subdued.

With all due respect to Professor Krugman, his pronouncements are clever and misleading. This is an apt characterization given the tone of his victory lap. His pejorative use of “Austrian types” and lumping “the Glenn Beck/Ron Paul frothing-at-the-mouth Austrian types” with monetarists in a giant homogenous blob of “unprofessional” subscribers of “right-wing ideology,” mirrors his conflation of consumer price inflation and the Austrian concept of inflation.

Ludwig von Mises pointed out that newly printed money is not equally distributed to all members of society. It gets credited to the bank accounts of government and banks first. It then flows to defense contractors who sell bombs and boats to the Department of Defense, or it flows to the investor-class who borrow to leverage investments in stock, real estate, or bitcoin. Hence, massive increases in the monetary base inflate stocks, homes, and bitcoin well before it inflates consumer prices.

Stock, home, and bitcoin prices are graphed with the monetary base below. The monetary base’s correlation with the S&P 500 and with Bitcoin are very strong. The correlation between home prices and the monetary base is strong prior to 2008 and after 2012.

Why Inflation Has Been Contained: Interest on Reserves

Asset price inflation could have been much worse during the post-crisis recovery. It has been somewhat contained but not by a Keynesian liquidity trap. A liquidity trap is the situation where the supply of reserves has increased to such an extent that it intersects the section of demand that has flattened at just above zero. The trap implies that the federal funds rate cannot fall below zero. The problem with this thinking is that it assumes investment and savings decisions are based on nominal rates, not real rates.