When the new Federal Reserve money starts churning…

I’ve been pondering different scenarios as to how the whole house of cards will fall. I read an article recently that seems to be the simplest explanation yet. Here it is in a few paragraphs.

The Fed buys bonds so the government can borrow at low rates. This enables it to have multi trillion dollar deficits annually with no immediate consequences. In order to buy the bonds, the fed conjures up money out of nothing. The money ends up on the balance sheet of some big bank. That big bank doesn’t touch the money, because the economy is fragile and they want to keep the cash reserves for rainy days. So interest rates get low and inflation is delayed, since the money isn’t moving.

Then, the economy starts picking up a bit. GDP goes up. People start borrowing money and spending money. The big banks start to unlock some of those cash reserves. Problem is, there’s such a staggering amount of them that it overwhelms the system and prices start flying out of control. So the Fed has to suck some of that cash back in its black hole by selling bonds, taking the money and burying it.

The Fed is like the Big Bang of fiat money. The monetary universe expands and contracts and the fed is at the center of the universe.

So anyway, as the Fed tries to control the hyper inflation it itself created, interest rates go up. People finally stop buying bonds. Banks, who were relying on the Fed feeding them with money, are no longer fed. Their leverage – the amount of money they lend out over the amount they actually hold – is now about 33 to one and gets called in by people looking for their cash. Banks fall like dominoes, and the Fed either has to agree to hyperinflation, or a depression. It will pick one or the other. Those that own real assets will be fine.

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3 thoughts on “When the new Federal Reserve money starts churning…

  1. So what will happen to the shekel when all of the bank of Israel’s holdings in Euros and Dollars go under? Inflation will be exported to Israel.

    Feds prints money, massive inflation here and massive inflation everywhere else. Be prepared. Remember, Israel had hyperinflation in the 80’s.

  2. What happens when the bank of Israel owns US bonds? Then the inflation creeps into Israel. But don’t worry, every government around the world has been printing money by the gazillions like there is no tomorrow.

    Remember hyperinflation in Israel in the 80’s? It might come here. Inflation is a tax. Plain and simple.

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