Federal Reserve Now Largest Owner of U.S. Government Debt—Surpassing China

The Federal Reserve said that as of September 2011, it owned $1.665 trillion in U.S. Treasury securities. That was more than double the $812 billion in U.S. Treasury securities the Fed said it owned as of September 2010.  Meanwhile, China owned $1.1483 trillion in U.S. Treasury securities, which was down slightly from the $1.1519 trillion in U.S. Treasury securities the Chinese owned as of the end of September 2010. 

Given our fractional-reserve banking system, that $1.7 trillion of Fed credit has the potential to expand liquidity in our economy by a factor of 10, or approximately $16 trillion.  That is a lot of moola, which can be equated to a lot of inflation if it wasn't for the decline in money velocity.  See the following chart.

As long as the velocity of money is trending down and below its long-term average of 1.68, price deflation rules the day.