For Central Banking junkies out there, Grep Ip is the journalist you need to read. He covers all things Fed for the WSJ. Yesterday he published a fascinating article about the Fed’s request to start paying interest on reserves held in its vaults. This would give the Fed yet more power to control the money supply, and would help avoid the consequence of pushing the Federal Funds rate toward 0% if they’re forced to act more aggressively to pump liquidity into the markets (see Economic Busts: Japan, circa the last 18 years). It would probably also discourage banks from hiding assets in off balance sheet vehicles. The more assets banks have ON the balance sheet, the more 0% interest reserves they must park at the Fed.
A good post that explains simply what others can go on for pages about. So is credit inherently inflationary? We hear about the danger of “printing money” by governments. That would be inflationary by definition since nothing is being created of value to accompany the increase in circulated money.Lending, on the other hand, is money being created with the idea of something new coming along with it that it will buy, a house being built for example. It also brings an obligation to repay the loan, bringing future money into the present, you might say.So, again, is extending credit in itself inflationary to any degree?