The St. Louis Fed just came out with an amazing conclusion. Jeff Cox of CNBC summarized it in the following excerpts of his recent article:

"One of the great mysteries of the post-financial crisis world is why the U.S. has lacked inflation despite all the money being pumped into the economy.

The St. Louis Federal Reserve thinks it has the answer: A paper the central bank branch published this week blames the low level of money movement in large part on consumers and their "willingness to hoard money." The paper also cites the Fed's own policies as a reason for consumers' unwillingness to spend.

The Fed has pushed its balance sheet to nearly $4.5 trillion. Much of that liquidity, however, has sat fallow. Banks have put away close to $2.8 trillion in reserves, and households are sitting on $2.15 trillion in savings—about a 50 percent increase over the past five years."

The argument over what causes inflation and why prices aren't rising after QE1, QE2, and QE3 has been raging since its inception and continues today. The mystery has been mainly among those that accept monetarism as a proper monetary theory, but shouldn't be any "great mystery" to the readers of my articles posted here on the subject beginning right after QE1 began. Here's what I had to say in "Why Prices Are Not Skyrocketing" written in 2010:

"There is another theory of money that challenges the Monetarists' theory of money that I believe makes a lot more sense -- one that explains why we are not experiencing higher prices given the huge increase in the money supply. It is the Subjective Theory of Value as formalized by Ludwig von Mises and the Austrian School of Economics. This theory, in its simplest form, holds that money derives its value not from the quantity in circulation, but the value individuals place on money in exchange for other goods.

What always leads to price rises or price declines is the hoarding or dishoarding of money by the population at large. Increases in the money supply can influence the value people place on money, but it is only one factor in calculating the future value of money. The Monetarist School sees an increase in money as a cause of higher prices, where the Austrian School does not. In the end it is the actions individuals take themselves based on their value of money that lead to higher prices, according to the Austrian School.

If Ben Bernanke dropped dollars from helicopters tomorrow, Milton Friedman would say that inflation would result. Von Mises would say it would depend on what individuals did with the money and to what degree. If they put it under their mattress no inflation would occur."

The Fed has just moved from acceptance of Milton Friedman's monetarism as a theory of the cause of inflation to the von Mises theory of money and credit.The Fed just figured this out, yet most Fed watchers still miss the point.

Let me add that it is not just a case of consumers hoarding money, it's the banks. They have hoarded most of the new money created as excess reserves. That's their mattress! Little has been lent out. Credit expansion is anemic while debt repayment has been a new modern day trend.The velocity of money has consequently fallen to all-time lows. Not since the gold standard have we seen such low levels of velocity.

In 2007 the amount every 1 dollar would turn over in the economy was 17 times. Today it's 4 times. This is called the "multiplier effect' and is one of the main contributors to inflation or deflation. It is in effect, leverage. Too much leverage is dangerous as we saw in the 2007-09 financial crisis. But too little leverage tends to lead to economic stagnation and possible deflation in the absence of pro-growth policies. This is what we are experiencing today.

The Fed's answer has been to buy bonds and mortgages. The theory is that if they can push interest rates low enough, consumers and businesses will borrow, money supply will grow, and credit expansion will fuel the economy. Well, there's another theory: "You can lead a horse to water but you can't make it drink." With all the money put into the markets, barely any went into the economy. Money supply increases have remained at about 5-6%, and has in fact declined over the last few years from 10% increases. Inflation fell with it as businesses and consumers reduced their tendency to borrow and spend.

I have argued over this period of disinflation here in the US and deflation abroad, that the central banks' monetary policies are misdirected. Lower interest rates have not created either progressive growth or progressive increases in money supply, nor progressive inflation. At best they have been anti-deflationary. To get moderate growth and inflation if that's the goal, money would need to go directly into the hands of people and people would need to spend it. But the Fed can't accomplish that. It is the same thing that has stymied the Japanese central bank for 25 years and the ECB today.

The way to accomplish fighting deflation and stagnation is not through monetary policy but through fiscal policy. Tax decreases across the board for all individuals and businesses would amount to a direct injection of money into the pockets of society in general. At the same time the Fed can then gently begin reducing its balance sheet. The net result should be a mild inflation, growing GDP, falling unemployment, and a return to normalcy.

It can be done in no time at all and there is no great mystery to it. But try getting this congress and this president to agree to anything so simple and effective. What's worse, the ECB is about to embark on their own brand of QE, and unless it directs money into the economy, it will also fail. Unfortunately it appears they are more concerned about lowering interest rates from abnormally low to even lower levels.

It's not lower interest rates we need, especially in this world of already abnormally low interest rates. We've seen the results of low interest rates, and it's unimpressive. A new bold policy is needed by the fiscal authorities of the world to address anemic growth and the threat of deflation.

We must recognize the difference between central bankers as banks of last resort, and monetary authorities that are charged with reducing unemployment and increasing growth. In the former role they have been extremely successful. In the latter role they have been impotent. No central bank has returned it's economy to normal growth and normal employment rates -- not Japan, not the ECB, and not the Fed.

The bottom line is that intellectually, many at the Fed are now rejecting both Monetarism and Keynesian monetary theory in favor of Ludwig von Mises's theories of money and credit. Whether this eventually leads to an actual change in monetary policy is unknown.

But no matter what the Fed does, it's time for all governments of the world to recognize that the responsibility of economic prosperity does not rest with central bankers, but themselves by providing more freedom, less taxation, and less controls and regulations over its citizens. Only then will we see a sustainable return to economic prosperity.

Paul Nathan