I saw this article on the Reuters Blog, by Rolfe Winkler. He chronicles quite succinctly the difficulty that the Fed has in trying to pump the economy up, while trying their best to stave off inflation, and potentially hyper-inflation that many economists fear is coming our way.
Note in the graph that the ‘excess reserves’ that the Fed has pumped into the banking system is approximately $700B, up from it’s decades-long level of $10B.
Now, the Fed argues that if it just sits there, with banks earning small amounts of interest on it, then all is well, and they can slowly reel these excess funds back in once the economy starts chugging along again. Everybody’s then happy, and, no inflation.
The danger is that the economy starts picking up a little steam, and the banks start to aggressively lend these excess funds, to gain even more interest income. Then, we have WAY too much money supply in circulation, and, you guessed it, hyper-inflation. And we all pay $10 a gallon for milk. Leave the Oreos.
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