Entering the Endgame for Monetary Policy

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Look at the H.4.1 report.  We may have finally hit the panic phase of monetary policy, where the Fed increases the monetary base dramatically.  They are pumping the “high-powered” money into loans:

  • $20 billion for Primary credit
  • $80 billion for Primary dealer and other broker-dealer credit
  • $70 billion for Asset-backed commercial paper money market mutual fund liquidity facility
  • $40 billion for Other credit extensions
  • $80 billion for Other Federal Reserve assets
  • -$20 billion netting out other entries

Making it an increase of roughly $270 billion from last week’s average to Wednesday’s daily balance.  Astounding.

In general, the increases are not being pumped into the banks, but into specialized programs to add liquidity to the lending markets.  Now, I’ve written about this before, but it bears repeating.  What happens if the Fed takes losses on lending programs.  It reduces the seniorage profits that they pay to the Treasury, which means the Treasury has to tax or borrow that much more.  The Fed isn’t magic; it’s a quasi-extension of the US Government in a fiat currency environment.  It’s balance sheet is tied to the US Treasury.

Yves Smith at Naked Capitalism is correct.  The US is no longer a AAA credit, particularly if you measure in terms of future purchasing power of US dollars.  I’ve felt that for years, though, with all of the unfunded future promises that the US Government has made with Medicare, Social Security, etc.  The credit of the US Government hinges on foreign creditors (like OPEC and China) to keep it going.  What will they offer them? The national parks? 🙁

I try to be an optimistic guy and hope for the best.  But the current actions of the government are making me think about a massive re-alignment of my portfolio… and I never do things like that.  But, if the government is ramming through desperate measures, maybe I should too.