Monday, February 8, 2010


There is a bit of deflation going on right now. Price deflation-not so much monetary deflation. The cost of many items is going down right now, but this will not last too long. It will just make the coming inflation seem that much stronger.

The Federal Reserve has pumped a great deal of money into the "too big to fail" banks. They printed the money to buy toxic assets held by the banks so that there would not be a systemic failure of the banking system. Good job, they saved the world. They bought toxic, worthless assets at full face value. TheY BOUGHT the assets, so the money is not a loan to be repaid. It belongs to the banks.

OK, so they "bought" these toxic assets (like worthless mortgage paper, credit default swaps, etc.) and now the banks have that cash. Free cash. Almost a TRILLION DOLLARS. In bank lingo, this free, spendable cash is called "excess reserve balances: (ERB-more on that below). The banks have money that they do not now have to hold in reserve - they can spend it on anything. What they are supposed to spend ito on is LOANS. They are supposed to lend the money to private businesses. Stimulate the economy through investment in private business, things like that. They are not lending.

Why are the banks not lending? Because they can make a better, low risk return elsewhere. That elsewhere is actually the Fed - right back where they got the money in the first place. How is the Fed able to pay interest to the banks that is so much better than what is available on the open market? Well, the Fed just prints more money and pays the interest. The Fed makes the banks a better deal because it doesn't really cost the Fed anything.

Why would the Fed do this - give the banks money and then PAY them interest on it? Because, the Fed wanted to save the banks and bankers - the Fed works for these bankers. But that's not all. If the banks went ahead and started lending the money out - there would be an extra TRILLION DOLLARS in the economy. Massive inflation. Inflation is a monetary thing-too many dollars chasing too few goods and services.

The Fed wants to control this money, like a genie in a bottle. This is a temporary fix. The extra TRILLION DOLLARS will not be kept locked up forever. When the bottle is opened-when the money is set free - there will be massive inflation.

Then you will want to own hard assets. Like oil, oil companies, metals, metal companies, etc.