June 11, 2009

Ballooning Money

Lets say you own a business. You bring in $24,000 profit from your business each year as income for your family. The entire business has $140,000 a year in sales. But, if you add up the debts you owe your suppliers, the building, your mortgage, and your credit cards, and your car payments, you owe over a Million dollars. Liabilities of over a million dollars with a 24 thousand dollar income, NOT GOOD! That is the position our federal government is in right now... only each of those numbers has 8 more zero's on the end! The profit is tax revenue (2.4 trillion), the sales are total GDP (14 trillion), and the debts are Social Security, pensions, Pension Benefit Guarantee Corporation, Medicare, Medicaid, etc. (100+ trillion).

US budget deficits:

As crazy as this is, the monetary base is even crazier. Monetary base is the sum of all the coins and bills in circulation, the vault cash at the banks, and the reserves held at the Fed. Normally 95% of the monetary base is in circulation, and 5% is in bank reserves. But back in September the Fed began pumping the market full of cash, almost $1 Trillion. This was all dumped into the bank reserves to promote lending. Bank reserves have jumped almost 20-fold, now the currency portion of the monetary base is less than 50%!

This is enabling the banks to make many new loans and increase the cash that is in circulation. Without actual GDP increase to back up this new money in circulation, the money becomes diluted, and inflation and rising interest rates are what follows.

A final disturbing aspect is that it seems the Fed doesn't even know where the money is going. They are just blindly pumping into the banking systems.

Question: Well, I understand that, but we’re talking about events that started unfolding eight months ago. Have you reached any conclusions about the Fed expanding its balance sheet by over a trillion dollars since last September?

Elizabeth A. Coleman: We have not yet reached any conclusions.

Question: you’re the Inspector General. My question specifically is do you know who received that $1 trillion-plus that the Fed extended and put on its balance sheet since last September. Do you know the identity of the recipients?

Elizabeth A. Coleman: I do not know. We have not looked at that specific area at this particular point on those reviews.

Question: So I’m asking you if your agency has in fact, according to Bloomberg, extended $9 trillion in credit, which by the way works out to $30,000 for every single men, women, and child in this country. I’d like to know if you’re not responsible for investigating that, who is?

Elizabeth A. Coleman: We, actually… we have responsibility for the Federal Reserve’s programs and operations, to conduct audits and investigations in that area.

Question: What have you done to investigate the off-balance sheet transactions conducted by the Federal Reserve, which according to Bloomberg now total $9 trillion in the last eight months.

Elizabeth A. Coleman: At this point, we’re conducting our lending facility project at a fairly high level and have not gotten to a specific level of detail to really be in a position to respond to your question.

Question: Have you conducted any investigation or auditing of the losses that the Federal Reserve has experienced on its lending since last September?

Elizabeth A. Coleman: We are still in the process of conducting that review. Until we actually, you know, go out and gather the information, I’m not in a position to really respond to this specific question.

Question: So are you telling me that nobody at the Federal Reserve is keeping track on a regular basis of the losses that it incurs on what is now a $2 trillion portfolio?

Elizabeth A. Coleman: I don’t know if… you’re telling me that there’s… you’re… missing… that there are losses. I’m just saying that we’re not… until we actually look at the program and have the information, we are not in a position to say whether there are losses or to respond in any other way to that question.

Alan Grayson: Mr. Chairman, my time is up, but I have to tell you honestly, I am shocked to find out that nobody at the Federal Reserve including the Inspector General is keeping track of this.
The months and years ahead will be interesting indeed! Someday economists will write books about what we are experiencing. Somehow I doubt it is going to be a happy ending.
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