Comment: IF it were a real helicopter drop...

(See in situ)

Michael Nystrom's picture

IF it were a real helicopter drop...

As in Ben dropping $100 bills over Boston. Yes, that would cause hyperinflation.

But that isn't how the Fed does it. They don't actually "print" and this is an important distinction.

If they print, it is out there, forever, in circulation, and prices only go up.

What the Fed does is offer credit. Let's say someone takes that credit, and with zero down, buys a million dollar house. Wow! Suddenly some lucky bank has a new asset worth $1 million! It is the mortgage on that million dollar house. And on that asset, they loan out more and more and more, like banks do.

But then say the buyer can't pay his mortgage. And no one wants that dumb house anymore because it is overpriced and always was. - poof - the $1 million dollar asset gets marked down to 100K. And there are still no buyers, and no one wants it, so the bank is paying people to get rid of it.

That is how deflation works. Yes they can create credit from thin air, but that credit can also disappear back into thin air. Bankers may have control over the former, but definitely not the latter.

- - - -

To increase the money supply, someone has to borrow. At this point, with rock bottom rates, who wants to borrow. You can get a 1 bed condo in Boston for $500K. Are you kidding? That is OVERPRICED. So who is borrowing? Only the Federal Government.

I think the "tapering" may have as much to do with the Fed getting worried about getting its money back as anything else.

Hope that helped.

To be mean is never excusable, but there is some merit in knowing that one is; the most irreparable of vices is to do evil out of stupidity. - C.B.