Alan Greenspan Warns Of Explosive Inflation: "Tinderbox Looking For A Spark"

[DamianTV]

http://www.zerohedge.com/news/2015-0...-looking-spark

Last month it was revealed that former federal reserve Chairman Alan Greenspan, the architect of U.S. monetary policy under four Presidents, is anticipating a significant market event as a result of the trillions of dollars that have been pumped into the system over the last several years. According to Greenspan, something big is coming.

His comments were shared by well known resource analyst Brien Lundin, who joined Greenspan for private discussions at last year’s New Orleans Investment Conference. In his latest interview Lundin further clarifies Greenspan’s private thoughts on current economic and monetary policy and sheds light on the former Fed Chairman’s suggestion that ‘something big is coming.‘

Greenspan made some good points to me… He was concerned about inflation… He was specifically concerned in relation to the outstanding, or excess, reserves which are close to three trillion dollars being held on the Fed balance sheet now… That money is just hanging over the U.S. economy like a big water balloon of liquidity and it’s just searching for a pin.

In fact, Greenspan referred to it as a tinderbox of explosive inflation looking for a spark.

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VIDEO on Link as well as full article.

Ukraine already hit Hyperinflation, and now the US is being challenged for Reserve World Currency.

[jkr]

[Zippyjuan]

Technical note- Ukraine does have very high (34% http://www.tradingeconomics.com/ukraine/inflation-cpi ) inflation but is not yet at hyperinflation. Hyperinflation means that rate of change in a month, not a year.

The Greenspan speech was back in October.

[Slutter McGee]

The excess reserves are really a problem, but I am a little tired of these world ending predictions.

Slutter McGee

[The Gold Standard]

The excess reserves are really a problem, but I am a little tired of these world ending predictions.

Someone predicting that they know when it will happen shouldn't be taken too seriously. But saying that it will happen isn't a prediction, it's a fact. The only way the Fed can remove the excess reserves is to sell off the assets they bought with those reserves. If the Fed starts selling off U.S. debt, what do you think will happen to the price of it? Of course it would crash. So they are selling off these treasuries that they paid top dollar for (very low interest rates) for much less. Not to mention the mortgage backed securities that only have value right now because the Fed is holding them and inflating non stop to prop up housing prices. If the market sees the Fed getting out of the game, interest rates will spike, housing will collapse again, and they will be trying to dump worthless garbage on the market, and I doubt with any takers.

I would be shocked if they could clear half of those excess reserves if they tried to unwind everything. An extra $1.5 trillion in reserves is a potential extra $15 trillion in the money supply. There is no way out of it. The only question is how long can they hold off the reckoning.

[Zippyjuan]

The Fed does not have to dump their assets. The securities the hold do mature and they can choose to not buy a new one to replace them (rolling them over is what they are doing right now). I suspect that this is how they will deal with their holdings- slowly allow them to mature and not replace all of them as they do. That will take a very long time- years and years.

The issue with the excess reserves banks hold is how quickly they get released. If the economy heats up, business will start borrowing more money to invest in expanding their operations. Consumers may expand their borrowing to buy more things. If that happens slowly, the reserves come out slowly and don't have much impact on prices. If it happens fast, the flood of money will cause high price inflation. The Fed has a couple of ways they can try to deal with that. One is to pay higher interest on those reserves (reserves used to be basically zero and were paid zero interest anyways- during the economic crisis the Fed started paying one quarter of one percent). That gives the banks incentive to keep more reserves. Second, they can raise the reserve requirement on banks (the current reserves are so high above the minimum that this would likely have zero impact however). Third, they can raise interest rates which raises the costs of borrowing and lowers the demand for borrowing that money.

[The Gold Standard]

One is to pay higher interest on those reserves (reserves used to be basically zero and were paid zero interest anyways- during the economic crisis the Fed started paying one quarter of one percent). That gives the banks incentive to keep more reserves.

They could do that. Fixing the problem of excess bank reserves by increasing bank reserves sounds like a plan they would go for. You have to wonder how long they could keep that up, and when they can't, the problem is that much bigger.

Second, they can raise the reserve requirement on banks (the current reserves are so high above the minimum that this would likely have zero impact however).

Yes, it would have zero impact.

Third, they can raise interest rates which raises the costs of borrowing and lowers the demand for borrowing that money.

They way the Fed raises interest rates is by restricting the supply of credit, and this whole discussion is about how they are going to manage to do that. If the problem is excess bank reserves, they really can't significantly raise interest rates until the market does it for them.

[Zippyjuan]

Back around 1980 the Fed was successful in raising interest rates significantly to fight off price inflation. Believe it or not even mortgage rates were as high as 20%. It was successful in slowing what had been persistent and rising inflation rates but the result was also double digit unemployment.

How dramatic the Fed actions will need to be will depend on what happens- either that slow release or a more rapid release of those reserves. Interest rates are a blunt tool- they don't have control over all the results nor perfect knowledge of what changes in rates or the timing of such changes will need to be. It is a guessing game.

[The Gold Standard]

Back around 1980 the Fed was successful in raising interest rates significantly to fight off price inflation. Believe it or not even mortgage rates were as high as 20%. It was successful in slowing what had been persistent and rising inflation rates but the result was also double digit unemployment.

How dramatic the Fed actions will need to be will depend on what happens- either that slow release or a more rapid release of those reserves. Interest rates are a blunt tool- they don't have control over all the results nor perfect knowledge of what changes in rates or the timing of such changes will need to be. It is a guessing game.

In 1980 banks didn't have $3 trillion in excess reserves. This is much, much more ominous than 1980, which is why people have been sounding the alarm for years now, even if many have foolishly tried to predict when the disaster would come.

[Zippyjuan]

Given that a recession of some form typically happens every six to eight years, predicting that one will eventually happen is pretty easy and rarely wrong if you wait long enough. Saying how bad it might be is a different story. You are right, they did not have all those reserves in 1980. Until 2009, excess reserves were usually about zero (banks don't make any money on money they don't lend out).