Fed Minutes: We Have Not Yet Even Begun to Print!

 |  Includes: DIA, SPY
by: Avery Goodman

The Federal Reserve is a unit of quasi-government, with no taxing authority or income of any kind, except that obtained from the U.S. Treasury and its client banks. However, it can and does create money, in the form of liquidity, which it then sends to banks. The liquidity that it releases into the market has the net effect of diluting the value of the U.S. dollar.

The Fed has extended credit to Fannie Mae, Freddie Mac, various banks, and insurance companies. It has “borrowed” this money from itself by increasing its balance sheet from $900 billion to the current $2.1 trillion. According to a speech given by Ben Bernanke to his client banks on April 3, 2009, the Federal Reserve will purchase cumulative amounts of up to $1.25 trillion of agency MBS and up to $200 billion of agency debt by the end of the year, and up to $300 billion of longer-term Treasury securities over the next six months, for a total increase in Fed spending of $2.95 trillion. This information is repeated in the Fed Minutes, today.

Federal Reserve lending can be viewed as actually an “off-balance-sheet” type of spending for the United States. According to an estimate released by the Congressional Budget Office in early March, 2009, the U.S. Treasury, itself, will be forced to borrow $1.8 trillion in 2009. You need to reduce the amount "spent" by the Fed, to the extent that some of its balance sheet consists of loans from the Treasury, and, if you count them twice, you would be overestimating the size of the total deficit between the two entities. The U.S. fiscal year begins October 1, 2008. Together, the deficit spending for 2009 will probably amount to $4 trillion when we include the Federal Reserve’s "spending" and subtract the loans from the Treasury. It might be a little less, depending on how you interpret the various balance sheet items. But, this total does not include unfunded liabilities for social security and medicare.

Historically speaking, the percentage of deficit spending is now in the same general range as Weimar Germany in the first half of 1919, while it was still in a minor depression and immediately before the onset of hyperinflation that eventually reduced the German Reichsmark by 1923 to a value that was 1/Trillionth of the exchange value it held in 1913. In some ways, our situation is worse than that of Germany in 1919. For example, our private debt is considerably higher. The private debt to GDP ratio is higher now than at any time in the known history of any modern industrialized civilization. In both absolute, and percentage terms, it exceeds the level of private debt in the Germany economy back in 1919. In other ways, though, we are better off. We are lucky enough to own the world's reserve currency (at least for now). That means the Fed has the opportunity to suck money from other countries, like China, who may be hesitant to liquidate dollar holdings quickly, for fear that doing so will speed up the inevitable implosion.

But, the Fed is not done. Apparently, the incredible amount of money-printing that they've already done is not enough. Many FOMC committee members, amazingly enough, want to print yet more this year! Do these people know nothing about economic history?

It can be summed up with one quote from the minutes, released Wednesday at 2:00 PM:

Members agreed that the monetary base was likely to grow significantly as a consequence of additional asset purchases; one, in particular, stressed that sustained increases in the monetary base were important to ensure that policy was consistently expansionary. Members expressed a range of views as to the preferred size of the increase in purchases. Several members felt that the significant deterioration in the economic outlook merited a very substantial increase in purchases of longer-term assets...

What more can I say that the Fed hasn't already said in this paragraph? These people intend to print an amount of new dollars which has had no precedent, in a major industrialized nation, since the days of the Weimar Republic in Germany. Ben Bernanke says he can remove this "liquidity" from the system when appropriate. But, does he take us all for fools? How can he possibly "remove" the new dollars without precipitating the depression he says he wants to avoid?

What we think is huge now, is merely the beginning. Hold onto your hats, folks! You'd better. You may not be able to afford one next year. Your dollars will be worth a mere fraction of their present value in the next few years. Whether the devaluation is 1/Trillionth or 1/10th, the effect will be to wipe out the American middle class for a generation.