If prevailing annualized inflation rises above 4.6% but remains below 9.0%, real seigniorage could climb to $130 billion, or about 6% of all federal receipts in a year like 2009 (U.S. Financial Management Budget). In itself, cash carries an interest rate of zero and no central bank can reduce its rate targets below that level. This is the pernicious "liquidity trap" that the Open Market Committee has sought to avoid by guiding U.S. overnight rates close to zero while avoiding a formal move to that level (Svensson). Obviously, once nominal rates have dropped to zero, no further easing is possible, requiring monetary authorities to employ a different set of policy instruments.

Many of these instruments are effective to the extent to which they are explicitly or implicitly inflationary. Although the Fed's recent "credit easing" campaign and open market operations were primarily aimed at soothing extremely risk-averse credit markets, they also generated substantial "quantitative easing" in the sense that they dramatically increased the money supply. This would ordinarily create long-term inflation, which in itself stimulates consumption and investment in the near-term. As a last resort, formally or informally devaluing of the dollar against other global currencies would erode its buying power (feeding inflation) and so reduce the real cost of servicing dollar-denominated debt.

Swedish central banker Lars Svensson argues convincingly that these inflationary policies, far from being harmful to the economy, help to stimulate healthy expansion. An "inflationary psychology" supports behaviors and outcomes that deflationary environments do not. However, this psychology can only take root if consumers and investors believe that expanded money supply is relatively permanent:

A temporary targeted increase in the banks' reserves with the central bank would probably be completely ineffective. The problem here is, however, that there is no way for the central bank to make a credible commitment to a larger money supply in the future. There is nothing to prevent the central bank from reneging on such a commitment and reducing the money supply in the future in order to reduce future inflation and keep it in line with the inflation target (Svensson).

In an environment where qualitative easing has failed, accepting that inflation will be elevated in the future does not necessarily entail embracing the hyperinflationary forces that poisoned the U.S. economy in the 1970s or Europe in the 1920s. Instead, it is a form of tough -- and credible -- medicine for a fiscal system that is choking on its debts. As Rogoff puts it:

No one wants to relive the anti-inflation fights of the 1980s and 1990s. […] But this problem is easily negotiated. With good communication policy, inflation expectations can be contained, and inflation can be brought down as quickly as necessary ("Inflation" 1-2).

Bibliography

Aizenman, Joshua, and Marion, Nancy. "Using Inflation to Erode the U.S. Public Debt." Working paper. Washington, DC: National Bureau of Economic Research, 2009. Web. 30 Mar. 2010 .

Erosa, Andres, and Ventura, Gustavo. "On Inflation as a Regressive Consumption Tax." Working paper. University of Western Ontario, 2003. Web. 30 Mar. 2010 .

Federal Open Market Committee. Untitled press release, 16 Mar. 2010. Web. 30 Mar. 2010 .

Federal Reserve. "The Federal Reserve's Response to the Crisis." Board of Governors of the Federal Reserve System official site, last updated 5 Feb. 2010. Web. 30 Mar. 2010 .

Federal Reserve Bank of St. Louis. "Series MZM, MZM Money Stock." Last updated 15 Mar. 2010. Web. 30 Mar. 2010 .

Neumann, Manfred J.M. "Seigniorage in the United States: How Much Does the U.S. Government Make from Money Production?" Federal Reserve Bank of St. Louis Review 26.3 (1992): 29-40. Web. 30 Mar. 2010

Reinhart, Carmen M., and Rogoff, Kenneth S. "Growth in a Time of Debt." Working paper. Washington, DC: National Bureau of Economic Research, 2010. Web. 30 Mar. 2010 .

Rogoff, Kenneth. "Inflation is Now the Lesser Evil." Syndicated blog post. Cambridge, MA, 2008. Web. 30 Mar. 2010 .

Rogoff, Kenneth. "From Financial Crisis to Debt Crisis?" Syndicated blog post. Cambridge, MA, 2009. Web. 30 Mar. 2010 .

Svensson, Lars E.O. "Monetary Policy with a Zero Interest Rate." Policy speech. SNS Centre for Business and Policy Studies, Stockholm, 2009. Web. 30 Mar. 2010 .

U.S. Bureau of Engraving and Printing. "Annual Production Figures." U.S. Department of the Treasury official site, 2009. Web. 30 Mar. 2010 .

U.S. Financial Management Service. "Monthly Treasury Statement." U.S. Department of the Treasury official site, 2010. Web. 30 Mar. 2010 .

U.S. Senate Banking Committee. "Citizen's Guide to Dollarization." Committee Documents Online: 106th Congress, 2000. Web. 30 Mar. 2010 .

White House Office of Management and Budget. Historical Tables Budget of the U.S. Government: Fiscal Year 2011. Washington, DC: 2010. Web. 30 Mar. 2010

Money Supply 2005-10

Trillions

Sheet1

FRED Graph Observations

Federal Reserve Economic Data

Link: http://research.stlouisfed.org/fred2

Help: http://research.stlouisfed.org/fred2/help-faq

Economic Research Division

Federal Reserve Bank of St. Louis

MZM MZM Money Stock (MZM), Billions of Dollars, Weekly, Seasonally Adjusted

Frequency: Weekly, Ending Monday

observation_date MZM

2005-03-21 6.00 6.0-2.75%

2005-03-28 6.00 6.0

2005-04-04 6.00 6.0

2005-04-11 6.00 6.0

2005-04-18 6.00 6.0

2005-04-25 6.00 6.0

2005-05-02 6.00 6.0-3%

2005-05-09 6.00 6.0

2005-05-16 6.00 6.0

2005-05-23 6.00 6.0

2005-05-30 6.00 6.0

2005-06-06 6.00 6.0

2005-06-13 6.00 6.0

2005-06-20 6.00 6.0

2005-06-27 6.00 6.0-3.25%

2005-07-04 6.00 6.0

2005-07-11 6.00 6.0

2005-07-18 6.00 6.0

2005-07-25 6.00 6.0

2005-08-01 6.00 6.0

2005-08-08 6.00 6.0-3.50%

2005-08-15 6.00 6.0

2005-08-22 6.00 6.0

2005-08-29 6.00 6.0

2005-09-05 6.00 6.0

2005-09-12 6.00 6.0

2005-09-19 6.00 6.0-3.75%

2005-09-26 6.00 6.0

2005-10-03 6.00 6.0

2005-10-10 6.00 6.0

2005-10-17 6.00 6.0

2005-10-24 6.00 6.0

2005-10-31 6.00 6.0-4%

2005-11-07 6.00 6.0

2005-11-14 6.00 6.0

2005-11-21 6.00 6.0

2005-11-28 6.00 6.0

2005-12-05 6.00 6.0

2005-12-12 6.00 6.0-4.25%

2005-12-19 6.00 6.0

2005-12-26 6.00 6.0

2006-01-02 6.88 6877.1

2006-01-09 6.89 6886.3

2006-01-16 6.87 6874.6

2006-01-23 6.88 6877.2

2006-01-30 6.86 6862.5-4.50%

2006-02-06 6.87 6874.1

2006-02-13 6.87 6867.0

2006-02-20 6.89 6892.1

2006-02-27 6.91 6912.9

2006-03-06 6.91 6905.0

2006-03-13 6.88 6882.1

2006-03-20 6.88 6877.5

r /> 2006-03-27 6.89 6893.8-4.75%
2006-04-03 6.90 6900.7

2006-04-10 6.90 6900.1

2006-04-17 6.91 6905.7

2006-04-24 6.92 6921.6

2006-05-01 6.92 6918.4

2006-05-08 6.91 6909.2-5%

2006-05-15 6.92 6922.2

2006-05-22 6.93 6929.3

2006-05-29 6.93 6934.5

2006-06-05 6.92 6923.8

2006-06-12 6.94 6941.4

2006-06-19 6.96 6964.4

2006-06-26 6.99 6986.0-5.25%

2006-07-03 6.98 6977.3

2006-07-10 7.00 6995.7

2006-07-17 6.99 6993.1

2006-07-24 6.99 6994.2

2006-07-31 6.98 6983.7

2006-08-07 7.00 7000.9

2006-08-14 7.00 7001.7

2006-08-21 7.03 7025.7

2006-08-28 7.03 7026.0

2006-09-04 7.03 7028.3

2006-09-11 7.03 7032.2

2006-09-18 7.04 7039.6

2006-09-25 7.05 7052.9

2006-10-02 7.07 7066.7

2006-10-09 7.10 7100.9

2006-10-16 7.11 7113.4

2006-10-23 7.12 7118.3

2006-10-30 7.11 7110.1

2006-11-06 7.13 7133.0

2006-11-13 7.13 7132.6

2006-11-20 7.15 7151.2

2006-11-27 7.18 7181.1

2006-12-04 7.19 7193.5

2006-12-11 7.20 7201.9

2006-12-18 7.23 7227.8

2006-12-25 7.26 7260.1

2007-01-01 7.27 7274.3

2007-01-08 7.27 7273.2

2007-01-15 7.25 7254.3

2007-01-22 7.24 7239.0

2007-01-29 7.24 7241.9

2007-02-05 7.24 7236.1

2007-02-12 7.26 7259.5

2007-02-19 7.28 7278.6

2007-02-26 7.30 7304.7

2007-03-05 7.28 7283.9

2007-03-12 7.30 7300.3

2007-03-19 7.31 7311.5

2007-03-26 7.35 7350.7

2007-04-02 7.37 7366.1

2007-04-09 7.38 7377.4

2007-04-16 7.40 7397.2

2007-04-23 7.41 7408.3

2007-04-30 7.41 7411.0

2007-05-07 7.44 7444.8

2007-05-14 7.45 7453.2

2007-05-21 7.47 7473.0

2007-05-28 7.48 7475.7

2007-06-04 7.47 7473.4

2007-06-11 7.50 7495.3

2007-06-18 7.51 7512.4

2007-06-25 7.54 7535.5

2007-07-02 7.57 7568.0

2007-07-09 7.57 7574.9

2007-07-16 7.59 7594.5

2007-07-23 7.60 7595.8

2007-07-30 7.61 7611.1

2007-08-06 7.63 7630.3

2007-08-13 7.67 7672.7

2007-08-20 7.74 7738.8

2007-08-27 7.81 7813.5

2007-09-03 7.79 7794.8

2007-09-10 7.82 7821.8

2007-09-17 7.85 7851.9-4.75%

2007-09-24 7.87 7868.3

2007-10-01 7.92 7923.0

2007-10-08 7.95 7952.7

2007-10-15 7.94 7939.5

2007-10-22 7.96 7962.8

2007-10-29 8.04 8036.3-4.50%

2007-11-05 8.01 8010.9

2007-11-12 8.05 8052.8

2007-11-19 8.08 8080.3

2007-11-26 8.10 8101.6

2007-12-03 8.12 8116.0

2007-12-10 8.15 8148.6

2007-12-17 8.15 8146.5

2007-12-24 8.16 8160.5

2007-12-31 8.16 8162.6

2008-01-07 8.16 8157.8

2008-01-14 8.15 8145.3

2008-01-21 8.17 8173.6-3.50%

2008-01-28 8.25 8250.0-3%

2008-02-04 8.33 8325.6

2008-02-11 8.37 8370.3

2008-02-18 8.41 8406.7

2008-02-25 8.44 8439.7

2008-03-03 8.48 8482.8

2008-03-10 8.51 8507.2

2008-03-17 8.53 8532.0-2.25%

2008-03-24 8.56 8557.9

2008-03-31 8.59 8594.3

2008-04-07 8.61 8607.2

2008-04-14 8.61 8606.4

2008-04-21 8.62 8621.4

2008-04-28 8.61 8611.7-2%

2008-05-05 8.59 8590.3

2008-05-12 8.64 8635.4

2008-05-19 8.67 8674.1

2008-05-26 8.70 8699.3

2008-06-02 8.71 8711.0

2008-06-09 8.71 8708.7

2008-06-16 8.70 8699.8

2008-06-23 8.71 8714.9

2008-06-30 8.71 8710.8

2008-07-07 8.75 8745.0

2008-07-14 8.77 8773.2

2008-07-21 8.79 8787.3

2008-07-28 8.77 8767.0

2008-08-04 8.76 8760.5

2008-08-11 8.76 8756.7

2008-08-18 8.75 8748.2

2008-08-25 8.74 8741.6

2008-09-01 8.76 8757.3

2008-09-08 8.77 8769.9

2008-09-15 8.76 8760.0

2008-09-22 8.83 8832.5

2008-09-29 8.84 8835.4

2008-10-06 8.78 8783.6-1.50%

2008-10-13 8.81 8810.8

2008-10-20 8.88 8882.8

2008-10-27 8.87 8867.0-1%

2008-11-03 8.89 8890.9

2008-11-10 8.91 8913.5

2008-11-17 8.95 8946.1

2008-11-24 9.00 8998.0

2008-12-01 9.07 9072.1

2008-12-08 9.13 9131.2

2008-12-15 9.17 9170.6-0%

2008-12-22 9.22 9218.6

2008-12-29 9.26 9258.3

2009-01-05 9.32 9319.2

2009-01-12 9.30 9300.5

2009-01-19 9.33 9329.6

2009-01-26 9.33 9328.7

2009-02-02 9.37 9374.6

2009-02-09 9.39 9385.8

2009-02-16 9.40 9398.3

2009-02-23 9.39 9387.6

2009-03-02 9.43 9431.0

2009-03-09 9.48 9480.9

2009-03-16 9.50 9496.9

2009-03-23 9.47 9467.0

2009-03-30 9.44 9436.1

2009-04-06 9.44 9436.3

2009-04-13 9.42 9415.8

2009-04-20 9.44 9439.0

2009-04-27 9.47 9472.7

2009-05-04 9.54 9538.4

2009-05-11 9.54 9539.9

2009-05-18 9.56 9560.5

2009-05-25 9.55 9553.4

2009-06-01 9.60 9603.9

2009-06-08 9.59 9590.7

2009-06-15 9.60 9595.0

2009-06-22 9.58 9577.7

2009-06-29 9.60 9597.5

2009-07-06 9.60 9601.0

2009-07-13 9.58 9577.5

2009-07-20 9.59 9590.5

2009-07-27 9.61 9614.3

2009-08-03 9.60 9602.7

2009-08-10 9.56 9563.1

2009-08-17 9.56 9559.2

2009-08-24 9.53 9526.2

2009-08-31 9.56 9564.9

2009-09-07 9.59 9585.2

2009-09-14 9.58 9579.2

2009-09-21 9.58 9582.7

2009-09-28 9.62 9624.8

2009-10-05 9.60 9600.2

2009-10-12 9.60 9597.6

2009-10-19 9.59 9587.8

2009-10-26 9.58 9578.7

2009-11-02 9.61 9607.6

2009-11-09 9.59 9593.5

2009-11-16 9.59 9592.8

2009-11-23 9.59 9593.2

2009-11-30 9.59 9589.6

2009-12-07 9.62 9616.3

2009-12-14 9.59 9594.9

2009-12-21 9.57 9565.1

2009-12-28 9.54 9542.6

2010-01-04 9.54 9539.7

2010-01-11 9.51 9513.2

2010-01-18 9.50 9503.3

2010-01-25 9.47 9470.3

2010-02-01 9.48 9480.3

2010-02-08 9.49 9489.8

2010-02-15 9.52 9522.8

2010-02-22 9.50 9495.8

2010-03-01 9.50 9496.2

2010-03-08 9.47 9467.3

2010-03-15 9.42 9422.6

Sheet1

MZM Money Supply 2005-10

Trillions