The following excerpt is from Righteous Investor and discusses the out-of-control spending in Washington and what to expect when inflation hits. For instance, February’s deficit was $223 billion dollars. That translates into $26 per person per day according to Righteous Investor. Moreover, the government’s insatiable demand for dollars spurs on the Federal Reserve’s Quantitative Easing (QE) programs, which does nothing more than create fiat money for government use. This translates into more dollars being pumped into the economy and, of course, the inevitable result of inflation.
“Now here is what has been happening: (1) the US government borrows money but doesn’t find sufficient lenders whether domestic or foreign, so the Federal Reserve bank lends to them the remaining shortfall. This is called quantitative easing because the money is created out of nothing. But that is not the end of QE: for Bernanke is also buying old debt as it turns over and finds no new borrowers (see “Hyperinflation when?“). QE greatly increases the amount of greenbacks that are in the money base: view (chart below) and be afraid and weep. (2) Next, commodities go up in price because too many dollars are chasing too few goods–food riots start happening in poorer countries. (3) Then, consumer prices go up. (4) Lastly, workers will get cost of living adjustments if indeed their employer can pay them at all. In any case, the last thing to adjust to this whole mess is people’s take home pay. But unfortunately, the adjustments will be too little too late because the next round of QE has already taken place and the spiral of hyperinflation has reached the next stage even before they receive their next pay cheque.”
Important to note is the Federal Reserve’s recent announcement that it may have to begin its third round of QE in response to sky-rocketing oil prices. Atlanta Fed President Dennis Lockhart stated at the National Association of Business Economics in Arlington that “If [the rising price of oil] plays through to the broad economy in a way that portends a recession, I would take a position we would respond with more accommodation.” As oil increases, so too does the cost of most, if not all, goods and services. This includes anything that requires petroleum in the production process, not to mention increased transportation costs for moving the product to market. Such is the rationale for QE3. Add to this recent reports of record food prices and subsequent riots from increased oil prices, and one begins to see the picture. Here we have three of the four points listed above: QE2 by the Federal Reserve last November when they purchased $600 billion in Treasury bonds; increases in food prices leading to disruption in the global oil supply via riots, and thus subsequent increases in food prices; and finally talks of QE3 if and when oil hits $150 a barrel.
The question is, how much longer until the banks begin lending at a healthy rate again. Despite the media’s on-and-off questioning of large financial institutions’ refusal to lend money, banks still hoard record levels of cash. Why? According to Project World Awareness, a part of the Emergency Economic Stabilization Act of 2008 encourages banks not to lend. They are not lending because the Federal Reserve is paying them interest not only on their required reserves, but also on their excess reserves.
“But as of October 9, 2008, the Fed began paying interest on all reserves, required and “excess” alike. And not just nominal interest, but interest at a rate which is higher than the “Fed Funds Rate” (the rate banks pay to each other for overnight loans), and even higher than current short-term Treasury yields. At a stroke the Fed eliminated for banks interest-rate risk, principal risk, counterparty risk, and even the capital cost of maintaining an extremely high degree of liquidity. The “cost” to banks of non-lending was driven down substantially.” (I strongly encourage those skeptics of hyperinflation to read this entire article.)
In short, the Federal Reserve is paying our banks not to lend our money to us, and this was signed into law by our government. Furthermore, once that cash does enter circulation, despite initial feelings of a recovery, prices for all goods and services will leap to a degree that will effectively destroy the greenback’s credibility. Despite the Fed’s notion that they will be capable of withdrawing excess funds from circulation, many believe otherwise. According to Monty Pelerin (pen-name), withdrawing the excess funds is not feasible because that would entail selling the toxic waste they bought from insolvent institutions. Not only did they overpay for those assets, but they have no means of establishing current values. In this sense, the Fed is simply incapable of withdrawing billions in excess funds from the economy. Consequently, those funds will stay in circulation, continuing to drive up prices.
- Is it time to buy US? II: February deficit $223 billion (rightinvestor.com)
- Fed’s Lockhart: Oil shock could lead to QE3 (money.cnn.com)
- World Food Prices Hit Record Highs Amid Oil Jitters (commondreams.org)
- Common Sense from a North of the Border Expat (economicnoise.com)
- Money supply, the stimulus & where is the inflation? (projectworldawareness.com)
- Bernanke’s Road to Serfdom (economicnoise.com)
Additional Notes: I recommend the following article, as it ties in Fed policy to foreign markets and higher food prices around the world with a slant toward U.S. manipulation of currency…an interesting read.
- Fed Exports Inflation, Stokes Revolutions (blogs.forbes.com)
Also, for those not familiar with Federal Reserve Policy, I recommend a previous post of mine written for the interested novice in Fed, money, and inflation matters.
- The Federal Reserve: Money, Debt, and Inflation (laissezfairelinks.wordpress.com)