Just like that

Federal Reserve holdings of U.S. Treasury securities:

Graph #1: U.S. Treasury Securities held by the Federal Reserve
via Random Eyes

Looks like the Fed thought they could just get back to 800K after the recession and stabilize it there, and everything would be fine.

And a little later they tried to stablilze it again, at twice the level. But pretty soon they had second thoughts again.

Now they're way up there at 2.4 million million, three times where they were before the crisis.

Now people worry about inflation, when all that money starts feeding loan demand. Everyone who thinks it might be a problem wants to solve the problem by having the Fed get that number back down where it was before the crisis.

That's the wrong approach. Doing it that way, you put the economy right back where it was before the crisis: primed and ready to have a crisis.

We don't want to do that.

The problem, the inflation, arises when those extra funds start feeding loan demand. No problem yet, because loan demand has been sluggish, right? Okay. So that's a clue.

If we have three or four times the money we had before, that's good. The problem is half solved. All we have to do is make sure that loan demand is held down to a third or a quarter of what it was before. Then everything balances out.

You want to say I'm crazy. I want to say you're confusing new loan demand with total loan demand. New loan demand is new uses of credit. Total loan demand is existing, outstanding debt plus new uses of credit.

It's the new uses of credit that help the economy grow. It's the existing, outstanding debt that makes financial cost excessive. It's the existing, outstanding debt that undermines demand. It's the existing, outstanding debt that we don't need. It's the existing, outstanding debt that we should start paying off, as a way to fight inflation.

Just like that.