The Fed’s Balance Sheet, Hyperinflation and a “Liquidity Trap”

Listeners’ Questions, Peter’s Answers- June 2, 2011

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Jon from Brooklyn, NY
A caller from Lima, Peru recently asked about whether the bonds that the banks are buying represent money that actually makes it into the system. Peter talked about the Fed’s balance sheet and the money the banks make from the spread but I’d like to know do those bonds represent current government spending for salaries, etc.? If so, why do people claim that all this money the Fed is creating isn’t making its way into the system and therefore, causing inflation?

Todd from League City, Texas
You stated in “Crash Proof 2.0” that “Americans are going to experience stagflation on an unprecedented scale in the form of recession and hyperinflation.” But in your video Q&A from April 28th you state that hyperinflation “is a worst case scenario, it’s not the most likely scenario.” Has there been a shift in your economic forecast? If so, what caused your change in outcome?

Chris from Butler, PA
I am interested in hearing your opinion on what a landlord should do, if anything, to prepare for a potential dollar collapse?

Michael from Aiea, Hawaii
Being that the Federal Reserve is a private bank, and they have bought up about 70 percent of Treasuries, what incentive would they have loading the U.S. more money and debasing their holdings in Treasuries? Also, does China have a central bank?

Dave from Chicago, Illinois
A topic I’d like to hear you touch on and likely dispose of is the Keynesian idea of a “Liquidity Trap.” It’s very relevant to today’s economy because many guys like Krugman LOVE to tell us that we’re “in a liquidity trap right now.” I got into a little debate myself and was kind of hunting for a good, simple analogy to help explain how the requirements for a liquidity trap basically contradict Keynesian principles regarding¬† interest rates and liquidity preferences.