Inflationomics

 

Is the Fed Really Exempt from all the Rules the Rest of us Must Follow?  NO!

The Fed may be exempt from marking its portfolio to market.  It may be exempt from an audit, or counterfeit laws, or seeking profitable investments in the short-run, but it’s not exempted from the laws of supply and demand.

Supply and demand will catch up with the Fed in the following three ways:

      1. The Fed’s portfolio of bad debtassets” has a much larger supply than demand.  In fact, because the Fed is the purchaser of last resort for the world’s bad debt, there will be a greater supply of bad-debt instruments than even the Fed can “afford” to buy.  Not only will it be called upon to bail out the GMs, AIGs, and FNMAsof the world, but there are also Harrisburg, PA, California, Illinois, Ireland, Spain, and Portugal (to name a few entities)…and if the Fed is foolish enough to bail out all those entities, there will be a long line of entities lining up for the third, fourth, and fifth rounds of quantitative easing.

      2. The dollars the Fed is using to buy the world’s debts are increasing in supply at a far greater rate than is the demand for them.  Over time, this makes the value of each dollar go down and the price for goods purchased with those dollars go up.  Consider that the dollars the Fed uses to purchase debts are “manufactured” out of thin air.  How much can they possibly be worth?  How much will people be willing to give in return for them in the long run?  Could it be that the Fed is already getting worthless debt in return for its worthless paper?  At some point, the Fed’s dollars will no longer be exchangeable for things of value.

      3. As the Fed increases its supply of money (thus creating inflation), interest rates will rise.  As interest rates rise, competition for money will increase.  In the short run, the Federal government will crowd out private borrowers from the capital markets, creating a shortage of money for private industry (the entities that earn profits by controlling their costs, create jobs, produce goods and services, and pay taxes that support a wasteful government).  As the supply of money available to private industry drops, industry will become depressed, lay off more employees, find itself unable to purchase new capital, and experience a depression.  More bail-outs will ensue.

      In the long run, when people realize that the Fed is still subject to the laws of supply and demand, and that the same thing that happened to Zimbabwe can also happen in the United States, they will do what the folks in Zimbabwe did.  They will turn to gold, other more reputable currencies, and barter.  At that point, the Fed won’t be needed (to print a worthless currency).

      Robert Jackson Smith

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