Today, in front of a Senate committee, Ben Bernanke defended, lauded even, his track record as Fed chairman. In response to being labeled the biggest dove since WWII, Bernanke fired back with “my inflation record is the best of any Federal Reserve chairman in the post war period—or at least one of the best.”

Well, he has a point there. Who would have thought that the Fed could bloat its balance sheet from a few hundred to a few thousand billion over the course of 5 years without sparking one whale of an inflation rate? Not I! So how can that be? More than once I’ve borrowed Milton Friedman’s great line “inflation is always and everywhere a monetary phenomenon”. I mean the rapid creation of new money chasing the not-rapid creation of goods and services has to result in higher prices, no? Well, the operative word there would be “chasing”. You see, while the Fed has bloated its balance sheet by buying fixed income assets from banks, banks have turned around and placed that newly created money on deposit back at the Fed, where they earn .25%.

Now why would banks deposit that money back at the Fed at .25% (never mind why the Fed pays it), when surely they could lend it to the private sector at higher rates? Well, I suspect it’s a combination of lack of demand for loans from the private sector and stringent lending standards on the part of the banks—and, well, I guess .25% (risk free) on a few trillion adds up. So, in essence, there’s relatively little chasing of goods and services (economists call it velocity of money) going on. Now if the economy gains some traction, and the pendulum swings toward greater certainty in the private sector—and less scrutiny in the banking sector—watch out, inflation may be a coming.

As for Mr. Bernanke; if he indeed wishes to go down as one of the great inflation fighters among history’s Fed chairmen, he couldn’t have been appointed at a better time. But he may want to go ahead and bow out, as his friends suggest he will, when his term is up in 2014.

Here’s a velocity of MZM (money zero maturity) money chart from the Federal Reserve Bank of St. Louis—notice the 1980 peak. Remember the inflation rate in 1980? It averaged 13.6%…