Quote from circadian:
MZM + Credit = far more appropriate measure of money supply than you'd think. Both are on the ropes. America has been riding a 50-year-long credit wave that began to crash in early 2000's. That's the difference. Expansionary monetary policy has to outstrip credit destruction rates.
You'll have your inflation once credit begins flowing again, but it's a slow process. That's the point of the bailout...to free up bank balance sheets of illiquid, nonperforming assets and replace them with lots of performing, current assets. Once the banks are capitalized properly, they'll slowly relax credit standards and begin to lend again. They'll benefit from a steep yield curve and lever America to the gills once again. At this point, the Fed really has no other choice, this has been the economic model for decades now.
Once a crisis point is reached, implement automatic stabilizers...but leave them in place for extended periods. Do everything you can to help financial institutions capitalize themselves, and when they're in decent shape let them know that they had better start lending, b/c you're one year out from raising rates. Banks will rush to jam cheap capital down the throats of oblivious consumers while the profit margin is still very high, and from this...the next credit wave/economic upturn/house-flipping-party will begin. After Fed tightens to a point where the lending profit margin is slim, i.e. flatter yield curve & consumers unwilling to borrow at punitive rates, the banks will start to wind down lending operations, house flipping orgies will end, daytraders will perish, and Rick Santelli will shake his head with a sense of impending credit market doom as the Ted Spread rockets to the moon. Some type of panic will occur, but not before people, once again, begin wearing their wealth on their necks, wrists, and grillz. The panic will mark the apex of the next economic crest. At this point, you've got to watch credit supply and demand.
Rinse, lather, repeat.
