M3 up 50%, fed can suck up excess liquidity later???

K

kxvid

Some people seem to think the following: Yes the money supply has exploded by 50%, but the fed can suck up the excess $$$ by raising interest rates when things improve.

My response: There are two highly likely scenarios once the economy starts improving.

Say we have a policy of non stratospheric interest rates. We would then have very high inflation (well into the double digits) easily much worse than in early 2008 during the commodity bubble. This will cause commodities to explode higher again along with the euro. High inflation would not be good for the economy. Consumers would be squeezed like lemons. High inflation is highly likely to certainly cause negative real GDP growth, this is very well understood in economics.

Or we have a policy of stratospheric interest rates. This could happen since Paul Volker is in the Obama administration. A policy of double digit interest rates could help slow inflation. However nobody knows the situation in the housing market. Things could still be very bad making high interest rates a disaster for the housing market and by extension the economy. High interest rates could certainly cause economic malaise or negative growth.

I think the market is beginning to realize that the two likely scenarios aren't pretty. I consider the two above scenarios optimistic really, there are many ways that the train could completely derail. Comments? :)
 
Quote from kxvid:


I think the market is beginning to realize that the two likely scenarios aren't pretty.
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It seems that you begin to understand the daily business of the Federal Reserve. Is "M3 up 50%" a private estimate?
 
this is why the fed is praying that productivity increases enough to offset the growing money supply. if that happens, ben is off the hook and will be seen as the genius who averted the depression of 2009.

if it doesn't, then we'll see one of the ugly scenarios you mentioned.
 
Quote from blackjack007:

this is why the fed is praying that productivity increases enough to offset the growing money supply. if that happens, ben is off the hook and will be seen as the genius who averted the depression of 2009.
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Doubtful. Fed has ALWAYS been loathe to reduce liquidity significantly, regardless.
 
Quote from Mkt.Cap:

It seems that you begin to understand the daily business of the Federal Reserve. Is "M3 up 50%" a private estimate?
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Yeah thats what Ive seen floated around since they don't publish M3 anymore.
 
High inflation plus high interest. If inflation is smoking hot, then investors demand a premium to cover their losses due to inflation. WTF give Joe Business Owner 100 grand now for 105 grand a year later if your 105 grand is only going to be worth 94.5? You lose over 5 grand on the deal.

You can't have high inflation without high interest rates. At least, not for long.
 
Somebody here suggested that I do some reading on quantitative easing. Well, after reading Bernanke's deflation speech I am convinced he will do anything to stop deflation. He also doesn't care about the dollar whatsoever. The short term and long term treasury market is now in the hands of the Fed. They are simply printing money(or its computerized equivelant) and buying long term treasuries.

Theoretically, they can print and buy all they want to keep long term rates low.....at least until the dollar drops substantially. Apparently, Bernanke is hoping he can just sell the treasuries when conditions improve to remove the money from circulation. The problem is that it will be difficult for him to do so. I personally don't believe they will tighten with the economy improving. But if they do, this slowdown might drag on for a decade. I would appreciate any feedback on Bernanke's speech if you have read it. What are his flaws?

http://federalreserve.gov/boarddocs/speeches/2002/20021121/default.htm
 
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