Fed Bail-Outs Set Stage for Hyper-inflation

 Since the announcement of the federal government’s plan to purchase all bad debt from ailing financial institutions, my head has been spinning. I’ve started and stopped this post more often than a driver with a manual transmission in a ten-mile traffic backup. How did it come to this? What does it mean going forward? How much influence did foreign creditors have on this decision? Like the writer with writer’s block portrayed in old movies, I now sit waist deep in the cyber equivalent of crumpled sheets of paper yanked in frustration from my typewriter.

Finally, I’ve realized that there’s no way to do this justice in one post. This fed action has spawned a series of posts that will probably dominate this blog for some time to come. There’s no way to comment on just how this can possibly work because, as I heard Mitch Albom explain on yesterday’s radio broadcast, that’s like trying to analyze how well the toilets flush before the blueprints are even drawn. But what I can tell you already is that it’s a blueprint for a house of cards.

So I’ll begin with the basics, keeping in mind the mission of this blog – to explain these events in light of the theory I’ve presented in Five Short Blasts. How did it come to this? How could we ever have arrived at a point where our federal government repudiates the very principles upon which our economy was built – hard work, investment, risk and reward? Now we learn that it was all meaningless. In the end, good old Uncle Sam will be there to dump a load of cash in your lap, regardless of how lazy or stupid you may have been. It’s as though we’ve all been like Lot, living among the Sodomites while avoiding their wicked ways, in anticipation of our final reward. But in this twisted version of Genesis, upon revealing to the angel his devotion to a good life, Lot receives a one-word reply from the angel: “Sucker!”

How have we come to this? It all goes back to the effects of overpopulation and low per capita consumption – both home-grown and imported through free trade with overpopulated nations. (If you’re new to this blog, the only way you’ll understand this is to read about the new economic theory I’ve presented in Five Short Blasts.) As millions upon millions of our best-paying manufacturing jobs were steadily lost to misguided trade policy, the government looked to the housing sector to take up the slack. Immigration was used to prop up demand. But, as unemployment worsened and dragged down the real median income, lending standards had to be loosened to stoke the supply of “eligible” mortgagees.

As long as this Ponzi scheme was sustained – driving home values ever higher by increasing the supply of buyers, everything would be alright. But, of course, it was never possible that the least qualified of these buyers would ever be able to keep up with their mortgages. The sub-prime mortgage crisis was born and the effects spread like a cancer, slowing the economy, driving unemployment still higher and picking off the next layer of stressed home buyers. Foreclosures escalated, home prices began falling and the assets on the banks’ books began vanishing. An unstoppable downward spiral had begun.

Unstoppable but for one temporary fix: the government had to step in, shovel up the mess, and toss it on the curb for someone else to deal with. That “someone else” is your children and grandchildren. The mess they’re being left is over a trillion dollars, the combined total cost of the bail-outs of the past two weeks – the figure admitted to by the government – which means it’s very likely that it’s at least ten times that amount. The government is now flooding the nation and the world with dollars. Not boat-loads of dollars. Not truck-loads of dollars. But container-ship-loads of dollars. The idea is to restore “confidence,” that false sense of prosperity that potential home buyers need to jump back in the market. This may work for a while, but the exponential growth in the money supply has set the stage for hyper-inflation. Just look at what happened to the price of oil when this deal was announced. It made the biggest one-day jump on record. In the meantime, median income will continue its slow decline, and the downward spiral will soon resume. Then what?

The government’s action has done nothing to address the root cause – the steady drain of wealth from our economy by a $2 billion per day trade deficit. Until this is addressed – until the trade deficit is completely eliminated – the downward spiral of our economy, though temporarily interrupted by the government’s bail-out, will resume and intensify. Bank on it.

More to follow.



6 Responses to Fed Bail-Outs Set Stage for Hyper-inflation

  1. Mark Wyatt says:

    Proclamation on the Federal Reserve System of the United States of America

    March 2008

    WHEREAS, Article I, Section 8 of the Constitution of the United States of America authorizes Congress “To coin Money, regulate the Value thereof, and of foreign Coin, and fix the Standard of Weights and Measures”;

    WHEREAS, on December 13th, 1913 the US Congress enacted the Federal Reserve System;

    WHEREAS, the Federal Reserve System is considered an independent agency within the federal government, with oversight of Congress and containing appointed public officials on its board of directors;

    WHEREAS, the Federal Reserve System Controls the Federal Reserve Note, the official currency of the great nation of the United States of America;

    WHEREAS, there may be controversies regarding the legality and constitutionality of the Federal Reserve System, it is recognized that the said system has operated continuously as the central banking system of the United States since the inception of the Federal Reserve Act of 1913;

    WHEREAS, the Constitution of the United States of America granted Congress the authority to create the current Federal Reserve System, it also does grant Congress the authority to modify or revoke the Federal Reserve System;

    WHEREAS, the actions of the Fedreral Reserve System represent the credit and currency of the United Stated of America to the citizens of this great nation and to the world;

    WHEREAS, the Federal Reserve System, acting independently within the federal government allowed, supported, and even promoted parasitical and non-productive uses of the money and credit of the United States of America;

    WHEREAS, the United States and likely the entire world’s financial system is undergoing massive de-leveraging of the said parasitical and non-productive uses of the credit and money of the United States of America (as well as other nations’ currencies);

    WHEREAS, the US dollar, the “Federal Reserve Note” is declining in value due to these parasitical activites, as well as potentially other causes;

    WHEREAS, it is recognized that the citizens of the United States and other nations did willingly participate at some level in the creation and propogation of said parasitical activities;

    WHEREAS, it is also recognized that the United States of America, a sovereign nation, has the legal, moral, and God given authority to take actions to benefit its citizens and to protect its good name, credit and money in times of difficulty;

    WHEREAS, it is recognized that the current time is such a time of great difficulty;

    WHEREAS, it is recognized the parasitical financial institutions and their activities are at odds with citizens of the United States of America and the good credit and money thereof;

    WHEREAS, the current indications are that the Federal Reserve System is acting to preserve the financial system currently flooded with the parasitical activities;

    WHEREAS, the current indications are that the neither the Federal Reserve System, nor the Congress of the United States, nor the people of the United States have access to the books of the institutions being preserved by the Federal Reserve, and therefor the degree of inter-connectivity and risk associated with the institutions and other entities cannot be determined;

    WHEREAS, the Federal Reserve System is accepting non-performing assets as collateral for credit with ultimate taxpayer responibility to entities not under its constitutional mandate;

    IT MUST BE CONCLUDED, that the Federal Reserve System is not acting to the benefit of the people of the United States of America, its credit, money, and good name;

    WHEREAS, it is recognized that the political will and capability of the government of the United States of America may not be up to the task of prosecuting this proclamation ; It is also recognized that this may be the only hope for the continued survival of the United States of America as the great nation as it has historically existed.

    NOW THEREFORE, it is PROCLAIMED by those supporting this Proclamation that the Congress of the United States of America FULLY NATIONALIZE the Federal Reserve System, and take full control of the credit and money of our great nation; The Congress must take whatever action necassary to seperate out, sequester, disown, or otherwise neutralize the effect of the parasitical financial activities which led to the current crisis; The Congress of the United States of America must reorganize, replace, or terminate the Federal Reserve System as appropriate; or otherwise devise a system for creation of the national currency.

    IT IS FURTHER PROCLAIMED, that the Congress of the United States of America in cooperation with the Executive of the United States of America contact allied nations and any other nation willing to participate in the overhaul of the failing and parastical financial sytem currently in operation and create new treaties and alliances as necassary to create a sane and productive system of finance with the express goal of supporting a productive national, and by extension and through voluntary cooperation, world economy;

    FURTHERMORE, it is PROCLAIMED that it should be the goal of such an international effort to maintain fair international trading practices allowing for protection in national interest of labor, resources, and productive capabilities;

    WHEREAS, it is recognized that such a move on the part of the United States of America may result in the necessity of an isolationist policy IF the other developed nations do not follow our lead; If such occurs, so be it.


  2. Pete Murphy says:

    An interesting site, Mark. While I’m not ready to advocate abolishment of the Federal Reserve, I do agree that it’s doing an extremely poor job of protecting the American currency and financial system. We desperately need an overhaul of leadership in the White House, Congress and in the Federal Reserve. We need leaders who put America first.

  3. Mark Wyatt says:

    Thanks Pete. I think it is a matter of not having a choice. With over $1 QUARDILLION (1000 $ Trillion) in derivatives contracts unwinding, I don’t think we will save the cutrrent system.

  4. Pete Murphy says:

    Mark, I’ve heard a figure of $60 trillion worth of derivatives contracts, but perhaps those are only the ones based on mortgages. Can you point me to another source to corroborate your $1 quadrillion figure? I’m not saying you’re not right; I just really don’t know.

  5. Rick Hauser says:

    Check out my new blog – http://www.2009GreatDepression.com
    I agree with you by the way….

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