Sunday, February 15, 2009
The Fed has pulled about $200 billion out of the system in the past four weeks, but the expansion of the monetary base remains epic in size. We've got to watch this very carefully. So far I would say that most of the expansion of the base (bank reserves and currency) has been in the form of bank reserves and has in turn been in response to a world that is desperately desiring extra safe money of the kind that only the US government can provide. That's not necessarily inflationary. But the recent rise in gold suggests that the Fed's willingness to supply money may be exceeding the market's demand for it. If they don't pull this balancing act off perfectly there could be huge consequences. Stay tuned.
Posted by Scott Grannis at 11:39 AM