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*T*
12-19-08, 06:59 AM
Any comments?

1) As of October -- Fed pays target rate or thereabouts on deposits at Fed.

2) Banks borrow via TAF, short T bills, overnight at effective fed funds (~.15%) and deposit at Fed for risk-free arbitrage.

3) Deposits at fed and borrowings from the fed therefore balloon (see pics) (loading the reflation gun).

4) Fed now lowers target to 0%-.25%, thereby ending the arbitrage (pulling the reflation trigger).

5) Banks now deploy the money, though not necessarily productively, but in an inflationary manner.

6) Possibly, the fed balance sheet shrinks against their will?

http://research.stlouisfed.org/fred2/fredgraphfile/?height=300&width=500&bgcolor=%23B3CDE7&txtcolor=%23000000&recession_bars=On&s[1][id]=BORROW&s[1][transformation]=log&s[1][scale]=Left&s[1][line_color]=%230000FF&s[1][range]=5yrs&s[1][cosd]=2003-11-01&s[1][coed]=2008-11-01&s[1][revision_date]=&s[1][vintage_date]=2008-12-19http://research.stlouisfed.org/fred2/fredgraphfile/?height=300&width=500&bgcolor=%23B3CDE7&txtcolor=%23000000&recession_bars=On&s[1][id]=EXCRESNS&s[1][transformation]=log&s[1][scale]=Left&s[1][line_color]=%230000FF&s[1][range]=5yrs&s[1][cosd]=2003-11-01&s[1][coed]=2008-11-01&s[1][revision_date]=&s[1][vintage_date]=2008-12-19