Friday, July 29, 2011

Will the Fed Reverse the Money Pumping?

"We may ask: Will we face a bad inflation when those interest-earning bank reserves now sitting in Fed accounts are finally released into the economy? Not if the money is removed first. This is not as unlikely as it may seen."

It is very unlikely. Without this injection, the banks are insolvent. They are insolvent because many of the assets they hold are not generating cash and are therefore not worth the mark-to-fantasy values at which they are held.

In other words, there are no excess reserves in truth; they are only excess because of the false accounting.

Additionally, how will the Fed unwind? Who will buy the rotten assets that the Fed took on its books? The Fed took these at what is almost certainly face value (or close to face value) - far above the worth at the time or at any time today or in the future. Who would pay face value to buy these from the Fed? If the Fed sold them all, they will recover only a fraction of the money that was injected when the Fed first bought or swapped for the assets.

There is no way the injection by the Fed is reversed.

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