The Fed has been pumping trillions into the system. They have doled out money to bail out banks, insurance companies, brokerages and yet they still need to pump up the economy by buying Treasuries to keep rates low.
The chart below shows the Fed has increased the Monetary Base by almost $2 trillion since the fiscal crisis began. It is interesting that they have added $1 trillion since the recession ended. If it ended, why did they need to add more liquidity?
Does this mean that the “recovery” has been nothing more than bought and paid for by Fed liquidity? And what does that say about the stock market recovery? Was it real, or bought and paid for by the Fed’s easy-open wallet?
More importantly is this – How does the Fed reverse the excess liquidity?
And before that – what happens when they stop pumping money into the economy?
A byproduct of all this Fed liquidity is inflation. Inflation is sometimes defined as too many dollars chasing too few goods. The chart below is a measure of liquid money in the economy called M1.
Since the Fiscal Crisis started, M1 has jumped about half a trillion dollars. This means that in the past couple of years, M1 grew more than it had in the prior 17 years. A rapid increase in money supply normally results in inflation.
THIS JUST IN:
IMF cuts U.S. growth forecast, warns of crisis
SAO PAULO (Reuters) – The International Monetary Fund cut its forecast for U.S. economic growth on Friday and warned Washington and debt-ridden European countries that they are “playing with fire” unless they take immediate steps to reduce their budget deficits.
U.S. gross domestic product would grow a tepid 2.5 per cent this year and 2.7 per cent in 2012. In its forecast just two months ago, it had expected 2.8 per cent and 2.9 per cent growth, respectively.
“We have now entered very clearly into a new phase of the (global) crisis, which is, I would say, the political phase of the crisis,” he said in an interview in Sao Paulo, where the updates to the IMF’s World Economic Outlook and Global Financial Stability Report were published.
If you make a list of the countries in the world that have the biggest homework in restoring their public finances to a reasonable situation in terms of debt levels, you find four countries: Greece, Ireland, Japan and the United States,” Vinals said.
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