Predicting the death of the Fed - Weimar Style

[bhikkhu]

(snip)".....That is only a part of the story. If the Treasury securities were merely sold into the market and the proceeds were loaned to the Federal Reserve, there would be no impact on Reserve Balances or the Monetary Base. Or as Ed Bugos likes to say, the liquidity would be "sterilized". In other words, the operation would merely represent a shift of existing money supply within the financial system, not an injection of new cash. Yet what we have witnessed in the past few weeks is a massive increase in Reserve Balances to the tune of over $160 billion.

And that can only mean one thing: the Fed is now monetizing bank assets, or at least is preparing to do so, on behalf of the Treasury. This is a bona fide helicopter operation, the first of its kind during the current credit crisis and certainly the largest in the history of First World central banking since the Great Depression. What we don't know is if these Reserve Balances will turn into Federal Reserve Notes and get stuffed under the mattress as panicked depositors continue to withdraw cash from the banking system or if these Reserve Balances will get loaned out by the banks whose assets are being monetized. If the former, the hyperinflation will be delayed until the cash is taken back out from under the mattress, which will happen once the bank runs have abated. If the latter, hyperinflation could come fast and furious.

In effect, what's really happening is that the Treasury is borrowing money into existence at the Monetary Base level. This is exactly the same thing that Weimar Germany did. What the Germans (and the Argentinians, Zimbabweans, etc.) found out, and what our "benevolent" leaders will also soon discover, is that the printing press is a slippery slope to oblivion. The worst-case outcome of giving into this temptation is almost unfathomable..."(snip)

http://www.kitco.com/ind/Szabo/oct082008.html

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Long article, full of background and vitriol. The basic prediction is hyperinflation once the credit markets come "unstuck". As much of this is over my head, any thoughts here?

[angryfirelord]

1. Re:

You can only print so much money at a time without people realizing it. Eventually, if you keep doing it, people will begin to take notice and start going for other things like gold. It's also possible that the Fed could simply collapse on its own if the dollar loses all of its value.

Hopefully Obama reads Kitco and will put the necessary regulations on the Fed. :)

[ixion]

2. this lays it out very well

and describes in detail one of my primary objections to these bailouts going on: we're broke, and every time we print another 100 billion, we move that much closer to the final blow.

[girl gone mad]

3. I think it's a distinct possibility.

In the near term, we're seeing deflation. Long term, we could have severe inflation against some currencies.

It's hard to make good predictions because of the nature of the global economy. Much depends on the monetary response from Europe and Asia.

[bhikkhu]

4. From what I read last summer, the euro and others tend to follow

...or looking at the M3 reconstruction from shadowstats:



where we reached a 16% growth in money supply, for instance, the primary thing keeping the dollar from becoming worthless was that the Euro and other global currencies were diluting almost as bad, at 12 or 13%. I don't know if its been in the past an entirely purposeful thing, but I doubt if a "decoupling" of $ values from the global economy can be avoided, given the desperate local measures developing everywhere and the variety of responses.

[Eurobabe]

5. So basically if I am reading you right

(and after speaking with a friend from Argentina today, who told me about how her 150K apt became worth 25% of its value when Argentina revalued its currency) is that the euro is really overvalued, and it would not be a good idea to buy land or house overseas as a safe haven.

Insight appreciated. My gut is already telling me the truth.

[bhikkhu]

6. No, you have to think about relative values

imagine if the EU and the US economies were the same size and both were monetized equally - that is, there were the same number of dollars as Euros. There would be a stable basis for relative value. Imagine then that the US doubled the numbers of dollars in circulation in an otherwise unchanged economy; the dollar would be worth half as much within the US economy, and also half as much relative to the Euro.

If on the other hand the EU doubled the number of Euros in circulation at the same time, then both notes would be worth half as much within their respective economies, but they would retain the same value relative to each other. This is the significance of the Euro and others having followed the dollar in increases in money supply, and why the dollar is still reasonably strong.

But, again, things are pretty volatile and it seems there are more local solutions not than coordinated efforts. The cooperative system that we have had is more easily broken than maintained, particularly when widespread global hardships translate into strong local political agendas.