We need to have a talk.  There is an absolutely astounding amount of disinformation being circulated these days with regard to the direction of our economy.

The Fed has announced that they are going to be purchasing $600 billion dollars of US Treasury securities by the end of June, 2011.  They will also buy $250 - $300 billion of additional US Treasury securities, using the principal payments of those still paying on mortgage-backed securities that the Fed holds.

Everyone is running around throwing their arms up in the air, yelling “Inflation is coming! Inflation is HERE!”

Here is a link to the Fed’s weekly H.4.1 report for October 27, 2010.  Look at page 3 and you will see the following:


This shows that the international bankers currently have over $1 TRILLION dollars of cash sitting in their excess reserves accounts at the Fed.

That money is what was received by the banks in exchange for selling the Fed a ton of mortgage-backed securities.  It has been sitting there for quite some time.

Let me ask those believing in inflation a question.

Why is there such great concern over $600 billion of new currency causing massive inflation, when a much greater amount of currency that already exists hasn’t caused the feared inflation?

Back to the Basics
ALL money is simply a claim on debt – which is the same as a claim on the promise of future labor.

Only a certain type of “money” called “currency” is recognized as legal tender for making purchases.  Currency has instantaneous maturity, and pays 0% interest to the bearer.

Other types of money, such as US Treasury securities, have longer maturities that can range from a few weeks to 30 years.  Longer term maturities pay a higher rate of interest.

It All Boils Down to Marbles
Let’s pretend that our current money supply is made up of 1,000 marbles.

Furthermore, we’ll say that 900 of the marbles are RED in color, and represent securities that have some maturity longer than zero days.

This means that we also have 100 marble that are GREEN in color, and have instant maturity.  In other words – they are currency which we can use to buy things.

The Federal Marble Manipulator (Fed) comes along and states that they’re going to buy 100 RED marbles!

Everyone runs around in a panic, declaring that the Fed is “monetizing the debt” and that we will have hyperinflation as a direct result.

Here’s what really happens.

The Fed issues 100 new GREEN marbles to the banks, and takes 100 RED marbles in return.  The Fed takes the RED marbles and puts them in its pocket so that they’re no longer in play.  Those new GREEN marbles are backed by the RED marbles that the Fed has in its pocket.  In other words, they are backed by claimed debt – claims on the promise of future labor of you and me.

What do we now have?

Our money supply now consists of 800 RED marbles and 200 GREEN marbles – totaling 1,000 marbles.

Has the overall money supply gone up?  No, it has stayed the same.

The difference is that we now have 200 GREEN marbles that are currency.  More currency in an economy can lead to higher prices – assuming people spend the GREEN marbles instead of just saving them.

However, businesses still can’t expand – since they depend on an increase in RED marbles to manufacture their widgets and build inventory.  The banks are not lending out new RED marbles, since they want to put the “squeeze play” on our economy.

Without more total marbles there will be decreasing wages, lost jobs, reduced benefits, etc.  Meanwhile, the increase in GREEN marbles has the possibility of contributing to higher prices for goods and services on a temporary basis, until everything comes crashing down in a deflationary mess (meaning the total number of marbles decreases rapidly as RED marbles are removed from the table through loan defaults).  These loans default because people have been pressed to the point where they can no longer service their debt load.

This may sound strange to hear, but be very cautious about the inflationary hypotheses floating around.  US currency is still the thing to have on hand as things progress.  Watch for the commodities bubble to burst, as a frustrated populace attempts to figure out why major inflation is not occurring.

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