Many commentators think the Federal Reserve’s dramatic rate cuts are flooding the world with liquidity and the consequence will be acceleration in inflation and debasement of the U.S. dollar. Bernanke is flying his helicopter over the U.S. dropping off bundles of freshly printed money, to paraphase a common refrain. So buy gold and commodities; sell bonds, such commentators recommend.
But the Federal Reserve is not running the “printing presses” any faster and Bernanke’s helicopter is gathering cobwebs in the hangar. True, the Fed’s efforts to stabilize the financial crisis through the Term Auction Facility (TAF) and the Primary Dealer Credit Facility (PCCF) is expanding liquidity. But as the economists at Northern Trustindicate, the Fed has also sold $230 billion (U.S.) of its U.S. Treasury bond holdings to private-sector banks over the four months to April 23. This has drawn liquidity out the financial system, roughly offsetting or sterilizing the expansion in liquidity arising from the TAF and PDCF.