Our government is printing trillions of dollars to bail out everyone from Main Street to Wall Street to the one trillion dollar Euro Street bailout this month. You would think all that money being printed would lead to out of control inflation. But it isn't. Why? When you print trillions of dollars, the value of every existing dollar must decline. But it isn't doing so in dramatic fashion. Why? Because the velocity of money has plummeted and continues to plummet. This link contains a continuously updated graph from the Federal Reserve Bank of St Louis. What does the velocity of money mean? Read here what businessdictionary.com says about it.
Here's how I understand it. Our government is printing trillions of dollars to bail out big banking institutions. The banks are taking the money being gifted to them at a Fed Funds borrowing cost of 0% and then buying US Treasury Bonds earning 4% interest. This has creating a massive profit spread for banks without generating any velocity of money. Now the bank is leveraging this guaranteed profit 10:1 or higher for this guaranteed profit at tax payer expense. There is no risk for these banks, only reward. And all this newly printed money is adding nothing of value to our economy.
Here's how I understand it. Our government is printing trillions of dollars to bail out big banking institutions. The banks are taking the money being gifted to them at a Fed Funds borrowing cost of 0% and then buying US Treasury Bonds earning 4% interest. This has creating a massive profit spread for banks without generating any velocity of money. Now the bank is leveraging this guaranteed profit 10:1 or higher for this guaranteed profit at tax payer expense. There is no risk for these banks, only reward. And all this newly printed money is adding nothing of value to our economy.
These banks are stealing the tax payers money right out in the open with the blessing of our government while you earn less than 0.5% interest on your hard earned dollars. It's blatant white collar Wall Street crime that Obama and Co are perpetrating while claiming to clamp down on fraud. What they are doing is a massive multi trillion dollar fraud against the saver.
We are supposed to take it lying down. These trillions of dollars going right into the pockets of big banking institutions are doing nothing to invigorate the economy. These trillions of dollars are creating no velocity of money. In fact, it's probably making the problem worse since now the banks have zero appetite for risk to loan to the general public. I suspect the velocity is falling even quicker with no appetite for loaning to the public. Instead, all they have to do is borrow free money from the government and loan it back to the government at a profit.
If you are a bank, would you loan your money to a poor black man from Mississippi trying to buy his first home with 5% down? Would you even loan it to IBM at 6% when you can leverage 10:1 against a sure bet of 4% with the govenrment. Of course, I would pick the sure thing with a massive leveraging of my capital every time.
Your government is recapitalizing our banks that made massive profits on the way up but lost 10X as much on the way down. And your government is making matters worse by creating a sure thing for banks that pretty much guarantees they won't loan to the public. And the public and businesses lose by not having access to capital.
Perhaps we have to look at this plan and state it for what it is. Maybe the government doesn't want banks loaning to the public. Maybe they want to recapitalize the banks with massive profits while every other sector of this country struggles. But why? Why would your government want banks not to lend? Why would they want to prolong the recession?
Maybe it's because they know once banks start lending, all those trillions of printed dollars will cause the velocity of money to skyrocket and hyperinflation will destroy the dollar and the government will fall and the riots will begin.
Perhaps the goal of our government IS to keep banks from lending as long as they can so the incredible debt destruction and asset deflation going on all around us is propped up by the trillions of newly minted dollars being printed to recapitalize the banks to prevent deflation.
Perhaps our government is printing trillions of dollars with the explicit goal of inflating the massive deflationary wave hitting our assets while also trying to time the whole thing to prevent hyperinflation. Perhaps the government's goal is to make the recession longer, prevent jobs from returning while waiting for the trillions of printed dollars to get absorbed in the greatest deflationary period of all times.
We live in interesting times.
