"[Fed] Chairman Ben Bernanke has explained his exit strategy to prevent future inflation. ... The exit strategy is incomplete. Proponents are guilty of practising economics without prices. They never say what the interest rate on reserves must be to get banks to hold the approximately $1 trillion of reserves above the minimum they're legally required to hold. That's the critical question. ... No economist doubts that the Fed can induce banks to hold some more reserves by paying interest. But how much? ... When will inflation start? The date is uncertain. But the triggering event will be either a sustained increase in bank lending or a large increase in Fed purchases of government debt. Perhaps both. Either one would trigger a sustained increase in money growth", Alan Meltzer (AM) at the WSJ, 28 January 2010, link: http://online.wsj.com/article/SB10001424052748704375604575023632319560448.html.
AM, a professor at Carnegie-Mellon, is our leading monetarist now that Milton Friedman is gone. I agree with AM, the Fed has no exit. You've been warned.
2 comments:
Proponents are guilty of practising economics without prices. They never say what the interest rate on reserves must be to get banks to hold the approximately $1 trillion of reserves above the minimum they're legally required to hold. That's the critical question.
Maybe the Fed guys plan on using a bunch of IR swaps from Goldman to manage the risk.
Lessons from Greece.
The banks can buy T-bonds (and finance the purchase at the Fed window!). The money will get out...
PS: With the future US deficits, someone with access to the output of the printing press has to be the one buying the T-bonds.
Post a Comment