This is the Cato Daily Podcast for Friday, March 20, 2009.

I'm Caleb Brown.

The Federal Reserve's balance sheet has taken another hit after some aggressive moves to spur

activity and credit markets to get those

dollars moving through the economy faster.

But is the Fed setting up a choice between another recession and runaway inflation in the

coming months and years.

Jim Dorn, Cato's Vice President for Academic Affairs comments.

What the Fed did was decided to inject about another trillion dollars into the economy over the next several months,

including the purchase for the first time of long-term Treasury securities,

two-year and ten-year notes with the purpose of actually reducing the interest rates

on long-term notes and actually therefore decreasing rates on consumer loans and mortgages.

So that's what they want to do, whether this will actually occur is another thing.

Because once people expect inflation with the Fed increasing the money supply

because basically what the Fed's doing is they're going to print money to buy

bonds. They're going to monetize a debt in other words. This is typically inflationary. Once people

expect the inflation to occur, interest rates instead of going down could well go up.

And this would have a negative impact on economic growth not a positive impact.

Is the Fed still dealing with what it sees as a liquidity issue?

The Fed is worried about deflation and they think that if

deflation were to occur it could lead to a situation that we had during the

Great Depression where people actually, instead of spending, are going to accumulate more and more cash balances, and this will have a negative impact on the overall economy.

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