Saturday, July 25, 2009
Thursday, July 23, 2009
Fed Method
The monetary base has been expanded by roughly $1Trillion (more than doubled) since last Spetember. When the inflation comes (and you are seeing it already) how will the Fed pull liquidity out of the system?
Well, in 2008 the Fed devised a scheme whereby they can pay interest on bank deposits held on deposit with them. So when the inflated monetary base starts working it's way into the economy, the Fed can suck it back out by merely increasing the interest rate they pay to bankers for keeping their cash on deposit with the Fed.
What are the implications of this?
1. Does it not still create money in the form of monetized interest payments (albeit at a slower pace)?
2. Will the Fed get in a viscous spiral whereby they chase the market interest rates up?
3. Will the Fed's lucrative rates be made available to slobs like you and me?
Well, in 2008 the Fed devised a scheme whereby they can pay interest on bank deposits held on deposit with them. So when the inflated monetary base starts working it's way into the economy, the Fed can suck it back out by merely increasing the interest rate they pay to bankers for keeping their cash on deposit with the Fed.
What are the implications of this?
1. Does it not still create money in the form of monetized interest payments (albeit at a slower pace)?
2. Will the Fed get in a viscous spiral whereby they chase the market interest rates up?
3. Will the Fed's lucrative rates be made available to slobs like you and me?
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