The government is monetizing their debt under the cover of the FED who is creating a monetary bubble to prop up and profit their banks.
By Dean Kalahar
January 27, 2012
David Malpass in the Wall Street Journal zeros in on a very complex and troubling situation going on within the Federal Government and the Federal Reserve.
Near-zero interest rates penalize savers and channel artificially cheap capital to government, big corporations and foreign countries. One of the most fundamental principles of economics is that holding prices artificially low causes shortages. When something of value is free, it runs out fast and only the well-connected get any. Interest rates are the price for credit and shouldn't be controlled at zero. It causes cheap credit for those with special access but shortages for those without—primarily new and small businesses and those seeking private-sector mortgages.
The economy's exit from Fed dominance of bond markets wouldn't be traumatic. The Fed has been fully sterilizing its asset purchases, meaning all the cash it has used to buy bonds is still contained at the Fed, not multiplied in the private sector. The Fed accomplishes this through bank regulation and by borrowing from banks at above-market interest rates—$1.5 trillion as of Jan. 18.
So the Federal Reserve (FED) is buying US government bonds and then they -as well as the administration, i.e. Dodd-Frank- are regulating member banks so as to keep the money that was used to buy the bonds from being lent to consumers.
The FED then borrows money from these same Federal Reserve banks and pays them interest greater than the rate set by the FED which is zero.
The FED thus soaks up the potential liquidity and the reserve banks make “no risk” money without having to lend dollars to consumers or cause inflation.
Since the member banks own the FED, the central bank also shares in the member banks profit. Dollars are thus not put into circulation but the banks become very profitable on the books/balance sheets which creates a multiplier effect in expanding the number of dollars without printing more dollars.
The result is tremendous hidden inflation as the purchasing power of each dollar declines as the number of dollars on paper goes up. As Malpass states, “the FED balance sheet is up 250% since 2008.”
The lack of transparency keeps the scheme all but hidden.
In the meantime, consumers/the market flock to gold as they feel their currency is being devalued by the Treasury Department and the FED.
At some point, as all schemes do, this will collapse and the inflation bomb will be unleashed.
In short the government is monetizing their debt under the cover of the FED who is creating a monetary bubble to prop up and profit their banks that upon its “pop” will make the housing bubble seem like a snap.
As Dennis Miller once said: “that is just exquisite bull s__t.”