Wednesday, December 11, 2013
How the US Dollar Will Fail?
Bernanke made new money but kept most of it in the Fed by paying interest on excess bank reserves. If you imagine a big black box around both the Federal Government and the Federal Reserve, then to everyone outside this box there is no difference between interest on government debt and interest on excess reserves. So really excess reserves are like government debt as far as the impact on the economy, inflation, and risk of hyperinflation.
It looks like a Yellen led Fed wants to reduce the interest rate paid on excess reserves. Interest rates have been rising, so to provide enough incentive for banks to leave money as excess reserves the Fed would have to raise the interest they pay. Instead they are talking of lowering the interest rate they pay.
Looks to me like a good bet for how things fail is that the Fed does not keep rates on excess reserves competitive, so that money comes flooding out into the real economy.
Of course, the Japanese Yen failing and then the UK and US following is another good bet.