How will Fed bailing out banks increase inflation?

[adaseb]

So we all heard now the Fed provided liquidity to all these banks which had tons of unrealized losses due to their bond portfolios.

The fed balance sheet basically erased months and months of declines in the last week due to this. Now my question is will this increase inflation or not?

Because this money doesn’t go to the people to spend. All it does it prevented a customer from losing all their money over $250K. They provided the liquidity and most likely will give the money back once the bonds mature in 10 years time.

What does everyone think of the feds actions?

[odolvlobo]

The Fed creates money to bail out the bank, adding to inflation. When the money is returned to the Fed, the inflation will be reversed.

[EarnOnVictor]

The recent development has exposed the US bank that people had so much trust in once again. This shouldn't have been happening in this century with all gauges/measures at the apex bank's disposal.

Well, this is not the first time that FED is bailing out banks, it only depends on the number of banks and the amount of bailout funds that would determine the extent to which inflation could be induced, it might not even be noticed at all.

Naturally, this should induce inflation by economical interpretation as it would be a situation where more money will be available for little goods and services.

But no one would know the extent now, let the bailout figure and the number of helped banks be ascertained first.

[zasad@]

The Fed is in the business of pumping air into leaky balloons. Banks lead a very risky policy and invest in various cryptocurrency projects. When the market falls, the banks suffer losses. There has already been rhetoric about banning banks from investing in cryptocurrency projects. Perhaps this is a new reason to increase regulation of banks.

[hugeblack]

It is called monetary policy, meaning that I will give something in return for preventing something else. During the past 6 months, the Fed's policy has been to limit hyperinflation to reach a healthy rate of 2%, and it has continued to raise interest rates to curb inflation and reduce market liquidity.

During the past week, a liquidity problem appeared in one of the banks, and thus panic began to affect all customers in most small and medium banks in the United States, and this may lead to the collapse of the economy, which prompted the Federal Reserve to intervene urgently.
So what is happening now is a temporary act to prevent the economy from failing, and it is a more urgent act than fighting inflation.

The problem is that reaction policy always leads to failure because it means economic confusion, so let's see what happens.

[adaseb]

The Fed creates money to bail out the bank, adding to inflation. When the money is returned to the Fed, the inflation will be reversed.

They do create this money but this money is never spent.

Suppose this,

Its like someone having staked ETH which they couldnt withdraw, ETH foundation created new ETH in exchange for those locked staked ETH so that user could withdraw immediately. Then when those locked staked ETH were unlocked, the ETH foundation would take them back. So the supply remains the same.

The above example is all hypothetical.

[Gyfts]

The Fed creates money to bail out the bank, adding to inflation. When the money is returned to the Fed, the inflation will be reversed.

There isn't a reason for the fed to introduce even more dollars into the economy after their COVID spending spree. The inflation won't be reversed, the inflation rate will go down but the price increases will still be there. That becomes a problem when the wage increases are disproportional from the inflation rate.

And of course, when the fed introduces new money into circulation, it's difficult to take that money out. Interest rate hikes are the only remedy they have and that has ramifications for GDP growth.

[so98nn]

FED should stop sitting in their warm offices and converting air into Money. They should really start looking after a strategy which will help America to get over the debts they are piling up over the time. If you checkout the real live data of US Income Tax Vs. US Debts then the later one is rising by millions every hours to days. Goa bless America in the upcoming decade.

Many fellow members think that America had been in debts since many years yet it is surviving and stuff like that. However, sooner or later this bubble will burst as well and FED won’t be in the position to overcome the returns after inflation is gone. Because by that time they will realise they are more into debts themselves and there is no more Air to Money conversion.

[Fortify]

So we all heard now the Fed provided liquidity to all these banks which had tons of unrealized losses due to their bond portfolios.

The fed balance sheet basically erased months and months of declines in the last week due to this. Now my question is will this increase inflation or not?

Because this money doesn’t go to the people to spend. All it does it prevented a customer from losing all their money over $250K. They provided the liquidity and most likely will give the money back once the bonds mature in 10 years time.

What does everyone think of the feds actions?

Lots of people don't seem to understand the nuances going on here and with the bonds that these banks bought. Many of these banks bought bonds (very secure money, but when purchased a couple years ago with a ten year maturity, they paid very little due to the interest rate environment at the time) but now if those banks wanted to sell those same bonds, maybe because.. there was a rush of customers who did not feel their money was safe and acted irrationally all at once, then they cannot sell off these low paying bonds quick enough. That's because you can buy newly issued bonds from the government paying much higher rates. So maybe these banks put too much of their money into these fairly illiquid assets and now struggle to cash out, but besides that they are still solvent - at least until their customers all go crazy at once.

[odolvlobo]

The Fed creates money to bail out the bank, adding to inflation. When the money is returned to the Fed, the inflation will be reversed.

They do create this money but this money is never spent.

Not directly. But, wouldn't you at least agree that the bail out is offsetting disinflation, and that is effectively the same as inflation?

[Hydrogen]

The fed balance sheet basically erased months and months of declines in the last week due to this. Now my question is will this increase inflation or not?

Its a good question.

The fed "erases" bond losses by expanding its balance sheet to buyout outstanding debt. I think the consensus is this expansion can be relatively contained within banking and financial systems. Without having much of a negative effect on markets or consumers. It doesn't trickle down in a way that directly affects the price of gasoline or eggs.

The evidence for this lies in many banks around the world being bailed out by the fed under the TARP bill from 2009 to the present. Without the process having much of an effect on the price of customer goods. The main difference from previous bailouts to current ones, is banks had better options and a growing economy to work with to payback bailout loans. While in the current market, they have a contracting economy and worsening economic conditions.

Some of what people are calling "inflation" atm is actually due to shipping delays creating artificial scarcity in markets. Which is a trend which has been observed for many years. Most noticeably in raw aluminum markets where coca cola and pepsi were forced to pay considerably higher prices for aluminum for their beverage cans. During a time when shipping delays created artificial scarcity for raw alu metals.

[bittraffic]

The Fed creates money to bail out the bank, adding to inflation. When the money is returned to the Fed, the inflation will be reversed.

They do create this money but this money is never spent.

Suppose this,

Its like someone having staked ETH which they couldnt withdraw, ETH foundation created new ETH in exchange for those locked staked ETH so that user could withdraw immediately. Then when those locked staked ETH were unlocked, the ETH foundation would take them back. So the supply remains the same.

The above example is all hypothetical.

I don't think that's the right comparison.
When FED is bailing out, the money doesn't just come from someone, they will print more money while people will keep withdrawing their money out of the banks, and ofc this causes inflation. Your $250K may not be worth $250k in the next few months.

ETH foundation afaik will just create a proportionate number of ETH based on the locked/staked ETH. Whether it could be withdrawn or not, it's up to the exchanges.

[el kaka22]

Well sort of will, how? This money wasn't in circulation, now it will go into circulation and that's why it will drop the value of dollar, and that will cause inflation because inflation is basically dollar losing value. When dollar does that, usually most other currencies follow the same path as well, they don't have to but they usually do.

This is why I believe that due to this depositors money being safe type of act they do, which is the right option, inflation will happen. Would you rather let people lose billions and not have inflation, or save everyone's money and have inflation? I feel like they made the right choice with this one.

[FUCKBSVFUCK]

I'm not sure what you mean by "increase inflation" as it sounds to me. 
 
Inflation is an economic phenomenon that has been in existence for thousands of years, and it can be used to create inflation in any form. 
 
The Federal Reserve is one of the in the world, ando so without a third party in its hands. 
 
The US dollar and the European Union are the two most powerful institutions in the world right now. 
 
The Fed is a central bank of the United States, and it has the power to make it easier for anyone to get in, and that's the reason why it’s so important to be part of the Fed. 
 
It’s not just any bank, it’s a whole lot of money.

[mu_enrico]

In most cases, economic inflation is caused by the government, i.e., the central bank's action.
While monetary inflation is always caused by the government, i.e., the central bank's action.

Now, let's take a look about the case:

So we all heard now the Fed provided liquidity to all these banks which had tons of unrealized losses due to their bond portfolios.
The fed balance sheet basically erased months and months of declines in the last week due to this. Now my question is will this increase inflation or not?
Because this money doesn’t go to the people to spend. All it does it prevented a customer from losing all their money over $250K. They provided the liquidity and most likely will give the money back once the bonds mature in 10 years time.

- unrealized losses: there are parties who have unrealized profits, the money never disappears, only changes hands.
- if the fed bail the losses without erasing the unrealized profits = monetary inflation.
- monetary inflation -> economic inflation.
- when the loan is paid to the fed, the amount of money in circulation is reduced, but the price most likely won't go back to the previous level. That's because a lot has changed, such as salary. Remember the sticky wage theory.

[Moneyprism]

america's banking system is actually very messy right now,, what the fed is doing is just to slow down this system before it collapses.. if I am an investor, I prefer to invest in banking in China or other countries than in America, that is much better than putting my money there

[Don Pedro Dinero]

Now my question is will this increase inflation or not?

Because this money doesn’t go to the people to spend. All it does it prevented a customer from losing all their money over $250K. They provided the liquidity and most likely will give the money back once the bonds mature in 10 years time.

If that money does not get into the hands of the people what will happen is that there will be asset inflation and not consumer goods inflation, which is what has been happening for the last 15 years. They told you that inflation was at 2 or 3 per cent when in reality assets such as houses, shares in good companies or bitcoin were rising much more because, due to the Cantillon effect, people who are closer to the printer take a good part of the printed money to these assets.

The Fed creates money to bail out the bank, adding to inflation. When If the money is returned to the Fed, the inflation will be reversed.

Or they will continue to print non-stop, with the odd hint that they will do so as recently, but at the slightest hitch it is business as usual.

[odolvlobo]

In most cases, economic inflation is caused by the government, i.e., the central bank's action.
While monetary inflation is always caused by the government, i.e., the central bank's action.

It's a lot more complicated than that.

Please explain to me why the doubling of the USD monetary base since 2020 has not caused a doubling in prices, and why there has been 10% inflation over the last year while the monetary base has dropped by 15%.

You might claim that inflation lags the money printing, but how long is that lag? How do you explain the low inflation rate for the 13 years between 2008 and 2021, even though the USD monetary base increased by 500%.

[hugeblack]

There are many factors that ultimately lead to an increase in inflation.

Inflation has various sources other than printing money and mismanagement of financial systems. There is inflation that comes from high energy prices, supply chains, retail sales, and others.

It is also a mistake to think that providing liquidity to all these banks means an increase in inflation, because if it does not do so, we may start a financial crisis than 2007–2008 financial crisis^[1], but as a result, the Fed’s move will increase one of the factors of inflation, which may lead to an increase in inflation, or it may not lead.

In general, I fear monetary policy turmoil more than the liquidity problem, because it means pouring water and adding more gasoline to the fire.


[1] https://en.wikipedia.org/wiki/2007%E2%80%932008_financial_crisis

[Don Pedro Dinero]

You might claim that inflation lags the money printing, but how long is that lag? How do you explain the low inflation rate for the 13 years between 2008 and 2021, even though the USD monetary base increased by 500%.

I explained it to you in the post just above this one but you chose to ignore it. Inflation measured as CPI is manipulated downwards by governments, and does not take into account asset inflation. To the supposed low inflation of those 13 years, add the inflation of assets like Real Estate, stock market and Bitcoin among others and you will see where the FED's money has gone.

[avikz]

So we all heard now the Fed provided liquidity to all these banks which had tons of unrealized losses due to their bond portfolios.

This is an expected behaviour of a regulatory agency. It's not just in US, rather Central banks all over the world steps in when they see a need for stepping in to revive a bank. Economy largely depends on the circulation of money and that's why banks are important.

The fed balance sheet basically erased months and months of declines in the last week due to this. Now my question is will this increase inflation or not?

Nope! This is money getting circulated in the economy. FED is not expected to print money here. Unless they are printing new money, there's no impact on inflation to a huge extent.

[odolvlobo]

You might claim that inflation lags the money printing, but how long is that lag? How do you explain the low inflation rate for the 13 years between 2008 and 2021, even though the USD monetary base increased by 500%.

I explained it to you in the post just above this one but you chose to ignore it. Inflation measured as CPI is manipulated downwards by governments, and does not take into account asset inflation. To the supposed low inflation of those 13 years, add the inflation of assets like Real Estate, stock market and Bitcoin among others and you will see where the FED's money has gone.

I don't subscribe to the manipulated CPI conspiracy theory, but the asset inflation is a good point.

[Wind_FURY]

You might claim that inflation lags the money printing, but how long is that lag? How do you explain the low inflation rate for the 13 years between 2008 and 2021, even though the USD monetary base increased by 500%.

I explained it to you in the post just above this one but you chose to ignore it. Inflation measured as CPI is manipulated downwards by governments, and does not take into account asset inflation. To the supposed low inflation of those 13 years, add the inflation of assets like Real Estate, stock market and Bitcoin among others and you will see where the FED's money has gone.

I don't subscribe to the manipulated CPI conspiracy theory, but the asset inflation is a good point.

The effects are not instant. It could take months to years before a policy from the Federal Reserve/a Central Bank could take effect in the entire economy.

Asset inflation happened because the money newly printed goes to those entities who have first access to them. The government, the banks, the rich and wealthy. BUT do we really expect that all that printed money would never go down to the lower parts of the system, to the plebs? Inflation will happen sooner or later.

[Kakmakr]

In my country inflation are manipulated by adding or removing products or goods to the inflation basket that has minimal impact. The inflation statistics are a poor reflection of the true inflation in the country. Example : Vegetable Oil went up the most and it was removed from the inflation basket. 

The Reserve Banks play "smoke & mirror" games with the money printing and inflation and citizens does not understand the long-term impact of those measures.   

[Wind_FURY]

In my country inflation are manipulated by adding or removing products or goods to the inflation basket that has minimal impact. The inflation statistics are a poor reflection of the true inflation in the country. Example : Vegetable Oil went up the most and it was removed from the inflation basket. 

The Reserve Banks play "smoke & mirror" games with the money printing and inflation and citizens does not understand the long-term impact of those measures.   

Haha, that's true! The devil is always in the details. In the United States' inflation data, there was a month when there was a reduction in inflation, I don't remember the month or if it was a month-on-month reduction or a year-on-year. But what it really was, there was one item in the inflation basket that had a very high reduction in price, I think 50%, which distorted the data. Do you know what that item was? Flowers. They prolly added it in the inflation basket after Valentine's Day.

¯\_(ツ)_/¯

[jrrsparkles]

You might claim that inflation lags the money printing, but how long is that lag? How do you explain the low inflation rate for the 13 years between 2008 and 2021, even though the USD monetary base increased by 500%.

I explained it to you in the post just above this one but you chose to ignore it. Inflation measured as CPI is manipulated downwards by governments, and does not take into account asset inflation. To the supposed low inflation of those 13 years, add the inflation of assets like Real Estate, stock market and Bitcoin among others and you will see where the FED's money has gone.

I don't subscribe to the manipulated CPI conspiracy theory, but the asset inflation is a good point.

The effects are not instant. It could take months to years before a policy from the Federal Reserve/a Central Bank could take effect in the entire economy.

Asset inflation happened because the money newly printed goes to those entities who have first access to them. The government, the banks, the rich and wealthy. BUT do we really expect that all that printed money would never go down to the lower parts of the system, to the plebs? Inflation will happen sooner or later.

Yeah you're right, this may not create an instant negative impact such as uncontrollable inflation but the money will roll out to the lower end sooner because rich people is controlling the business and banks so when they are going to withdraw money then it will go to the hands of other side which ends up in circulation so there will be inflation due to this. But FED did this to revive the bank and that's what we can expect from the Central Bank.

[Alpha Marine]

I don't think the Fed bail-out increases inflation. The money doesn't go back into circulation.
Increased rates led the banks to a state where they required bailouts. The reason for the increased rates was to curb inflation. This is based on the theory that higher interest rates will reduce borrowing and spending. While this does not always work, it's working in this case because even if the banks are kind of safe to an extent right now, the lending, spending, and investment expansion have been reduced, thereby reducing inflation rates.

[Hispo]

My opinion is that at first glance those measures should not generate as much inflation as a direct injection of money into the system would, it will create some because there will be an increased of theorical supply, which may be the addition of the unrealized value of the bonds added to the cash which the clients of the bank are receiving from the government in form of artificial liquidity.

In the end it is all matter of whether those banks will be able to recover the money form their investments to pay back the FED, otherwise, the USA government is slowly buying positions on a future bankrupted bank without knowing about it, turning all that situation into a bailout. Bankers save their money, and goverment takes the hit, what people forget sometimes is that the taxpayers are the ones who indirectly pay the bailouts. The money comes from them.

[sana54210]

My opinion is that at first glance those measures should not generate as much inflation as a direct injection of money into the system would, it will create some because there will be an increased of theorical supply, which may be the addition of the unrealized value of the bonds added to the cash which the clients of the bank are receiving from the government in form of artificial liquidity.

In the end it is all matter of whether those banks will be able to recover the money form their investments to pay back the FED, otherwise, the USA government is slowly buying positions on a future bankrupted bank without knowing about it, turning all that situation into a bailout. Bankers save their money, and goverment takes the hit, what people forget sometimes is that the taxpayers are the ones who indirectly pay the bailouts. The money comes from them.

Even the word of it makes it go up, that is the point. Like if you "say" you printed 1 trillion dollars, even before you print it, there will be price increases. Economy is as much numbers as it is psychology and that is a known fact. You could even fake it, not really print anything but the president could go out and said you did and the economy is in shambles, and then it will be in shambles, it will get worse.

Data haven't changed, numbers haven't changed, you did absolutely nothing, you just made president say 2 sentences, and suddenly it al goes terrible, that is how it works. This is why inflation with more printed money is a reality, it's both bad in amount and impacts it, but also terrible for the psychology of the market at the same time as well.

[Hispo]

My opinion is that at first glance those measures should not generate as much inflation as a direct injection of money into the system would, it will create some because there will be an increased of theorical supply, which may be the addition of the unrealized value of the bonds added to the cash which the clients of the bank are receiving from the government in form of artificial liquidity.

In the end it is all matter of whether those banks will be able to recover the money form their investments to pay back the FED, otherwise, the USA government is slowly buying positions on a future bankrupted bank without knowing about it, turning all that situation into a bailout. Bankers save their money, and goverment takes the hit, what people forget sometimes is that the taxpayers are the ones who indirectly pay the bailouts. The money comes from them.

Even the word of it makes it go up, that is the point. Like if you "say" you printed 1 trillion dollars, even before you print it, there will be price increases. Economy is as much numbers as it is psychology and that is a known fact. You could even fake it, not really print anything but the president could go out and said you did and the economy is in shambles, and then it will be in shambles, it will get worse.

Data haven't changed, numbers haven't changed, you did absolutely nothing, you just made president say 2 sentences, and suddenly it al goes terrible, that is how it works. This is why inflation with more printed money is a reality, it's both bad in amount and impacts it, but also terrible for the psychology of the market at the same time as well.

Perhaps it is also about choosing the least psychologically negative measure. What you say makes sense, but we also need to consider how the people would feel psychologically if banks started to fail and lack liquidity, prompting people to run to their banks out of fear.

We should not underestimate the goverment and the steps they take to cold down the negative perceptions and preserve the trust of the investors and those who deposit their money in the traditional banking system. In that sense some inflation may be not so bad in comparison to massive defaults.

[Fortify]

So we all heard now the Fed provided liquidity to all these banks which had tons of unrealized losses due to their bond portfolios.

The fed balance sheet basically erased months and months of declines in the last week due to this. Now my question is will this increase inflation or not?

Because this money doesn’t go to the people to spend. All it does it prevented a customer from losing all their money over $250K. They provided the liquidity and most likely will give the money back once the bonds mature in 10 years time.

What does everyone think of the feds actions?

It just goes to show that the illusion of central bankers being highly skilled, professional forecasters and experts in monetary policy is a joke. They bumble along in the good times, aka the easy times, but in moments of panic they are marginally less clueless than the average person on the street and quite often make poor decisions. For example if they were wise they would not have left rates so low for so long, it allowed all this cheap money to flood and slosh around in the market but when inflation went crazy they had to tighten up so sharply it threw the whole economy out of tilt. Now they're going to cause pain for a lot of people, people borrowing loans and mortgages, probably forcing a recession with the blind aim of bringing down spending & hoping prices for fall.

[Iadegbola34]

It's true that they provided liquidity to banks that were facing significant losses due to their bond portfolios, and this did erase months of declines in the Fed's balance sheet. However, the question remains as to whether this will ultimately lead to inflation.

It's worth noting that the money provided by the Fed isn't going directly to consumers, so it's not necessarily going to drive up demand and prices. Rather, it's helping to prevent customers from losing their money if banks were to fail. And as you mentioned, the Fed will likely get their money back once the bonds mature.

It's difficult to predict the long-term impact of these actions, but for now, the Fed is doing what it can to stabilize the financial system and prevent a larger economic crisis. It's understandable to have questions and concerns about their approach, but hopefully, we'll see positive results in the coming months and years

[Smartvirus]

It's obviously there business. The fiat currency is there product and the banks helps them to act as its custodians but, the feds are very much in the business of its management so, bailing out its custodians to ensure there is trust between the banking system and its customers is definitely what the feds would like to keep going.
Unfortunately for the rest of us, it is a manipulation in the scale of things which would in most cases have a negative effect and that is inflation. Your actually pumping more money into the system and that has got to effect price by some means. Price becomes unstable to accommodate and suck up the excess cash in circulation until it stabilises. It's there business and they've been working it goo.

[Don Pedro Dinero]

I don't subscribe to the manipulated CPI conspiracy theory, but the asset inflation is a good point.

As for the 'conspiracy' just look a couple os posts below:

In my country inflation are manipulated by adding or removing products or goods to the inflation basket that has minimal impact. The inflation statistics are a poor reflection of the true inflation in the country. Example : Vegetable Oil went up the most and it was removed from the inflation basket. 

That is just one example. The 'conspiracy' is not to say that if the CPI says inflation is 3%, the real inflation is 30%, but surely 6 or 7%, which is not so outrageous in absolute terms but in percentage terms (100% higher or more).

Although I suppose if governments changing the basket that makes up the CPI is seen as a conspiracy, I'm not going to convince you.

[gunhell16]

Even when inflation really becomes the headache of all countries around the world in the past few decades until now it has not disappeared or been eliminated. The number one hit is the banks and stocks in the market, in short, the economy of each country is really affected.

I hope they can fix this somehow, although the one who really benefits from this happening is the government anyway because the government will not agree that they will not get anything.