Fed plan: sacrifice the dollar

safe store of value?
Fears of recession have turned to reality in the minds and wallets of every American not named George W. Bush.  Having long forsaken the free market economy to arbitrary powers, Americans naturally turn their economic concerns over to the federal government and the Federal Reserve.  The government has offered them $600 in tax rebates to help boost the economy.  This stimulus is miniscule in the grand scheme of the economy.  The Federal Reserve has taken much more drastic action.

 Fed chair Ben Bernanke recently announced that the central bank will increase its controversial Term Auction Facility loans to $100 billion per month, and said the TAF will remain in place for at least the next six months, and could be raised even further.  In addition, Bernanke said the Fed would be offering $100 billion per month of repurchase agreements.  All the borrowings could be collateralized by mortgage-backed securities, which are widely considered the most toxic investments in today’s market.  Essentially, banks are transferring their bad loans over to the government, to be paid by U.S. taxpayers, by printing money out of thin air. 

In our $12 trillion economy, $200 billion per month represents 20 percent of GDP.  Over the next year, trillions of dollars of worthless money will be tossed around in the U.S. market, and while this increases the number of dollars and helps stock prices, it is detrimental to the value of the dollar.  Stockholders should remember that their stock prices are measured in dollars, and while their stocks only go down some days, the dollar will go down every day with rare exceptions over the next year.

The rules of Keynesian economics are very simple, market corrections in this system are unavoidable, and the U.S. is overdue for a very large one.  Ben Bernanke and the Federal Reserve have decided to avoid the traditional route of depression by filtering it through the dollar first, but this will only delay the suffering felt by Americans.  By the end of 2008, the mighty dollar will have fallen below $0.45 on the Euro (it is now at $0.65), over three million jobs will have been lost in the U.S., the credit crisis will still haunt the market, and mutterings of the word “depression” will seriously enter the political discussion for the first time in many Americans’ lives.


Federal Reserve’s “Term Auction Facility” = inflation machine

On December 21, 2007, the Federal Reserve Board introduced a new source of liquidity available to banks called the “Term Auction Facility (TAF).”  The reason stated for the TAF is “pressures evident in short term borrowing markets.”  The TAF is a loan auction, which allows banks to take out a 28 day loan from the Federal Reserve.  The results of the TAF are starting to become evident, and problematic.
It is important to note that the discount window has always been considered a “lender of last resort,” and that banks are instructed to use it as an emergency source of liquidity, when other banks are unwilling to loan federal funds.  This rule is followed because any time the Federal Reserve loans money from the discount window, it involves injecting more cash into the banking system and causes inflation. 
Since TAF’s inception in late December, the Federal Reserve has been issuing $30 billion of TAF loans to banks to provide them with liquidity.  This is cash created to cover current liabilities (DDA and investment withdrawals from U.S. banks) and encourage lending.  The Federal Reserve has never done anything like this before.  Rate cuts, which also cause inflation, have always been the Federal Reserve’s only way to encourage lending.  The injection of cash into the banking system will compound the inflation.  It is a way of keeping the banks liquid and confident at the expense of the value of the dollar. 
I did not read this on a press release or a website; I just analyzed the Fed’s own data, which is available below.  The scariest thing about this data is on the first link, which shows the non-borrowed reserves of U.S. depository institutions to be negative.  This is unprecedented.  Granted, the borrowed funds are from the Federal Reserve, but this is still bad news for American savings.  This means, if banks do not turn a huge profit soon, and repayments are demanded by the Fed, they will not have any money left, and will be forced to start selling plant assets and cutting jobs. 
The Federal Reserve is giving out more unwise loans to banks as the problem worsens, despite losses in the financial sector.  These loans are likely to be forgiven, and the losses are going to be masked by creating more money out of thin air through the U.S. Treasury (printing more notes).  The banks will make money, but the depository account holders will lose due to currency devaluation.  Expect the dollar to drop big time, and soon.  When the bag of dollars is rendered worthless, do not be one of the unfortunate ones left holding it.  Get out of U.S. currency, U.S. banks, T-bills, bonds, etc. now.  The dollar is not a safe store of value when the Federal Reserve is acting this irresponsibly.