The Fed Has Painted Itself Into a Corner

04 Mar

The Fed Has Painted Itself Into a Corner

The Fed really has America’s monetary situation screwed up.  

Badly.

The last three Fed chairmen have printed money to beat the band:  Bernanke, Yellen, and Powell.

They have done the work of three men:  Larry, Moe, and Curly.

The Fed itself and the lapdog financial press call what the Fed has done under this hapless threesome many things:  Quantitative Easing, open market operations, yield curve control, debt monetization, liquidity operations, demand management, repurchase agreements, TARPing, deficit accommodation… and probably other names we can’t even remember.

But it is all money printing.  It will eventually destroy the dollar and bring the US economy crashing down with it.  That’s because money printing creates no new wealth.  It only debauches the value of the currency, while a dependable currency is a necessary condition for a strong, dynamic, prosperous economy.

Right now, the Fed is buying $120 billion a month with made-up money.  At the same time, Washington’s deficits are out of control, and yet it has another $1.9 trillion stimulus package on the drawing boards

We have shared the following chart before.  It shows Fed assets, the total amount of things like government bonds that the Fed purchased with money it just conjured electronically out of nothing.  We still call it money printing because that is how it was all done not so long ago.

 

On the day Bernanke was put in charge of the Federal Reserve, on February 1, 2006, its assets had been fairly stable, growing slowly.  They totaled $832 billion.   Think about that.   At that moment, the Fed had been in existence for 93 years, after all of which its assets were less than $900 billion.  Now, just 16 short years later, its assets have exploded to $7.590 trillion!  

Under Bernanke, Yellen, and Powell, the Fed’s assets have grown more than 800 percent.

That is a lot of money printing.

Today the Fed is purchasing $120 billion of bonds a month (by printing the money, needless to say).  This is intended to keep interest rates down.  

But it is not working.  Interest rates are moving up.  Last August the yield on the US 10 year treasury was 0.52 percent.  A week ago, it reached 1.54 percent.  It climbed a full percent in six months.  How much more money-printing, asset purchases must the Fed implement to keep interest rates from rising?

No one knows.  But the Fed can’t let rates rise for long.  The cost of a two percent increase on outstanding US debt, now $28 trillion, is $56o billion a year.  

Besides the inescapable fact is that the more money the Fed prints, the higher rates will eventually go.  Because eventually investors will demand an interest rate premium over the rate of inflation.  So, the more the Fed prints to keep rates down, the less the dollar will be worth.  And the higher rates will go, compounding the debt beyond comprehension.

All of this is implicit and inevitable in what these Fed chairmen have done.  Imagine, all that expensive education, graduate schooling, and fancy degrees, and they know less than nothing about what they have done.

Buy gold and get the heck out of the way of Larry, Moe, and Curly’s train wreck.

jim-sign