OK guys, new plan. Print money so fast that everyone loses track of how much we've spent.
November 25, 2008
– Comments (9)
It's funny, the government is printing money so fast that the article that Barron's ran about the Federal Reserve's ballooning balance sheet just a few days ago is already obsolete.
At the time it was printed, the Fed's had leveraged its assets 53 times, causing its capital ratio to fall below the 2% threshold that many consider to be a flashing warning sign for normal banks.
Then yesterday the Fed, in conjunction with the Treasury department bailed out Citigroup with a potential price tag of $306 billion.
Today the Fed announced a $600 billion program to buy mortgage-related debt and securities and a $200 billion facility to buy consumer debt securities.
I told you that Bernanke and friends were going to continue to print money until we are eventually able to inflate our way out of this mess. The Fed's balance sheet is growing at an astronomical rate. It's certainly levered much more than 53 times right now. Less than a year ago it was levered 25 times and it had a 4% capital ratio. The Fed's holdings of Treasuries not already lent to dealers has fallen to its lowest level since 1980.
In the current environment, people would be running away from any other financial institution that was levering up like this faster than turkeys from pilgrims, yet people seem to be flocking to treasuries and the U.S. dollar. The recent strength of the U.S. dollar is a complete illusion. For the life of me, I can't understand why anyone would buy treasuries at this point. Sure they might go up in value slightly if the Fed cuts rates all the way to zero and we are currently battling deflation, but the chickens are eventually going to come home to roost.
Heck the government needs inflation to get us out of this mess. There's no way that we are ever going to be able to pay off the massive debt that is being accumulated without it. The burden on the American taxpayer would be too massive.
It doesn't matter if the massive leverage that the government is employing can't keep pace with the deleveraging of investment banks and hedge funds if foreign countries lose confidence in the U.S. dollar. How that hasn't happened already is beyond me. If I was a country like China, at the very least I would want to diversify my reserves or take advantage of the recent surge in the dollar to sell them to fund domestic stimulus projects.
This whole mess disgusts me.
Deej
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