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The Fed Throws a Curveball – Inflation?
publication date: Nov 4, 2010
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author/source: Brad Hamill
Imagine that President Obama and Congress came out today and announced that they
would be increasing the money supply by an additional $600 billion dollars by
the end of June, 2011. Would you be upset? Would you be burning up the phone
lines to Washington, D.C. in order to voice your displeasure?
What if it was the international bank controlled Fed that did it instead? Would you still be upset? Who would you call? Congress can’t do anything about it. President Obama can’t do anything either. Today the Fed announced $900 billion dollars of US Treasury security purchases that will take place between now and the end of June, 2011. Here is the FOMC (Federal Open Market Committee) announcement. You might look at the announcement and wonder where I get the $900 billion dollar figure from. That’s because the link I gave to you was just the press release. The real details lie in the Operating Policy We see the following quotes from the operating policy: “Based on current estimates, the Desk expects to reinvest $250 billion to $300 billion over the same period, though the realized amount of reinvestment will depend on the evolution of actual principal payments.” This is saying that the Fed will continue to use all principal payments on the Mortgage-backed securities that it holds (and which home owners are making payments on) to purchase US Treasury securities instead of applying those payments to the actual loan that they’re paid against – like they should be doing. The Fed’s Ties to Real Estate Fraud contains a detailed explanation of why this is happening. “To provide operational flexibility and to ensure that it is able to purchase the most attractive securities on a relative-value basis, the Desk is temporarily relaxing the 35 percent per-issue limit on SOMA holdings under which it has been operating.” The Fed is lifting the cap that limits a particular purchasing entity from buying more than 35% of a particular Treasury auction’s offering. This is important, as it allows the international bankers to control a larger amount of the purchase. “Purchases associated with balance sheet expansion and those associated with principal reinvestments will be consolidated into one set of operations to be announced under the current monthly cycle.” Co-mingling of purchases allows the Fed more opportunity to hide what purchases are being made for what reason. Was the purchase a reinvestment of MBS principal? Or was it a direct purchase of US Treasury securities with new Federal Reserve Notes (dollars)? We won’t know. “Purchases will be conducted with the Federal Reserve’s primary dealers through a series of competitive auctions operated through the Desk’s FedTrade system.” “Primary Dealers” are the same as saying “international banks”. The New York Fed, controlled and run by the international banks, will be buying US Treasury securities from the international banks in exchange for Federal Reserve Notes – some newly created, and some that came in the Fed’s back door through principal payments made by home owners on the Fed’s mortgage-backed securities. The Question of the Day is Why? My previous Hamill Economic Update postulated that the Fed would be purchasing more Mortgage-backed securities, instead of US Treasury securities. My hypothesis was that they could then better hide those securities from the legal system when homeowners came calling about all of the fraud being perpetrated upon them. Obviously, my analysis was wrong. The Fed is purchasing US Treasury securities instead of Mortgage-backed securities. Why? Option #1) The Fed has initiated a tremendous money printing program that will saturate our economy with dollars in order to kick-start the economy and drive inflation. This is the “answer du jour” which will have all of the precious metals brokers licking their chops at all of the commissions to be made. Let me put this into a little perspective for you. Section 9 of the Fed’s H.4.1 Weekly Balance Sheet Report  What do you think will happen if the Fed adds ANOTHER $600 billion ON TOP of this by the end of June, 2011?!!! If option #1 one is correct then we should see the stock market rocket up to 17,000. We would also see gold run towards $2,000/oz. and silver rise to $40/oz. Gasoline for your car would again rise above $4/gallon and all forms of products would increase drastically in price. Remember, an economy will always consume the amount of money that is actively circulating in it. Option #2) There are two sides to every story. My previous article concerned itself with angry homeowners, and their reaction to fraud being perpetrated against them in the form of incorrect, or missing, promissory notes. Something dawned on me today...why would the international banks even care about our anger. After all, we’re the ones stuck with the debt! We’re the ones that are just trying to survive economically – and don’t have $200 to take the banks to court, much less the $2 million that it would more realistically cost. If the banks don’t need to worry about us, then there is really no need for them to sell any remaining Mortgage-backed securities that they hold to the Fed out of fear. This is assuming that the banks haven’t PREVIOUSLY sold all of the MBS they held during round one of “quantitative easing”. Who do the banks need to worry about? What about all of the investors in the world that are holding Mortgage-backed security trash that the banks sold to them? They weren’t able to sell their securities to the Fed like the international banks did! They’re stuck with them! Or are they? What if these large investors (pension funds, corporations, etc.) started demanding “put-backs” to the banks that swindled them? What if these investors began threatening a large number of lawsuits in order to make it happen – and produced the necessary funds to hire the very best attorneys? What if the banks didn’t have the money to cover buying back a bunch of worthless securities from the investors? Some very large banks would go broke very quickly! What if the Fed announced an extremely large purchase of US Treasury securities – some would say mind-boggling? What if these new dollars went to the Primary Dealers (international bankers), who then used those dollars to purchase the “put-backs” that the large investors are demanding? These banks could temporarily keep those funds in their “excess reserve” accounts at the Fed and earn interest until ready for use. Would the investors be making extra money off of the deal? No, their securities would just mature at an earlier date at par value. However, they would then be rid of the MBS holdings. The international banks would then be holding the toxic mortgage-backed securities, ready for round three of quantitative easing where the Fed purchases those as well. How Can We Tell What’s Going to Happen? Look at bank lending as a signal to see whether the Fed is interested in inflation or deflation. If the dollars from round two of quantitative easing end up in the excess reserve accounts of the banks or paid to investors as part of a “put-back” settlement then deflation is still very much alive. If the banks begin lending again and interest rates begin to rise then very, very major inflation (think worse than Jimmy Carter years) is on the table. Don’t get too caught up in the inflation hysteria just yet. That course of action makes absolutely no sense, given the Fed’s actions over the past few years. I doubt very seriously that the international banks are ready to stop the deflationary squeeze that we all are feeling. Your comments and questions are welcome… If you are not currently on the Economic Update email list you can email me at: brad@newfamilyeconomics.com to be added. There is no charge and your email address will never be shared. description that was also released today. shows that there is approximately $921 billion dollars of Federal Reserve Notes in circulation right now.  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