Saville's article has a little different perspective:
"Fed has begun to inflate as if there were no tomorrow, and
the Fed's efforts have not yet had a dramatic effect on the economy's total money supply.
Banks have taken full advantage of the Fed's largesse and have substantially increased their reserves, but bank reserves are not included in broader measures of money supply.
Banks will eventually inject their excess reserves into the economy by making new loans, thus transforming the increase in reserves into an increase in total money supply. But there is the risk that "eventually" will prove to be a very long time and that over the coming months/quarters the banks will frustrate the Fed's inflation-promoting efforts by continuing to build up reserves. To get around this potential problem the Fed plans to inject money directly into the economy (it is going to bypass the banks). As we've noted in earlier commentaries, in order to set the stage for an eventual inflationary outcome the Fed does not have to create enough new money to offset investment losses and the economy-wide reduction in credit. Credit contraction will usually put downward pressure on the prices of commodities and assets in the short-term, but it doesn't directly affect the money supply and therefore doesn't directly affect the long-term trend in money purchasing power. Credit contraction can LEAD to higher purchasing power of USD. But if the money supply continues to increase it will counteract to affect of credit contraction.
Inflation Expectations
This is the essence of DEFLATION scare which we experience now. What has surprised us is the incredible speed with which the general perception has shifted from fear of inflation to fear of deflation.
Despite what some Federal Reserve researchers happen to believe, inflation expectations have plunged. Moreover, the plunge in inflation expectations translates into a surge in real interest rates because the real interest rate is the nominal interest rate minus the expected rate of currency depreciation. This increase in real interest rates adds to the upward pressure on the US$.
Best....MDW
Lead, Follow or Get Out of the Way...
Be Sure to Perform Your Own Due Diligence
