To understand this best, one MUST read the Federal Reserve Act in its entirety. Mike Shedlock put it best in a posting on his excellent blog today - that the Fed cannot force borrowers to borrow nor lenders to lend or in his words:
To understand how powerless the Fed is, one needs to understand the difference between credit and money, how much the former dwarfs the latter, and what the Fed's role is in getting banks to lend. I discussed those ideas in Fiat World Mathematical Model.Unlike Congress, the Fed has no power to give money away. Nor would they do so if they could.....As noted above, the Quantitative Easing will not cause hyperinflation. Moreover, it is doubtful the Fed can cause it at all. The Fed cannot give money away nor can the Fed force banks to lend or consumers to borrow. Those who disagree must still address the difference between theory and practice.Unlike the Fed, Congress could give money away.I do not know if giving everyone in the US $60,000 would do it or not, but announcing a plan to give everyone $60,000 a month indefinitely would sure do it.How likely is that?The answer is 0%. Congress struggles right now extending unemployment insurance. There is little political will for more stimulus. The next Congress is a guaranteed bet to be more conservative.To be sure, more stimulus and more Quantitative Easing are coming but the latter does not matter and the former will be in insufficient quantity.
The critical line is that only Congress has the power to give money away. The Fed was not vested with that power - I read The Act and that authority just ain't there.
We can argue over just how aggregate debt gets back to whatever we determine "normal" or "sustainable" is.... but get back there it will. Yes, the government is going to continue to deficit spend, and yes this will be less than the contraction in aggregate debt - ergo, we are going to be stuck for sometime in this deflationary environment. In the end, the folks willing to sell us their manufactured goods ON CREDIT (which gives us our trade deficit and them their U.S. reserves and Treasury Bonds) will stop doing so... that will be the end of the trade deficit, and BY NECESSITY, the end of Oil imports into the U.S., the end of a pretense of "growth", etc..., etc...
In the past, I was as guilty as the next blogger of the fallacy of misplaced concreteness... or that all things being equal, then.... but as we all know, all things are NOT equal. Things change, policies change, opinions change, data change... s**t happens. The U.S. is not going to default on its bonds! That would harm the rich, the powerful, the influential, and the political classes... that would make NO sense given that these folks run the train set. Nope. The U.S. will default on Social Security, Medicare, and Medicaid... and as an impartial chess enthusiast... that is the right thing for the U.S. to do. The Republic MUST go on, no matter how f***ing stupid past administrations and Congresses have been.
That's the politics of it... the economics of it will needs be figured out on the personal level.