Whitslack

How to Hedge, and Against What

I don't know about this analysis. Since people are saving more, banks are amassing more deposits on their books, which means banks will be allowed to create heaps more new money by lending. (Look for a video series called "Money as Debt" if you want to know how this works.) In the present environment where government policy is changing on an almost daily basis, banks are too fearful and/or uncertain to make any moves, so they're just collecting deposits and shoring up their balance sheets. But at some point, profit motive will again assert itself, and the banks will return to lending. With the additional deposits on hand due to all the increased savings, they'll be set to create new dollars in much greater quantities than the Fed has done. (The Fed has more than doubled the monetary base in the past year.) Lots of new money and decreased production and inventories translates directly to higher prices.

The correct thing for the Fed to do (if we concede that it should even exist at all) would be to remove all the excess liquidity that it injected into the system. However, it won't do this, for two reasons: 1) it's politically unpopular because it exposes the U.S. economy for the shame that it is, and 2) it actually will be unable to remove the liquidity, since its only mechanism for doing so is to sell all the toxic crap it bought back into the market, but no one wants to buy any of that for anywhere near the ludicrous prices the Fed paid for it in order to inject the liquidity in the first place. I'd hate to be Ben Bernanke; he's playing a lose-lose game.