Re: Comment on Fed Balance Sheet

[Skip to the end]

(email exchange)

>   On Thu, Mar 19, 2009 at 6:15 PM, Mauer wrote:
>   Just to clarify: are there any circumstances in which the Federal Reserve
>   could “create” inflation or hyperinflation a la the Bank of Zimbabwe?

Yes, if they raised rates high enough.


That would mean a large jump in government deficit spending on interest and a hike in the marginal cost of production. This is what happened after Volcker raised rates to over 20%. That inflation broke only because deregulation of natural gas in 1978 brought out enough supply to replace 15 million barrels per day of crude that was being burned for power, which broke the Saudi monopoly.

>   Or does the unique privilege accorded to the central bank having the
>   reserve currency always preclude that?

Just the way any non convertible currency works. Inflation isn’t all that much of a function of interest rates.