Is Bernanke Going to Inflate or Not?
That has been the question in my mind for the last year. As I will explain in more detail in a future post, Bernanke has been “sterilizing” his liquidity injections to Wall Street as best he could, thus far. Briefly, what Bernanke injects as reserves by lending to a bank, he takes out of the system by selling off some of the Fed’s holdings of Treasury debt. So when you see stories in the WSJ talking about injections of $75 billion etc., that’s at best like a revolving line of credit; you wouldn’t add up all those headlines to get a cumulative increase in the money supply. Now because Bernanke has been sterilizing all along, the monetary base grew quite modestly indeed.
So it seemed that Bernanke was following the political necessity of doing something to bail out Wall Street since September 2007, but that he was putting his macroeconomics skills to use in trying to minimize the damage to the dollar. The question then became, “What happens when the Fed has drained its balance sheet, and has nothing left with which to sterilize its injections to troubled banks? Will Bernanke cut them off, or will he allow the monetary base to grow like gangbusters?”
My vote had been Door #2. And this latest figure (HT2LRC) reinforces my view (click to enlarge):
