In August 2009, the Federal Reserve surprised investors by announcing it would keep its securities holdings unchanged at $2.05 trillion by reinvesting proceeds from mortgage debt into Treasuries. Recently, Chairman of the U.S Federal Reserve Ben Bernanke announced that the Federal Reserve plans to do another $600 billion round of “quantitative easing” (QE2) from November 2010 through mid-year 2011.
Prior to this last recession, the Federal Reserve held $800 billion in securities. At the end of QE2, the Fed will own $2.6 trillion in securities. How does the Fed get $2.6 trillion to buy securities? They print it. Actually, they just open their account on the computer and add $2,600,000,000,000.
The Federal Reserve was created to protect us by regulating the banks and money supply. Prior to the Fed, each bank was responsible to maintain its own reserves. If the bank could not meet withdrawal requests, it failed. With a federal banking system in place, the entire system can provide reserves to support withdrawals from any one bank.
The problem with this approach develops when banks collectively take too much risk and a massive number of bad loans throughout the system default. A review of history—such as, the Latin American debt crisis, savings and loan debt crisis and now the mortgage debt crisis—tells us exactly what happens.
The banks will explain to Congress that without assistance, there will be dire consequences. Not only will there be unemployment and hardship at home, there will be massive disruptions in world markets. Our exports will drop, foreign capital will dry up and we will suffer greatly. They say we need Congress to provide money to avoid a collapse.
The needed bailout money comes from the U.S. Treasury. The Treasury borrows the money—that is, issues Treasury bonds—to raise the funds. The fictitious money created by the Federal Reserve is used to buy the bonds from the U.S. Treasury—if no one else will. This is what has lately been termed “quantitative easing.” This new money the Fed creates to buy Treasury bonds floods through the economy, lowering the value of the dollar.
While the economists continue to debate whether the Federal Reserve’s activities will save us from deflation or cause inflation, the insidious inflation creature is destroying families.Consider the following facts. In 2009, approximately 4 million Americans fell out of the middle class and now live below the federal poverty line, according to a report from National Public Radio.And in July, 2010, 41.8 million Americans were on food stamps, according to Bloomberg.
In addition, just about every commodity in the world is up by 20 percent or more. Since the Federal Reserve began printing money in March, 2009, the CRB index is up approximately 50 percent from 200 to 300. What’s going on? It isn’t that demand for commodities is growing too much because the economy is hardly growing at all.
The Federal Reserve has printed $1.2 trillion of new money and is in the process of printing $600 billion in additional new dollars. Inflation is destroying the purchasing power of the dollar. Since March, 2009, the dollar is down by about 20 percent relative to a basket of world fiat currencies, and it is down 51 percent relative to gold. The lack of purchasing power is causing many American families to suffer. One out of every six Americans is now enrolled in at least one anti-poverty program run by the U.S. government, says USA Today.
The press and many economists told us inflation would not materialize unless the banks were ready to lend a lot more mone—unless the velocity of money increased. They have been proven wrong because the total credit in our economy has continued to expand. How? The Federal Reserve has expanded its balance sheet even faster than the banks have contracted theirs. This is bound to continue, thanks to the unlimited bailout of Fannie Mae and Freddie Mac, the ongoing trillion dollar federal deficits that equal more than 10 percent of annual GDP, and the present value of government obligations, including total public debt, social security, Medicare, and government pensions totaling $61,000,000,000,000.
Federal Reserve Chairman, Ben Bernanke, recently said, “The central bank's aggressive monetary policy will not spark unwanted inflation in the future.” Yet, the fact is, many Americans are suffering from the effects of inflation right now, as is evident in escalating tuition, healthcare and other expenses.
In conclusion, never has the Fed “printed” trillions of new dollars. Never have we experienced trillion dollar deficits. At the same time, we have unprecedented levels of debt and other government obligations. America will need the Fed to continue “printing” money to meet its obligations. This is causing a devaluation of the dollar. Many Americans on the margin are suffering today from inflation; their dollars simply will not buy what they once would. The tragedy is the Fed, and the media do not or will not recognize the existing inflation or the suffering it is causing. This situation can only get worse as the new dollars from this second round of “quantitative easing” work their way into the economy.
-Vern Sumnicht, CEO of Sumnicht & Associates, founder and president of iSectors, LLC is an investment advisor with 27 years of experience helping wealthy individuals, foundations, trusts and other institutional clients manage their investment portfolios.
