While the Fiscal cliff and subsequent fallout have taken a toll on the average working American to the count of 2% right where it counts, there is a something altogether wonderful and dreadful knocking at the door: Inflation.
The wave of inflation that has been on the horizon ever since Federal Reserve monetary policy gave us new acronyms such as ZIRP (Zero Interest Rate Policy) and QE (Quantitative Easing), appears to be breaking and will soon wash ashore. Now that it is breaking, the only thing that stands between the average working American and higher prices for anything tangible is some flavor of collective default by the nation’s banks. However, thanks to the programs which are represented by the above mentioned acronyms, this is highly unlikely.
At this point, then, the only entities whose default could cause such a chain reaction are the Federal Reserve, US Treasury, or possibly the European Central Bank. However, the sheer magnitude of the tidal waves of cash that have been unleashed may even make the default of one of these institutions manageable.
The Federal Reserve has succeeded in the sense that they have flooded the system with so much cash and have repeatedly stated in no uncertain terms that they will backstop the markets of US Treasuries and Mortgage Backed Securities until the US Dollar’s last dying breath.
While for a time, maturing debt obligations were mopping up the liquidity that the Federal Reserve was pumping in, most consumers have now moved to extend maturities via refinancing or, on the conservative end, have closed out both cash and debt positions by paying off mortgages with savings which had been “ZIRPed” into dormance as an income producing asset.
This collective action has put the economy in a sort of warped reset where the fiat currency debt monster can run amok for the foreseeable future, with the attendant fatal real world consequences for the economy.
Oddly enough, as the Federal Reserve begins to claim victory over the financial crises which its own policies have made possible, the double whammy of the Basel accords and Dodd-Frank regulatory regimens may eventually eliminate many of the financial institutions which today are household names. For banking is increasingly a commodity service, and the onset of ZIRP has served to even the playing field in an industry that before had nearly insurmountable barriers to entry.
By holding interest rates near zero, the Federal Reserve is causing one of the largest collective resets in the banking sector that the world has ever witnessed. The banks that will take their place are just now being created, and the size of their balance sheet and market share will make today's too big to fail institutions seem modest by comparison.