Don’t worry about the Fed printing…yet.

Here are a couple of charts that illustrate the significance of what the Fed has undertaken lately. First, look at the change in its balance sheet this year from about $870 billion, almost all in Treasuries, to $1.5 trillion, with fewer Treasuries, more repos and swaps, and an alphabet soup of new credit facilities:

Source: Federal Reserve Bank of Atlanta’s Macroblog (yes, a Fed branch has a blog).

For the inflation/deflation issue, what matters at the moment is that all that new credit (not much new currency, only about $30 billion more in actual notes) is just sitting in banks. Unlike in the Greenspan years, nobody worthy of credit wants to borrow the new funds, since they can’t generate positive returns on investments, and the banks aren’t lending to people with bad credit anymore.

How do we know it is not being lent out? The Fed is actually pretty transparent as far as nefarious government sponsored entities go, and provides a lot of useful data through the FRED website. Here is the sum of loans and investments at US commercial banks:


As you can see, lending has gone flat after an enormous expansion. And this is just the past 5 years — check out the longer view for a graph that would have knocked Mises’ Austrian socks off:

When you hear “credit bubble”, think of the above.

Workers of America, Unite! (to fight the evil of lower prices)

Inflation, in the end, will have to come from massive government spending programs. The Greater Depression will have a scaled up New Deal. Keynesianism is still all the rage, and when the bailouts have had time to fail, expect Obama to start handing out trillions to government contractors through various new Orwellian-sounding departments and administrations.

For the dollar, the Treasury market will be the canary in the coal mine. It is rallying now from safe-haven buying, as it should, and it could even go a lot higher, but when it turns, grab your gold and run. Nothing is so damaging to an economy as government work programs and the kind of inflation that they create. This is what happened in the Wiemar Republic. The government was the main employer, and it paid workers (and foreign creditors) with freshly printed cash.

In the US, I imagine that the public finance system will continue to operate as it always has: 1) Taxes, income from which will continue to drop in the depression; 2) Bond sales, but there is a limit to the world’s appetite for notes from a bankrupt creditor; 3) Federal Reserve money creation for the purchase of bonds that the public does not want. This last part is how fresh cash gets into circulation, and how the government indirectly funds itself through printing. When public demand for Treasuries dries up, you can bet the government’s demand for funds will be greater than ever, so then we will see what Bernanke can really do with a printing press.

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