| The Federal Reserve Is Inflating at . . ..
The Federal Reserve Is
Inflating at 341% per Annum. (Don't Look for the Decimal
October 24, 2008
I have never seen anything like this. The adjusted
monetary base over the last eight weeks has risen at
341% per annum. The increase in the monetary base is
indicates panic at the Federal Reserve. The financial
system is coming unglued.
The monetary base is high-powered money. For every
dollar injected here, the money supply can rise by at
least 10 to one. A 10% reserve requirement is imposed on
large urban banks, i.e., a 10-to-1 multiplication
factor. This is the fractional reserve banking process.
This is from the Federal
recession is pushing down the price of commodities. So
far, the new money has gone to banks and financial
institutions. They are not lending to businesses. They
regard businesses as too risky. This is getting a lot of
These articles never mention the obvious: the banks
can lend at any time. They make no money if they don't.
They can buy Treasury debt. Central banks do. So can
commercial banks. This explains why Treasury rates have
not increased, despite the increase in the Federal debt.
Federal government spends every dime it borrows. This
money will flow into the economy by way of Washington.
This money will not be lent to private businesses. It
will not re-capitalize the country. How can it? It is
not saved capital. It is fiat money.
If the banks are not lending at all, the monetary
base sits there, ready to be used by the banks. At the
first sign of economic recovery, they will start making
loans. The money multiplication process will take over.
If this expansion of the monetary base does not stop,
it will create mass inflation when the banks begin to
lend (assuming they aren't lending to the government
To stop it later, the FED can sell assets to shrink
the monetary base. Which assets? Toxic waste loans? Who
is going to buy them? Who wants toxic waste assets in
the any stage of the recovery? It can sell Treasury
debt, but only until it runs out. It has a little over
$450 billion remaining.
If the banks will not lend at all, then the FED is
"pushing on a string." But why won't they lend? They are
legally allowed to. Why borrow in the federal funds
market if you have legal reserves? Yet banks are
borrowing in this market. They borrow because they have
no reserves remaining.
Banks can buy Treasury debt, which is liquid. The
debt pays some interest. Something is better than
nothing. Not to buy Treasury debt is to throw money
away. Banks do not throw money away. Banks buy Treasury
debt; the government spends it. Businesses seeking loans
find that they must pay higher interest, because the
Treasury gets the money. So, the government's share of
the economy grows. This reduces productivity. An economy
in a recession needs productivity to get out of the
The fractional reserve process takes over. The money
supply grows. We can see this happening now. Here are
the latest M1 statistics. You can see that the figure is
headed straight up after years of being flat.
Alert anyone you think should see this.
Email this page. People can monitor these statistics
free of charge on my site. Go to Federal Reserve
Charts and Yield Curve, which are in the
Free Materials section of my site.