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The Fed is not wildly printing money, as yet no hyperinflation, we’re not becoming Zimbabwe

2 March 2010

Despite folks seeking to incite panic by comparing the US to Zimbabwe (e.g., Glenn Reynolds), the Federal Reserve is not monetizing the government’s debt (aka massive printing of money).  It’s balance sheet has been flat since the end of 2008.  The Fed expanded its balance sheet (printing money) in the 4th quarter of 2008, as the demand for cash skyrocketed — and the Fed wisely accommodated it, least panic liquidation destroy the economy (as it did in 1929-32). 

Most of this cash remains in bank deposits, not circulating and causing inflation.  So long as this money remains in banks, the Fed can relatively easily extract it (aka exit strategies).  The following graphic tells the tale, from a Fed report, 24 February 2010.

As for the future, none can accurately see what lies ahead. 

  1. Some experts believe the economy started recovering last summer, in which case all is well.
  2. Some believe the recovery will start soon, in which case all is well.
  3. Some believe economy has the economy stabilized only due to massive government stimulus, that the private sector engines have not restarted, and that the recession will linger into 2011.  That would put the government on course for insolvency, but only years (perhaps a decade or more) in the future. 
  4. Some believe the economy might have a second leg down.  That would imply a crisis in late 2010, or 2011 — depending on the government’s response.

Stay cautious and alert.  The next few months might be important.  Perhaps historic.

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