The effect of the deleveraging of the credit bubble will be to destroy dollars.
The Fed (except by physical printing/monetizing of debt) doesn’t create ‘unlimited-lifetime’ dollars….. In reality it is the private banks which create the dollars when they lend out (they can lend out ‘real money’ but just put an entry on their book—you and I have to give them real dollars) and when they call in loans, as is happening to hedge funds and mortgage companies, the dollars are destroyed.
The limit of course is based on the reserve ratio banks must keep with the Fed.
What’s the Fed’s role? The Fed can significantly change the *profitability* of new loans and hence the effects on bankers.
In a credit contraction the banking system will on its own be destroying dollars, so lowering a rate may not be stupendously inflationary. But it is a balance, surely.
