The Federal Reserve Will Never Tighten
Everyone is now talking about the Federal Reserve needing to raise interest rates now because inflation is running very hot. Another, often overlooked, aspect of the Federal Reserve is its balance sheet. When you think of the Federal Reserve balance sheet, think of Quantitive Easing — where the Fed buys things like Treasury bonds.
The Fed will never be able to shrink its balance sheet (i.e. “Quantitative Tightening”). The reason why this is the case is a little more complex. In short, it has to do with our monetary system. Our current monetary system is debt-based/credit-based.
Given that our current monetary system is credit-based, the Fed can’t shrink its balance sheet. We saw what happened in 2018/2019 when they started shrinking it: disaster ensued. The stock market going down was just one issue that occured, see below:
Why does disaster come?
The reason is that our current monetary system can create a deadly cocktail: debt and deflation. The Fed shrinking its balance sheet is deflation — monetary deflation. This monetary deflation might not be a problem under other forms of money, but it’s a problem with a money system — our…
