NightBlogger

Posted by Karl Denninger
The Fed can halt deflation only in the instant case, and in the four dimensions that actually govern reality that fourth dimension, time, derails attempted printing every time. Why? Because The Fed cannot control what people will demand in order to loan out their capital. It can set a target rate and then defend it by either injecting or withdrawing liquidity, but if it tries to set the rate too far under the actual trading rate (that is, the true cost of borrowing is higher than what the fed funds target is set to) the amount of money necessary to defend that too-low rate rises to infinity! Once The Fed prints the perception is that they will do so again. As such interest rates in the market rise to the actual monetary inflation rate plus a margin for the risk of The Fed doing it a second time. See the problem? The margin is always positive, otherwise nobody would lend at all! More

Tags: A paper, capital, deflation, inflation, The Fed