I'm not convinced that these gigantic sums will not, sooner or later, still become the fuel for hyperinflation, or at least for a greatly accelerating rate of general price inflation, which economists expected they would be before the recent recession and all of the government’s and the Fed’s extraordinary responses to it occurred. Second, I am not convinced that the banks will remain content forever with earning a negative real rate of return on their holdings ... If they were to realize only the difference between the rate the Fed is paying them and the rate they would earn by lending these funds exclusively to prime customers — an increase of 3 percent on their return — they would gain an additional $45 billion in income. ........ I understand, of course, that banks are seeking to repair their damaged balance sheets, in light of their recent debacle in real-estate-related investments of various sorts and in conformity with the new Basel requirements for increased bank capitalization. Still, I am not convinced that these consideration can account fully for the very curious conditions now existing in the banking industry.
Here's a piece by Robert Higgs, expressing doubt that the excess reserves injected by the Fed won't ever result in hyper-inflation. In a key part, Robert states:
My own position is that reserves have nothing to do with how much banks will lend, and do not determine whether and how much hyperinflation can happen. Banks will lend when they want to lend, whether they already have the reserves beforehand, or if they can’t get at any more new reserves, they will securitize if they have to. Hyperinflation will not be caused by having too much reserves in the banking system per se, but by having too much demand in the general economy.
When demand comes back, even if the Fed has withdrawn all excess reserves, the securitization market will have come back to life, and banks will lend again. (And they will likely lend too freely if capital standards remain weak). So the best way to prevent a hyperinflation is to constrain bank lending directly with more stringent regulation. Pushing reserves into the banking system is a failed experiment by the Fed and we should not allow ourselves to be misled as well by its efficacy. If we do, we'll miss the real problem of weak regulation. Weak regulation is what will bring us back to the conditions of 2001-2007. I posted a similar theme here.
Also, for as long as the private sector is overindebted and still deleveraging (in balance sheet recession), I believe we will be far away from the risks of having too much demand in the general economy. Better to be worrying about deflation instead for now, while also preparing for the day banks start thinking along the lines of Robert Higgs'. Your thoughts?