Forget Deflation, Fed’s $3 Trillion ‘Reflation’ Is Much Scarier
Nov 20th, 2008 | By Bill Bonner | Category: Politics & EconomicsAfter record declines in October’s producer and consumer price indexes, deflation is today’s buzzword. But Bill Bonner says the explosion of assets on the Fed’s balance sheet will create serious monetary inflation problems further down the line.
This from The Daily Reckoning:
To give you an idea of the wild measures undertaken by the feds, we look at what is happening at the world’s leading bank – the US Federal Reserve.
The short form of how the Fed operates is this: it holds a certain amount of securities in its vault; this is the cornerstone capital – or monetary base – of the whole banking structure. How does it get this capital? It buys it, creating the money to pay for it as necessary. Naturally, the Fed doesn’t want to create too much money or the inflation rate would get out of control and economists would point their fingers accusingly. But now, people fear dandruff more than inflation. So, the Fed has gone wild.
From the day of its founding in 1913 to September 24, 2008 the Fed’s assets – the aforementioned cornerstone capital for the US financial system – grew to $1 trillion. By November 14, 2008 the amount had grown to over $2 trillion. And in a speech in Texas, the head of the Dallas branch of the Fed said he expected the total to reach $3 trillion by year end.
For the moment, this explosion of monetary inflation is hardly noticed. Asset deflation has the headlines. People worry about having too few dollars, not about having too many.
Comes the news this morning that US business chiefs are asking the up-coming Obama administration for another $500 billion ‘stimulus’ program. They’ll get it. And much more. Trillions worth.
Trying to stimulate the economy with easier credit in the early 2000s, Alan Greenspan overdid it. He gave the world the credit it wanted, and created the biggest bubble in human history.
Now that bubble is collapsing and his successor – Ben Bernanke – is confronted with a new problem. Now it is cash that people want – income to pay their debts! Bernanke will give them what they want. And, most likely, he will overdo it too.
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Best-selling investment author Bill Bonner is the founder and president of Agora Publishing. Owner of both Fleet Street Publications and MoneyWeek magazine in the UK, he is also author of the free daily e-mail The Daily Reckoning and three best-selling books, Financial Reckoning Day: Surviving The Soft Depression of the 21st Century, Empire of Debt: The Rise of an Epic Financial Crisis and Mobs, Messiahs and Markets..
