Ron Paul: Monetary Base Increased By 75% in 2 Months

[SevenEyedJeff]

http://www.house.gov/htbin/blog_inc...d,ID=081201_2549,TEMPLATE=postingdetail.shtml

 

[SevenEyedJeff]

Texas Straight Talk

A weekly column
The Neo-Alchemy of the Federal Reserve

As the printing presses for the bailouts run at full speed, those in power are no longer even pretending that the new giveaways will fix our problems. Now that we are used to rewarding failure with taxpayer-funded bailouts, we are being told that this is “just a start,” more funds will inevitably be needed for more industries, and that things would be much worse had we done nothing.

The updated total bailout commitments add up to over $8 trillion now. This translates into a monetary base increase of 75 percent over the last two months. This money does not come from some rainy day fund tucked away in the budget somewhere – it is created from thin air, and devalues every dollar in circulation. Dumping money on an economy, as they have been doing, is not the same as dumping wealth. In fact, it has quite the opposite effect.

One key attribute that gives money value is scarcity. If something that is used as money becomes too plentiful, it loses value. That is how inflation and hyperinflation happens. Giving a central bank the power to create fiat money out of thin air creates the tremendous risk of eventual hyperinflation. Most of the founding fathers did not want a central bank. Having just experienced the hyperinflation of the Continental dollar, they understood the power and the temptations inherent in that type of system. It gives one entity far too much power to control and destabilize the economy.

Our central bankers have had a tremendous amount of hubris over the years, believing that they could actually manage a paper money system in such a way as to replicate the behavior and benefits of a gold standard. In fact, back in 2004 then Fed Chairman Alan Greenspan told me as much. People talk about toxic assets, but the real toxicity in our economy comes from the neo-alchemy practiced by the Federal Reserve System. Just as alchemists of the past frequently poisoned themselves with the lead or mercury they were trying to turn to gold, today’s bankers are poisoning the economy with accelerated fiat money creation.

Throughout the ages, gold has stood the test of time as a consistently reliable medium of exchange, and has frequently been referred to as “God’s money”, as only God can make more of it. Seeking superhuman power over money in the way alchemists did in ancient times caused society to shun them as charlatans. In much the same way, free people today should be sending the message that this power and control over our money is no longer acceptable.

The irony is that even had the ancient practice of alchemy been successful, and gold was suddenly, magically made abundant, alchemists still would have failed to create real wealth. Creating gold from lead would have cheapened its status to that of rhinestones or cubic zirconia. It is unnatural and dangerous for paper to be considered as precious as a precious metal. Our fiat currency system is crumbling and coming to an end, as all fiat currencies eventually do.

Congress should reject the central bank as a failure for its manipulations of money that have brought our economy to its knees. I am hoping that in the 111th Congress my legislation to abolish the Federal Reserve System gains traction so that the central bank can no longer destroy our money.

Posted by Ron Paul (12-01-2008, 01:07 PM) filed under Monetary Policy

 

[ladyjade3]

We'll get an updated figure out Thursday supposedly. It could be lots higher than that.

 

[theoakman]

and who was on the receiving end of it all?

Rich bankers...

they are screaming "All your monetary base are belong to us"

 

[Emmitt2222]

"fund tucked"

Maybe I just have a dirty mind, but I had to read that three times to get it right

Now the only question is whether this new creation of money can outpace our rapidly shrinking credit sector. I am willing to bet on the printing presses because we are just in the first half of this race right now.

 

[SWATH]

75% inflation in 2 months. Isn't that rate like 1640% inflation per year?

 

[icon124]

and who was on the receiving end of it all?

Rich bankers...

they are screaming "All your monetary base are belong to us"

yeah duh...who else is going to get it?

Do you guys know what the monetary base is....different from the money supply...the base can increase by 1,000,000,000%, but if there is no lending then no inflation will occur.

 

[gonegolfin]

75% inflation in 2 months. Isn't that rate like 1640% inflation per year?

There was no inflation from this. It is bank reserves that increased and therefore the monetary base (as there was not a corresponding decrease in currency outstanding). The money supply will increase if these reserves are either lent or invested.

Brian

 

[gonegolfin]

yeah duh...who else is going to get it?

Do you guys know what the monetary base is....different from the money supply...the base can increase by 1,000,000,000%, but if there is no lending then no inflation will occur.

You mean no lending and no investing. The banks can also purchase securities with these reserves, which will increase the money supply (Ex. buying treasuries).

Brian

 

[gonegolfin]

The updated total bailout commitments add up to over $8 trillion now. This translates into a monetary base increase of 75 percent over the last two months. This money does not come from some rainy day fund tucked away in the budget somewhere – it is created from thin air, and devalues every dollar in circulation.

The "and devalues every dollar in circulation" phrase is not correct. Increasing the monetary base has the potential to devalue every dollar in circulation.

Brian

 

[theoakman]

yeah duh...who else is going to get it?

Do you guys know what the monetary base is....different from the money supply...the base can increase by 1,000,000,000%, but if there is no lending then no inflation will occur.

do you think they just increased it for fun? It's in the hands of bankers with no oversight. As long as it stays there, nothing happens except the decreases you see across the board. Oil, food, real estate, stocks, etc... The bailout money isn't going to be used for lending. A lot of recipients of the bailout money are planning on using it to buy other companies. When they do, it's inflationary.

"If the American people ever allow private banks to control the issue of their money, first by inflation and then by deflation, the banks and corporations that will grow up around them (around the banks), will deprive the people of their property until their children will wake up homeless on the continent their fathers conquered."

-Thomas Jefferson, Letter 1802 to Secretary of the Treasury, Albert Gallatin

All the people with savings are sitting on the sidelines waiting to buy houses and other things at lower prices. Rather than let the law of natural consequences take it's coarse, the fed is supplying bankers with giant amounts of money that they'll use to buy everything up at fire sale prices. Why would they lend money to the general public when they can just buy it themselves with their new money?

Once they do decide to buy everything up, they'll be free of their cash and own real assets. They are going to buy up all the real assets at fire sale prices (gold, silver, oil, land, corporations) and leave us holding a bunch of $1000 bills.

 

[gonegolfin]

do you think they just increased it for fun? It's in the hands of bankers with no oversight. As long as it stays there, nothing happens except the decreases you see across the board. Oil, food, real estate, stocks, etc... The bailout money isn't going to be used for lending. A lot of recipients of the bailout money are planning on using it to buy other companies. When they do, it's inflationary.

All of the $700 billion of the TARP was/is funded via treasury auction. The spending of this money does not increase the money supply. It is not the TARP that has caused the increase in bank reserves. It is the other lending that has been unsterilized since the beginning of September. This quantitative easing is evident in looking at total Fed lending being roughly constant in the last several weeks, with non-borrowed reserves decreasing dramatically.

Brian

 

[icon124]

You mean no lending and no investing. The banks can also purchase securities with these reserves, which will increase the money supply (Ex. buying treasuries).

Brian

Yeah but the in reality how much will the have to invest before they even start to make an impact and begin inflation. Most of the inflation comes from lending, plus in my eyes that's a given for investments...but I guess your right you have to explain every little thing around here hahaha

do you think they just increased it for fun? It's in the hands of bankers with no oversight. As long as it stays there, nothing happens except the decreases you see across the board. Oil, food, real estate, stocks, etc... The bailout money isn't going to be used for lending. A lot of recipients of the bailout money are planning on using it to buy other companies. When they do, it's inflationary.

No, they aren't lending because the bankers are smart enough to know that there isn't enough profit there now. You can buy securities and companies for a bit, but in banking your profit comes from lending.

 

[gonegolfin]

Yeah but the in reality how much will the have to invest before they even start to make an impact and begin inflation. Most of the inflation comes from lending,

Whether the resultant deposits were created by lending or investing, it is the same increase to the money supply. If $500 billion in excess reserves is invested (say in buying treasury debt), that will make a real and very sizeable impact on the money supply, even if the resultant deposits are not lent for another cycle of money creation.

Brian

 

[icon124]

Whether the resultant deposits were created by lending or investing, it is the same increase to the money supply. If $500 billion in excess reserves is invested (say in buying treasury debt), that will make a real and very sizeable impact on the money supply, even if the resultant deposits are not lent for another cycle of money creation.

Brian

Yeah I understand that, but my point is geared more towards your last statement. Only one cycle occurs under investment...while a possibility of near 9 cycles (well theorectically if we assume a RR ratio of 10%) can occur with lending. That's a huge difference, I would never see why a bank would choose investing over lending...unless it was for diversification or lending just wasn't there.

 

[gonegolfin]

Yeah I understand that, but my point is geared more towards your last statement. Only one cycle occurs under investment...while a possibility of near 9 cycles (well theorectically if we assume a RR ratio of 10%) can occur with lending.

I knew the point you were trying to make, which is why I explicitly called this out. But the fractional reserve system does not achieve nearly this amount of leverage in practice. And again, a very sizeable impact can be made on the money supply simply by investing these excess reserves (with no lending of these resultant deposits). So, what we are talking about is the difference between serious inflation (via investment of excess reserves) vs. catastrophic inflation (if the money is invested and lent several times over). Even if it goes no further than investment of the excess reserves, serious inflation (in my opinion), will result. It will be interesting to see if the Fed pulls its finger from the hole in the dam by ceasing to pay interest on excess reserves.

That's a huge difference, I would never see why a bank would choose investing over lending...unless it was for diversification or lending just wasn't there.

Banks will invest instead of lend when it is in their interest to do so ... such as in the case where the Fed sets up an easy carry trade with minimal risk. As opposed to the risk in lending in the current economic climate.

Brian

 

[icon124]

I knew the point you were trying to make, which is why I explicitly called this out. But the fractional reserve system does not achieve nearly this amount of leverage in practice. And again, a very sizeable impact can be made on the money supply simply by investing these excess reserves (with no lending of these resultant deposits). So, what we are talking about is the difference between serious inflation (via investment of excess reserves) vs. catastrophic inflation (if the money is invested and lent several times over). Even if it goes no further than investment of the excess reserves, serious inflation (in my opinion), will result. It will be interesting to see if the Fed pulls its finger from the hole in the dam by ceasing to pay interest on excess reserves.


Banks will invest instead of lend when it is in their interest to do so ... such as in the case where the Fed sets up an easy carry trade with minimal risk. As opposed to the risk in lending in the current economic climate.

Brian

I guess that's where me and you differ

Although I do see your point when it comes to serious inflation with investing, I just don't think there is a huge chance of that happening. I guess it really depends on what they invest in. If it's treasury bills/bonds/notes or overseas we won't see it for a while. If they want to go out and buy stocks in the U.S. then we will see it by next week, haha not really but you get my drift (I do know they are regulated when it comes to the type of investments they can make though).

My bet is if we see a sizable amount of inflation (double or more from the long run average) it will be because of to much lending. Investments will probably bring some too that the Fed can't offset simply because of the huge amount of reserves they are putting into the system, but nothing compared to lending.

Oh well, all we can do is sit and watch right? Unless you become a banker and get to do it first hand.

 

[gonegolfin]

Although I do see your point when it comes to serious inflation with investing, I just don't think there is a huge chance of that happening. I guess it really depends on what they invest in. If it's treasury bills/bonds/notes or overseas we won't see it for a while.

As I have written in a couple of my past missives, there is the real possibility of a carry trade being setup here. The banks can borrow cheap funds as well as use existing reserves and invest in risk free treasuries. The Fed would like to encourage this as it would help bring down intermediate and longer term interest rates. But it would also provide more fuel for funding upcoming treasury auctions (which will be required) and keeping the secondary market stable (meaning low interest rates). Any yield over 0.65% is profitable now. And if the Fed pulls the payment of interest on excess reserves, it will encourage such a carry trade even more.

If the Fed cannot encourage the banks to lend, they will lay this free money in front of the banks (or do both). They will also enter the treasury and agency markets, buying further up the maturity ladder.

Brian

 

[NolanLawson]

they are screaming "All your monetary base are belong to us"

What you say ?! This made me laugh.

Seriously, though, it's true. Check out this graph from shadowstats: http://www.shadowstats.com/charts_republish#m3

As far as I can tell, the gray line is the spike in cash that the Fed has been printing out (inflation), and the blue line is all the credit that the banks have been contracting (deflation). Hard to say, but it looks like inflation will be the big winner in the end.

 

[gonegolfin]

Seriously, though, it's true. Check out this graph from shadowstats: http://www.shadowstats.com/charts_republish#m3

As far as I can tell, the gray line is the spike in cash that the Fed has been printing out (inflation), and the blue line is all the credit that the banks have been contracting (deflation). Hard to say, but it looks like inflation will be the big winner in the end.

No, the gray line is M1. The Fed has really only been creating money since September and this is credited as bank reserves, which are not part of the money supply. These bank reserves show up in the monetary base. The money supply will expand only if the banks use these reserves for investment or use them as the basis to lend new money into existence. M1 has actually been up just marginally since the beginning of September (when the Fed began "printing money"). The M1 plotted is the year-over-year percentage change. It is up about 7% year-over-year (ending in October '08).

Brian