On the Brink of Inflationary Disaster
by Robert P. Murphy
Ever since Ben Bernanke began his massive infusions of money into the financial system, many analysts (including me) have been worried about the severe weakening of the dollar if and when the fractional-reserve-banking system magnified the initial injections severalfold.
Although the trend could reverse, data from the past two months suggest that the inflationary big one may be upon us.
Keeping the Genie in the Bottle
To understand the potential problem, we need to review some basic facts. Back in the fall of 2008, when Lehman collapsed and the entire financial system appeared in jeopardy, the Fed began bailing out investment banks through massive asset purchases and extraordinary lending operations. These activities rescued the major banks that would otherwise have gone bankrupt, by taking bad assets off their books (at inflated prices) and by propping up the new “market” price of the assets remaining on their books.