Thursday, April 23, 2009
The Printing Presses Are Running Full Speed Ahead
The printing presses are running full speed ahead at the Federal Reserve as it pumps more money into the economy in an attempt to awaken it from the economic doldrums. Bloomberg reported recently that the Federal Reserve has completed its "eighth purchase of government securities" in its quantitative easing campaign, bringing the total amount of Treasuries acquired to $43.9 billion since the purchases began on March 25th. The Federal Reserve "plans to buy as much as $300 billion in U.S. debt over six months", further increasing a balance sheet that has already "more than doubled . . . in the past year". 1 As mindblowing as all this is, it is even more mindblowing that it is being advertised. Our government is making no effort to hide the fact that it is debasing our currency by creating money from thin air and buying up government debt.The consequences of all this? The article discusses that too:Fed Chairman Ben S. Bernanke’s plans may result in a higher cost of living, said Allan Meltzer, the central bank historian and professor of political economy at Carnegie Mellon University in Pittsburgh. Rising costs erode the value of the fixed payments from bonds.
Considering how much the Fed has expanded the money supply over the past year, I don't see how Meltzer could be wrong in his assessment. High inflation down the road seems to be pretty much "baked into the cake" at this point. Check out the following chart from the St. Louis Fed, which shows the expansion of the monetary base.
Inflation “will get higher than it was in the 1970s,” Meltzer said. At the end of that decade, consumer prices rose at a year-over-year rate of 13.3%. 2
What is scary and sobering about this chart is the fact that inflation in the monetary base has a direct impact on inflation in prices. Widespread price inflation is a symptom of monetary inflation, which is the growth of the money supply. More money in the economy means that more demand is placed on goods and services, which in turn, drives up prices for goods and services. If this is difficult to understand, think of it this way: imagine that Congress passes a new, even more massive stimulus package that gives everybody in America a check from the government for $10,000. What do you think the majority of people would do with that money? Spend at least a good part of it, right? All that spending would represent increased demand for goods and services, and as we all know from high school economics, higher demand leads to higher prices. As can be seen in the chart above, the monetary base has expanded massively over the past year. The only reason we haven't seen rampant price inflation yet is that banks are largely hoarding the money because they are afraid that if they lend it out they will never get it back. Once the economy begins to stabilize and bank lending begins to loosen up, all that hoarded money will begin to enter the economy, and the result may be a massive surge in price inflation.
References
1. Treasuries Gain After Federal Reserve Buys Government Debt. (April 13, 2009). Retrieved April 23, 2009 from, http://www.bloomberg.com/apps/news?pid=20601087&sid=ahXVnbCqrqP8&refer=home.
2. Ibid.
![[Most Recent Quotes from www.kitco.com]](http://kitconet.com/images/quotes_special.gif)
2 comments:
The only reason we haven't seen rampant price inflation yet is that banks are largely hoarding the money because they are afraid that if they lend it out they will never get it back.They are actually hoarding it to shore up their margins. As you already know the banks can lend out $10 for every $1 in deposits. Due to this they have a minimum in reserves that they must hold at any given time and this is usually handled by overnight trades between banks but one of the banks fell last year because they could not get this overnight loan from JP Morgan Chase. (there is a history in that one as its not the first time they have failed to loan out causing a bank to go under) By holding this money they are keeping themselves from (the common practice of) being dependent upon another bank for their solvency.
Otherwise I agree with everything in this post. Once those banks let loose the cash...
Thanks for the comments Erik! It's a little scary to think of how fragile the whole system is. I've read recently that there could be a spate of national bankruptcies in Eastern Europe, and many US banks have a lot of money invested in those countries. And let's not forget about the carnage that will result from the upcoming commercial real estate crash. On top of that, our government just approved a $3.44 trillion budget with around $1.2 trillion in deficit spending that will have to be funded with borrowing or printing - or both. I believe that this all will get much worse before it gets better.
Post a Comment