METHOD IN FED MADNESS
The Federal Reserve poured hundreds of billions of brand-new “air dollars” into grasping hands of the U. S. Treasury, but the vast majority of those dollars promptly found their way into bank reserves held by the Fed itself. Bank lending to the private economy did not increase noticeably. You might think this is another well-intentioned failure of “economic stimulus” if you fail to detect the Fed’s true motives. Surprisingly, China may have taken the Fed’s head-fake.
Fund Debt Before Interest Trap Door Falls
By Wayne Jett © July 18, 2011
QE2 Creates Debt, Reserves, No Loans
From the end of October, 2010, and June 29, 2011, non-borrowed bank reserves increased $641.4 billion. In that period, the Fed’s balance sheet expanded by about $572 billion. So bank reserves grew roughly 12% faster than the Fed created new monetary base even during QE2, the euphemism for Fed monetizing of new federal debt.
Did these burgeoning bank reserves drive bank lending into the private sector, as Austrian theory suggests fractional reserve banking inevitably does? From May, 2010, through June, 2011, bank loans for commercial and industrial uses increased by $43 billion, a measly increase of 3.5%. The increase in commercial/industrial loans is a mere 6.7% of the increased bank reserves themselves – fractional banking in reverse if ever it has been witnessed.
Do not be misled to believe that bank loan growth is so anemic because the private economy just doesn’t want to grow – that there is no interest in lending and no interest in borrowing. Banks do as their regulators tell them. Clearly, judging from the vast growth in reserves compared with loan business, the word to banks is they shall refrain from lending lest they wake up on a Friday afternoon and find themselves seized as financially unstable. Financial media alibi that banks are struggling to build their loan business.
The Fed has plied this line in order to monetize the monstrous growth in federal debt without allowing the spike in monetary base to blow consumer prices through the roof. If CPI or PPI were to get out of control, surely long term interest rates would do so as well. Significantly higher yields on Treasury securities would stop the Obama administration’s spending (i.e., its creation of unserviceable debt) in its tracks. That mustn’t happen, according to the agenda of the dominant elite, until federal debt is sufficient to destroy the middle class and assure IMF-imposed confiscatory tax rates (and interest rates) for all time.
China Misses Fed Ruse
Judging from China’s real struggle with inflation caused by keeping its peg to the sharply de-valuing dollar, the People’s Bank of China must not have detected that the flood of currency created by the Fed for Treasury is not really flowing into the U. S. economy. PBOC could have avoided its inflation flare-up by mimicking the Fed: issue renminbi as called for by the currency peg, but tell all its banks to put all the new currency into reserves and don't make loans.
Fiscal Policy Fight in Center Ring
If the Fed’s stockpiling of monetary nitro-glycerin is not excitement enough, the circus-going public should try the mid-way of U. S. fiscal policy. There you will be entertained by such contortionist wonders as a Keynesian apologist posing as supply-sider pretending to be a lawyer arguing that the Constitution does not permit Congress to impose statutory limits on the amount of federal debt. John Maynard Keynes’ only valid theory is proven once again: an economist may improve his financial standing by abandoning classical theory, embracing the dark side, and providing rhetorical cover for mercantilist plunderers.
President Obama’s dedication to increasing federal debt and the Fed’s mission to stop Great Depression II are twin engines of the same hi-jacked airliner – this one heading towards the Statue of Liberty and the Constitution. Whether the Fed continues in the same vein of unrestrained dollar devaluation and finally faces discipline from global economic forces, or suddenly reverses course to “save the dollar” with more Keynesian prescriptions of high interest rates, the outcome will be the same. A nation burdened by unsustainable debt is not a free nation – no more than an indentured servant is a free person.
Meanwhile, business as usual continues for the likes of J. P. Morgan Chase, the biggest winner of 2008 in taking both Bear Stearns and Washington Mutual for essentially nothing. Morgan just settled for pocket-change ($211 million) charges of conspiring to destroy competition for investments by cities. Morgan’s elitist wolf-pack-mate Goldman Sachs unflinchingly asked a federal court to seal its courtroom from public observation so its secret computer codes – previously described as capable of manipulating financial markets world-wide “unfairly” – cannot become more notorious than already is the case.
If relief is to come in time, it must be by the political process and soon. This means the middle class, including the upper middle class which pays those high income tax rates targeted at “the rich,” must join together to dis-empower the dominant elite. You may prepare yourself for this encounter by reading The Fruits of Graft: Great Depressions Then and Now. ~