By the time the Federal Reserve completes its plan to funnel another $600 billion into the U.S. economy by buying treasuries and mortgage-based bonds from banks, it will have added an estimated $2.3 trillion to the nation’s overall money supply. And it has done this without causing inflation — at least the official inflation rate posted by the government.
How has this been possible? What’s the secret of this amazing monetary feat? Here’s the explanation.
The primary effect of this money increase was simply to improve the books of banks from which the Fed made its purchases, banks whose own investments were so bad that they threatened the institutions’ solvency. In essence, what was was done here was to replace the lost value of investments that deserved to lose value because they were massively over-valued, with new false value produced by the Fed’s unique ability to create money.
This new money did not generate inflation — at least not yet — because it wasn’t then loaned out by the recipient banks. As long as the money just sits there it does little more than produce an excuse for higher bank stock prices. A big chunk of this bank infusion that didn’t go toward reserve enhancement was also used by banks themselves to purchase stocks, thereby puffing up stock prices even more.
The $2.3 trillion in new money has thus inflated one part of the economy: the stock market, a market that certainly would not have soared in the last two years because of a non-existent booming economy.
Wall Streeters who make their living from this market have enjoyed their own burst of inflation in the form of record compensation packages paid to them in 2009 and 2010. This new wealth has generated a certain amount of inflation in luxury goods, but not in goods purchased by most Americans who don’t work on The Street. Why? Because while their 401(k) and other pension holdings may have seen an uptick due to a rising stock market, this new pension money can’t flow out into the economy freely until tapped by retirees, which is a slow, long-term, largely non-inflationary process.
Here, then, is the marvelous secret of how the Fed creates $2,3 trillion in new money without generating widespread, CPI-linked inflation. The new money goes to banks, goes to Wall Street, goes to luxury goods peddlers, goes toward New York City upscale housing prices, but doesn’t filter down much (or at all) to Main Street Americans.
The underlying logic here is clear. Pray that those on the top who receive this massive dose of Fed-spawned wealth deign to trickle some down, but so slowly so that it doesn’t rocket consumer prices up too quickly.
This is your Federal Reserve at work. Playing a game it calls “quantitative easing.” They like this game at Goldman, Morgan and Citi. How is it playing out for you?
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