Oh boy. Helicopter Ben is not happy with the state of the economy. As predicted by many economists and general trend analysts economic growth is still sluggish. The money supply has been tripled in recent years in a vain effort to turn this bus around. It doesn’t look like the ineffectiveness of those efforts is going to stop the Fed from reusing the only tools in its box a few more times. Yes, Bernanke and his fellow monetary wizards are ready to make it rain once again! In a press conference this week he sympathized with the economic problems of the American people and assured us that he was prepared to take more action if needed. From the horse’s mouth:
“We’ve already taken quite a bit of action, but we’re prepared to do it more and we have the tools to more if that’s appropriate.”
The Fed chairman went on to cite many unfortunate situations as rationalizations for why the economy is not growing as fast as they once predicted and why unmatched money printing efforts haven’t led to the promised magical recovery. Such circumstances included the European debt crisis, remaining high unemployment, and the Japanese disasters. I’ll give the Fed and its disciples one out of three on the Japanese excuse, but the others were not unpredictable acts of God. They were factors previously considered by many economists outside this mainstream circle of experts.
In case you didn’t catch my subtle mention of it above, the Fed has tripled the money supply in a few short years. Tripled! And by a few short years, I mean 2. If you have any concept of numbers let alone monetary theory you can see this is a HUGE amount (If you’d like some concept of money, my previous Monetary Policy blog is here to help). The monetary base at the end of 2007 was around $830 Billion. Today it is over $2.6 Trillion! Now we are told by the same old, Keynesian hacks that the reason we haven’t bounced back as promised is because the amount was too low to weather the storms of the European entitlement culture default or Japan’s unfortunate year? If tripling the money supply, absorbing all the toxic mortgage debt, and keeping interest rates at historic lows for historic periods hasn’t magically pulled us out of a fundamentally flawed economic situation, maybe it’s time for some proud people to concede that money manipulation tools cannot defy economic laws.
Most national currencies as fiat based systems are flawed, but especially here in the US where we enjoy the unfair advantage of also being the world’s reserve currency. The inflationary consequences of this unprecedented monetary expansion are softened quite a bit by this rare honor. Our dollar’s privileged position as the global reserve currency means that the rest of the world needs it. The US dollar acts as gold once did to the dollar-the real worth behind the paper note. Of course Federal Reserve notes are not gold, and can readily be produced and pumped into circulation at the whims of government bankers. This scam will work as long as the world keeps valuing our money as gold, but what will happen when the world has had enough of our monopoly power to make as much as we wish? Its status of global reserve currency will be revoked, and the monetary scam will be revealed. Printing wealth will not be possible because the global economy will see the US dollar for what it actually is; a debased coin now more filler than it is gold. The inflationary effects of this could be absolutely devastating. This has already begun happening. Foreign investors are either dumping dollar reserves or seriously considering doing so while nations around the globe are calling for a new world reserve standard.
Aside from the end of the dollar’s elite status worldwide, there is another real monster lurking in the shadows. Runaway inflation is also a very real possibility with the amount of money now in existence. Part of the reason that price inflation has not really surfaced as boldly as one might think when the money supply is increased at such a rapid pace is the reluctance of banks and other major recipients of this cash to release this money. This cash hoarding has helped keep the pace of inflation relatively modest. But like our currency’s world status this will not last. This money will hit the market through its various avenues and when it does it will be a tsunami. The consequences could wipe out your savings (if you actually have any these days), your investments, your wages, your way of life. I know it sounds like a very radical doom and gloom prophecy, but based on some economic theories it is a quite sensible prediction. It has happened before, it will happen again. Let’s end the madness. More easy money will not solve the problem. It will at best spur some superficial growth that delays the inevitable corrections or blow up an unsustainable bubble that will lead to our next crisis. Either way, we will be left poorer in the end.