The Fed's Biggest Bubble
Source: Safe Haven, Michael Pento (8/24/10)
"Creating money from nothing sends erroneous signals to traders."
But this is only a half-truth. Yes, most of the money created by the Fed has been kept by commercial banks as excess reserves. However, the Fed doesn't conjure reserves by magic. It first creates an electronic credit by fiat, then purchases an asset held by a financial institution. Those primary dealers then deposit that Federal Reserve check into their reserves. The act of creating money from nothing and buying an asset drives up the price of that asset in the open market, which sends erroneous signals to private buyers and sellers, eventually creating gross economic imbalances.
Therefore, the inflation created by the Fed first gets concentrated in whatever asset it has chosen to purchase - before spreading throughout the economy.
While it is true that we have been spared from the imminent curse of skyrocketing consumer prices, thanks to the falling money multiplier, it is blatantly untrue that the trillion-plus dollars the Fed created have been rendered inconsequential.
U.S. sovereign debt should only enjoy such historically low yields due to an overabundance of savings, low inflation, and low debt. None of those preferable conditions currently exist.