I am a big fan of Harvard University’s economist Greg Mankiw, but I have to say that I am puzzled by his position on the subject of inflation. At the end of December, Mankiw wrote a post called “The Monetary Base is Exploding. So What?” where he explained:

An article in Saturday’s Wall Street Journal says that some big-league investors are betting that inflation will rise significantly. The reason? “The nation’s exploding monetary base is a harbinger of inflation.” Is this right? Probably not.

The main reason, Mankiw argues, is that while the monetary base has indeed exploded — which usually leads to inflation — the Fed now pays interest on reserves. And if the interest rate on reserves is high enough, banks should be happy to hold onto those excess reserves, instead of starting to release this extra monetary supply in the economy.

Mankiw is correct that the banks have let their excess reserves pile up, rather than extend new loans. (Whether that’s a good thing or not is another question.)

However, even though Mankiw is right that the banks are sitting on their reserves rather than extending new loans, it doesn’t mean that it doesn’t have a tremendous cost for taxpayers. Where is the money coming from to pay for these interests? Besides, it doesn’t mean, as he seems to imply, that the broader monetary aggregates have been unaffected by the surge in the base. That is not true. Look at what happened to M1 and M2 since the fall of 2008. Can’t Mankiw see that M1 (the blue line) has surged since 2008? I do. See for yourself.

For more, read my recent Reason column on inflation here.