I mentioned this elsewhere, but thought it important:
http://www.voxeu.org/index.php?q=node/3444
The Fed’s astoundingly large increase in reserves has many worried about future inflation and wringing their hands over exit strategies. This column argues that the Fed can control inflation by varying the interest rate it pays (or charges) banks on their reserve holding. Consequently, the Fed’s exit strategy need not be constrained by concerns about inflation – reserve interest-rate policy can take care of inflation, but the Fed should publically announce this policy.
Could it be that (hyper)inflation is not jjust around the corner?
Irish Liberty Forum
What's the fed paying interest with? I couldn't seem to find the answer in that article
Increasing reserve interest rates will not lead to monetary deflation which is necessary to avoid hyperinflation.
A reserve interest rate, if raised higher than the FFR, will become a price floor. If the FFR is 1%, and the RIR is raised 2%, than the FFR will rise to slightly higher than 2%, as banks undoubtedly trust the Fed more than they do other banks.
Its effects will be similar to raising the FFR except raising the RIR will actually increase the money supply. To raise the FFR, the Fed sells assets and takes dollars out of circulation, thus contracting the money supply. To raise the RIR, the Fed must print more money to pay the higher interest payments to the banks. The reserves are still controlled by the banks, they are equivalent to dollar hoarding, so the money supply increases by at least the amount of interest payments, but prices may not increase as much due to the hoarding of dollars by banks.
The reason why raising the RIR won't prevent hyperinflation is because the only way to raise it is through net monetary inflation. True, it may cause prices rises to temporaily slow down or even cause price declines, but this is only due to dollar hoarding, not true monetary deflation.
Eventually, to avoid hyperinflation, the money supply must contract by allowing banks to fail without the FDIC or by the Fed raising the FFR through the traditional method of money supply contraction.(sell assets, take dollar out of circulation).
I'll use the aircraft analogy to summarize this argument. Since 1716, central banks have been trying to fly the economy with a series of central controls. In all this time, they have always been seeking a soft takeoff and landing. Despite this, they crash and burn every time. Six months ago, we installed a new doohickey in the cockpit. We haven't tested it yet, but you're all along for the ride whether you like it or not. Why are you worried?
Some economists have proposed that the Fed charge banks for holding reserves, an expansionary policy worth considering. With the Fed funds rate at around 15 basis points, it would take a charge to restore the differential that drives banks to lend rather than hold reserves. Were the Fed to charge for reserves, they would become the hot potatoes that they were in the past, when the reserve rate was zero and the Fed funds rate 4 or 5%. Banks would expand lending to try not to hold the hot potatoes and the economy would expand. There is no basis for the claim that the Fed has lost its ability to steer the economy. (However, the Fed would have to go to Congress to get this power, as it did to get the power to pay positive interest on reserves.)
To me this seems dangerous. So now the Federal Reserve will force banks to make bad lending decisions simply because they cannot hold the money?
not because they can't hold the money, but because the Fed want's inflation.
It appears Bob Murphy has attempted to answer this: http://dailyreckoning.com/will-new-fed-tools-avert-hyperinflation/
For a different idea, economists Woodward and Hall think the Fed just needs the ability to charge banks for holding reserves....How does this avert the threat of hyperinflation? Simple, according to Woodward and Hall. If banks ever start loaning out too much of their (now massive) excess reserves, and thereby start causing large price inflation, then the Fed can simply raise the interest rate it pays on reserves. Banks would then find it more profitable to lend to the Fed, as it were, rather than lending reserves out to homebuyers and other borrowers in the private sector. Voila! Problem solved.Obviously these tricks can’t avoid the consequences of Bernanke’s mad money printing spree. At best, they would merely push back the day of reckoning, while ensuring that it grows exponentially (quite literally).A quick numerical example: Let’s say the Fed wants to drain $100 billion in reserves out of the banking system, in order to cool off rising prices. But it doesn’t want to sell off some of its assets on its balance sheet (like “toxic” mortgage-backed securities), so instead the Fed sells $100 billion worth of the brand new “Fed bonds,” as Yellen hopes.In the beginning, this will indeed solve the problem. When people in the private sector buy the Fed-issued bonds, they write checks on their banks and ultimately those banks see their reserves go down at the Fed. There is less money held by the public, and so prices don’t rise as quickly.But what happens when the Fed bonds mature? For example, if the Fed sold a 12-month bond paying 1% interest, then after the year has passed our private sector buyers will hand over the securities and now their checking accounts will be credited with $101 billion. At that point, the economy would be in the same position as before, only worse: there would be an extra billion in newly created reserves (because of interest on the Fed debt).
MatthewWilliam:while ensuring that it grows exponentially (quite literally).
So I take it they're paying the interest on reserves with newly created reserves? Are they really that stupid?
FED believes that economic situation will improve and price of toxic assets it has on the balance sheet will go up. So FED will sell those assets and suck liquidity that way. Intereset on reserves should be just temporary. We'll see...
I think we are in hyperinflation to an extent.
Manny Mars
What will trigger hyperinflation is the Federal Government's enormous expansion along with the collapse of tax revenue, which will require the Fed to monetize government bonds in order to maintain its interest rate targets.
The monetary base is largely meaningless, and it fluctuates only in response to people's concerns about private bank solvency.
The fallacies of intellectual communism, a compilation - On the nature of power
To indicate my bias I am purchasing gold and gold mutual funds. I did not see the author putting money where the words are. But assume the author did buy dollar denominated assets what then? There will be either inflation or a shrinking of the economy. Why?
The central bank will expose malinvestments when ever they raise interest rates even a little. The US Fed had them down to 1% then slowly brought them up to 5%. This 4% difference sent shock waves through the economy as thousands of borrowers found they could not obtain credit or expected to obtain credit at much lower rates. Also tons of malinvestments (AKA Adjustable Rate Mortgages) had their rates jump higher than the borrowers could pay. The Fed then began to lower the rates.
The only difference then and now is how far the economy has deteriorated. So the Fed has created trillions of new currency that is current in bank reserves. As the economy improves the banks will begin to lend those reserves or face going out of business. Once they do the Fed will have to start cranking up interest rates or using similar schemes to remove that money from the economy. They will cause another bust that will look to be much worse than the current one. So the Fed could just leave that money out there. But then you will have expectations of ever increasing currency amounts in the economy. This will cause significant inflation.