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Strategies & Market Trends : The Residential Real Estate Crash Index
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To: Tommaso who wrote (211556)7/22/2009 1:35:41 AM
From: RockyBalboaRead Replies (2) of 306849
 
Have not seen this one until now: an interesting article exactly referring to my intuitive thought on Fed removing stimulus... any why it is tricky:

marketskeptics.com

This 15-Fold Increase will be impossible to reverse

Next September, when the fed realizes it has gone too far and tries to reverse its balance sheet expansion, it will be unable to do so. The realities which will hinder the fed’s control of the money supply are:

1) The toxic assets filling its balance sheet

Expanding the money supply is easy. All the fed has to do is print dollars and then use them to buy assets. There is no effective limit to how much the fed can print and spend.

Shrinking the money is much trickier. To shrink the base money supply, the fed sell assets and takes the dollars it receives for them out of circulation. The amount the fed can shrink the money supply is therefore effectively limited by the market value of assets on its balance sheets. Since the fed is in the process of loading up on toxic securities while trying to restore health to the financial sector, it is now sitting billions of unrealized losses. These unrealized losses means the fed has little ammunition available to bring the money supply under control.
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