The thing is, the Fed's balance sheet (Treasuries) has gotten enormous. There's a limit on how many more it can buy and fund these allegedly non- inflationary excess bank reserves. When that limit is reached, it will have to sell Treasuries thereby increasing interest rates and quashing any recovery.
The excess reserves in this sense are inflation in a can. You won't see it until the can is opened and interest rates rise.
The critical issue IMO is that no central bank in history has any experience in sanitizing the enormous amount of liquidity the Fed and other central banks have created. It is really a unique one of a kind historical situation. And it is global in nature.
I'm clearly no expert but it seems reasonable to think that the new normal, to use a hackneyed phrase, requires the continued monetization of debt to keep interest rates low. Paradoxically, when liquidity is so high, even small changes in the velocity of money mean higher inflation which result in higher rates. Higher rates are deadly to a system accustomed to low rates; they will kill off a recovery thus requiring even more debt monetization.
I think this is the Japanese lesson - QE leads to low rates which leads to more QE to keep rates low. But the Japanese are special in that the buying of national bonds is almost a civic duty. A huge amount of JGBs are held internally. Not so with Treasuries, despite the Fed being such a huge buyer recently. China, the Arab petrostates, etc. also hold our Treasuries and they will act commercially, in their own best interests, when rates go higher, I.e., they will sell them.
That is when the status of the USD as a reserve currency will be challenged. Some sort of SDRs with multiple currencies and gold as the measuring sticks will supplant it. It is telling that the Bank of International Settlements wants gold as a Tier One asset and that foreign central banks, especially the Chinese, are accumulating gold.
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