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To expect to print and print and print and take monetary supply to unprecedented levels relative to economic output and not have repercussions seems unlikely to me.


It certainly does at first sight but looked at more closely a different kind of game is revealed.

Inflation is not caused by money supply alone but by money supply times velocity. The best analogy might be a lake full of water, as long as the water is not allowed to flow (zero velocity) it can produce no electricity (inflation). What is the game the Fed is playing? You might remember that when banks got a fistful of money from the Fed they still were not lending. If they don't lend they don't cause inflation. The Fed gave the banks money on the guarantee of worthless (toxic) assets. This money was then deposited at the Fed and the Fed paid banks interest on "their" money. Take away the BS and the Fed was giving profits to the banks so they could build up their depleted reserves. The money never went into circulation hence no inflation. If the Fed manages to undo this then all that has happened is that taxpayers replenished bank reserves -- a hidden tax.

The Fed is just doing its job as lender of last resort. Of course, the only money the Fed ever had was taxpayer money.

Denny Schlesinger
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