Inflation Isn't Inevitable

As long as the Fed is responding to demand, an increase in the money supply is not inflationary.

The numbers are sobering. Over the past year, the level of bank reserves has soared more than tenfold, to $830 billion, and the total amount of credit the Fed has extended to the economy has doubled, to more than $1.6 trillion. Furthermore, the government is projecting that this year's fiscal deficit will top $1 trillion, the highest level relative to gross domestic product since World War II.

For anyone who has studied monetary theory, those numbers sound ominous. There's no doubt that inflation is caused by too much money chasing too few goods, and the Fed has certainly created a ton of money.

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Jeremy J. Siegel
Contributing Columnist, Kiplinger's Personal Finance
Siegel is a professor at the University of Pennsylvania's Wharton School and the author of "Stocks For The Long Run" and "The Future For Investors."