Whatever ails this economy, it is most definitely not a shortage of money or a credit squeeze. This chart shows just how dramatically the Fed has responded to the subprime crisis. In the past eight weeks, the amount of bank reserves—which the Fed creates by buying securities—has increased from $98 billion to $467 billion. That's an increase of 376%, almost a quintupling of the raw material for the world's supply of dollars. The Fed has created four times more high-powered money in the past two months than they created in their entire history.
The Fed is not necessarily creating the preconditions for a hyperinflation. They are responding to an enormous surge in the demand for money by supplying what the market desperately wants. Presumably they will take this money back out of circulation once conditions normalize. As long as the supply of and demand for money are in balance, there is no big inflation problem.
At the risk of potentially creating too much money, the Fed is making sure that that no one will be able to blame them, as many blame the Fed back in the Great Depression, for allowing a monetary deflation to take hold, since that could seriously aggravate the current crisis.
Every measure of the money supply, (e.g., currency, base, M1, M2) is at or very near a record high. Total bank lending is at or very near a record high. Commercial Paper continues its rising trend that began four years ago. Commercial & Industrial loans made by banks to small and medium sized companies are at all time highs.
As I've said many times here, there is no shortage of money, nor any shortage of credit on an economy-wide basis, despite the continuing popular perception that banks are not lending and the economy is being strangled for want of credit. The problem continues to be a shortage of buyers, and that has a lot to do with a lack of confidence. Faced with tremendous uncertainty and a barrage of bad news, everyone is pulling back. But they could just as easily regain their confidence and start spending again. This is not a scenario that leads us to the end of the world as we know it, but that is what the markets are braced for.