Sunday, August 14, 2016

The Road to Zimbabwe

September 30, 2009 by · Leave a Comment 

Bullion Vault

Just how can the Fed mop up the excess liquidity its pumped into the banks…?

SPRINKLED ACROSS the official talk about efforts to end the current recession, you’ll hear assurances – notably from Federal Reserve chairman Ben Bernanke – that when the economy does revive, it won’t be allowed to blast off into runaway inflation, writes Terry Coxon, editor of The Casey Report.

The Fed, we’re being promised, will prevent such a launch by reabsorbing the hundreds of billions of Dollars of excess liquidity it recently created to halt the credit crisis.

Delivering on those assurances won’t be easy. There is no reliable, real-time guide to how much cash the economy needs, so deciding when to drain excess reserves from the banking system (by selling off T-bills or other Fed assets) and judging how rapidly to do the draining will be largely guesswork. And the consequences of guessing wrong will be unforgiving. Drain too fast, and the recovery stalls. Drain too slowly and price inflation comes charging out of the chute.

Figuring out how much cash is just right for the economy has always been the Fed’s central puzzle. And until late last year, coming up with a workably close answer, day after day, was the only thing the Fed really needed to focus on. Executing its decisions was easy. Since it could create money, the Fed had unlimited power to expand liquidity by buying Treasury securities (or anything else). And since it owned a mountain of Treasuries built up from past purchases ($480 billion as of last September), it had the power to drain liquidity by selling from its holdings.

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