Congress charged the Federal Reserve with the responsibility of controlling the nation’s #monetary system in the hope of avoiding or at least lessening the next financial crisis.
However, the Fed has never engaged in a monetary explosion like it is today. We are truly in uncharted territory. The Fed’s easy money policy could create a financial crisis and an economic disaster. This could well be even more severe than 2008.
When the crisis began, the Fed had a balance sheet of about $800 billion. Today, after T.A.R.P., QE I; QE II; Operation Twist; and QE III, the Feds balance sheet exceeds $4.1 trillion! Here’s the troubling part. Even though the Fed has done everything possible, the economy continues to struggle.
On the other hand, prudent fiscal policy (i.e.; tax policy and spending), which is the responsibility of Washington, has been absent. Instead of a prudent fiscal policy, we have had an explosion in #national debt. This has been largely due to an increase in entitlements.
Inflation is the general rise in prices. Deflation is the reverse. The problem with deflation is that it causes people to restrain from spending as they wait for prices to fall. This can become a self-perpetuating cycle which is difficult to escape.