McDuck's Account Talk

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THE FED’S FUTILE MOVE

By Dick Morris And Eileen McGann

Published in the New York Post on March 19, 2009

In an effort to promote liquidity and boost the economy, the Federal Reserve yesterday announced plans to grow the money supply by another 50 percent to 60 percent. This ignores the profound observation of Gen. George Patton: “You can’t push a string.”

When the Fed expands the money supply, it doesn’t pass out $100 bills on Broadway. It gives lines of credit to banks and other financial intermediaries to generate some money and also buys up Treasury bills in circulation to pump out more cash.

But the money supply has already expanded by 271 percent in the past five months. Why does the Fed expect what hasn’t worked to suddenly start working?

Right now, there is about $800 billion plus currency in circulation sitting in wallets, purses and cash registers around the country. Another $800 billion is sitting in a vault at the Federal Reserve Board, for a total monetary supply of about $1.6 trillion.

In a vault? Yes. When Congress voted the TARP program to bail out banks, the banks actually took only a small part of the money. The rest they used to offset losses on their balance sheets while letting the Fed hold onto the money.

Why didn’t the banks want the money? Because they’re not about to make loans in this economy. They’re more than happy to let the cash sit at the Fed earning them interest. (The Fed decided to start paying interest last November).

So now the Fed will, in essence, be creating another trillion of money supply to sit in the vault alongside the $800 billion already there. The new money will remain idle for the same reason the old money has because banks won’t make loans in this environment.

And what of the money that is going out the door to buy Treasury bills? Those selling Treasuries won’t run out and spend the money on flat-screen TVs. With higher taxes coming up next year and the economy in the tank, they won’t spend it or lend it they’ll probably just turn around and buy more T-bills.

Think of a parking garage filled with cars. The cars’ owners leave them in the garage, because it’s a bad day with rain and snow and conditions aren’t suitable for driving. Similarly, banks and consumers leave their money in the vault at the Fed or in their bank accounts or under the mattress.

When conditions improve, though, all those metaphorical cars will suddenly be taken out for a drive. All at once. And a traffic jam of monumental proportion will ensue.

When everybody starts spending the money they’re now leaving in vaults and mattresses, way too much money will be chasing way too few goods and services. Double-digit inflation will return to America.

Yesterday’s Fed action won’t help but it will put more money out there that the Fed will have to mop up once the economy, on its own, revives.
 
The 2009 Henry Hazlitt Memorial Lecture, presented by Peter Schiff. Recorded at the annual Austrian Scholars Conference, Ludwig von Mises Institute, 13 March 2009 at Auburn Alabama.

 
KevinD said:
Thanks! That was awesome!
Click to expand...

Yeah, I also thought it was awesome. The video/audio quality was great and yb let them store it in entirety. There's about a dozen times when he states the situation that the Pres/Fed has us in, the audiences laughs. I especially like when he describes BO's speech to the American people about it's time we pay back the money that China has lent us.
 
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McDuck said:
I especially like when he describes BO's speech to the American people about it's time we pay back the money that China has lent us.
Click to expand...
That WAS funny. :laugh:

I liked the point he made about the .gov trying to make mortgages "affordable" while trying to keep home prices up. NNUUTS! :blink: The math just don't work for my simple mind...
 
I liked the "Wallstreet got drunk" but where'd they get the alcohol part. :) Shoulda made Bernie Madoff Secretary of Treasury lol.
Great Schiff video.
 
3/31/2009
Rescue Approaches GDP as U.S. Pledges $12.8T
- Bloomberg

3/31/2009
Obama to Automakers: It's My Way or the Highway
- Reuters

3/31/2009
GM Must Quickly ‘Do More’ as Threat Grows
- Bloomberg

3/31/2009
Hard Line on Auto Aid Puts Bailed-Out Firms on Notice
- Washington Post

3/31/2009
Record Drop In Home Price Index
- CNN Money

3/31/2009
Recession Puts a Major Strain On SS Trust Fund
- Washington Post

3/31/2009
Contracts Now Seen as Being Rewritable
- New York Times

3/31/2009
Conference Ind. Fights Wave of Cancellations
- New York Times

3/31/2009
FAA Sees 9% Fewer Air Passengers This Year
- San Diego Union-Tribune

3/31/2009
Soda Market Loses Pop
- Atlanta Journal-Constitution

3/31/2009
Farmers to Plant Less Corn This Year
- Chicago Tribune
 
 
4/3/2009
China Emerges As Economic Powerhouse
- CBS News

4/3/2009
China Positioning Yuan For a Run at World Supremacy
- Los Angeles Times

4/3/2009
G-20 Shapes New World Order; Lesser Role for U.S.
- Bloomberg

4/3/2009
2 Million Jobs Lost So Far in '09
- CNN Money

4/3/2009
College Grads Face Worst Job Market in Years
- San Jose Mercury News

4/3/2009
Midwest Economy Shows Deep Recession
- Kansas City Star

4/3/2009
Housing, Mortgage Markets Remain Bleak
- Wall Street Journal

4/3/2009
Failure Rises on Mortgages Revised in Late 2008
- Bloomberg

4/3/2009
Tent Cities Pose Challenges for US Census
- Financial Times

4/3/2009
Too Many Cars, and They're Not on the Road
- Washington Post

4/3/2009
Economy Wreaks Havoc With Private Golf Clubs
- Providence Journal

4/3/2009
Consumers Cut Back On Haircuts in Tough Economy
- Orlando Sentinel
 
Those are some fine statistics from 1932 and 1933 - kinda makes me wish I'd been there.
We'll see what happens this week - any positive percentage gain would make me happy.
 
Nice having that data from the 32-33 period.

It does make me a little worried, however. We have had a nice uptick here, but fundementally we still have a very, very weak economy, and this week- we should be seeing quarterly numbers that are down for a lot of folks. Very possible we'll get another downturn after four nice weeks higher.

But it is darn good information to see. thanks McDuck.
 
Today 06 APR 09

  • DJI lost 0.5% closing at 7975.85, after reaching 8000 last Friday for the first time since February 9.
  • S&P500 down 0.8% to 835.
  • Mr Mayo, a German analyst, wrote that a "key implication'' of increased risk taken by banks was that "loan losses (to total loans) should increase to levels that exceed the Great Depression.''
  • Reporting first-quarter earnings begins this week.
 
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