Though the massive increase in the most narrow measure of the money supply (The monetary base) would have created record inflation all by its lonesome, The real danger is long term Interest rates, which can only be contained as long as society believe the USD is a viable currency. This, however, is not the case in the view of the people (nations) that really matter. China along with Brazil and few other latin American countries have decided to engage in international trade in Remimbi, Real, etc. This holds vast implications as it "unofficially" takes the world reserve currency status away from the USD. Even Russia!, Yes Russia have publicly voiced it worries concerning the massive money pumping the US has engaged in. It has also stated that it intends to sell some of their US debt.
WHAT DOES THIS MEAN? This means large amounts of US dollars will flow back into the U.S (the majority of currency in circulation is held outside presently) , exciting inflationary fears domestically, which will ignite the inevitable inflation. But What If the Fed realizes the potential consequences of its actions and decides to suck up excess reserves? Well this is unlikely to happen, at least to a meaningful degree as residential mortgages reset, thus causing the default rate to increase. Not to mention the Commercial real estate bubble, which has managed to avoid massive defaults as they are far better capitalized the residential sector. Know the Bubble that will break us! Back in the late 70's, Paul Volcker needed a 19% prime rate to combat the easy money policies of his predecessors. We will undoubtedly experience far greater rates of inflation, but to be conservative lets just assume inflation will reach the same level in the next 2-4 years.
Bernanke, due to ignorance regarding economics in general may begin to raise rates to 2%, then 5%-8% between now and 2011. In other words, even if he switched course towards tighter monetary policy, he could not drastically raise them as this would send us into an even deeper recession that what we are experiencing now. To keep rates down/ prop up the banking system, the fed is going to either monetize debt (no matter what they are saying now) , issue more debt to foreigners (but they are trying to sell it now) or keep doing treasury auctions week after week after week. The ill effects will be extremely higher loan defaults, both residential and personal (as they are closely linked to the 10-year, which the yield has nearly doubled over the last 6 months). This will likely lead to the current excess reserves in the system (900 billion) potentially creating 8.1 trillion via fractional reserve banking. The other, even more devastating effect will be a substantial rise in the 30 year treasury yield (which like the 10 year, has nearly doubled from 2% in Dec to 3.93% presently). This means our creditors in Dec would be receiving annual interest payments on the debt (assuming 12 trillion, though it is likely higher) would be .02* 12T= 240B. As of the 2nd week in June, these payments will now be an annualized 480 billion.
The Fed, eventually will have to resort to monetizing the 30-year to subdue these high payments. But free market forces are telling society to save, in opposition to what the Fed wants in attempts to spur economic growth. So eventually the yield on the 30-year treasury can't be artificially suppressed. So assuming the free market's equilibrium interest rate (the loanable funds market) reverts to the aforementioned 20%, our interest payment would then be an astounding 1.92 Trillion every Year! In case my ramblings seem confusing, I will refer back to a post I wrote 2 months ago.
"It is well known the Fed will be a big purchaser of treasuries, those buying now will be positioned when the buying spree begins. if the Fed pays higher price in the future (to contract the money supply), traders can earn spectacular profits. But realistically speaking, this demand for Treasuries is artificial as they are in the hands of speculators, not investors. In other words they are similiar to house flippers. (people did not occupy these houses but flip them and sell to future buyers, but as these houses came back on the market , prices collapsed). Like the housing bubble the Government issued massive amounts of debt to finance multi trillion annual deficits. So the fed continually buys treasuries to prevent a collapse as these speculators mentioned earlier unload their holdings. They has to print money to buy these bonds because we are broke adding to inflation. As this inflation diminishes the value of low yielding bonds, we embark then down a slippery slope. As the Fed the starts to prop up bond prices, the larger incentive to hit the feds bid.
THE RESULT WILL BE THAT ALL TREASURIES SOLD WILL BE PURCHASED BY THE FED. The outcome resulting from such actions coupled with inflation kicking into high gear, will necessarily cause all other type of debt (municipal, corporate, ect,) to fall through the floor thus PUSHING RATES TO THE MOON. the fed will prevent these rates from going to high by purchasing the other types of debt previously mentioned. To avoid this scenario the fed will have to pull out of the bond market before its to late. But this will cause exactly the thing the FED is trying to prevent as defualt rates, would increase, 5, 10, 15,20 fold or more(no one can really know). UNLIKE THE BURSTING OF THE REAL ESTATE BUBBLE, THE GOVERNMENT CAN’T BAILOUT THE BOND MARKET BECAUSE IT WILL BE THE FED THAT NEEDS A BAILOUT.
Conclusion: It seems more likely than not that HYPERINFLATION will be the outcome, if we continue down the current road we are on. I can only see one way out (although we will still suffer massive inflation and a great depression similar to th 30's) if we default to our creditors, relieving us of 2 Trillion (4 or 5 would likely be the case, using realistic numbers) just to service our national debt. Combine that with 956 billion in healthcare (social security, Medicare, Medicaid) which will be nearly 1.5 trillion per year in 2015-2016. Excluding the additional ridiculous healthcare initiative, defense spending and others, we will have 3-5 trillion of unfunded liabilities before we know it. Perhaps I am 95% percent wrong; Wealth Destruction on a massive scale is still in play. BUY GOLD, SILVER OR ANY REAL ASSETS