Friday, November 5, 2010

Policies are made for the sheppards, not the sheep

The Fed exists to keep the big banks profitable and to help fund government's massive spending programs.  QE II is an open policy of monetary inflation to help achieve these ends, but the Fed has been QE'ing all along.  Andy Sutton reports:
The Fed has been backdoor monetizing for some time now. There are many different ways they’ve done this such as using currency swaps with the ECB, and other ‘facilities’ in foreign jurisdictions like the UK to make their purchases for them. Notice at around the same time China started cutting back on its exposure that Great Britain, broke as a stone, started ramping up bond purchases. It is a pretty safe bet that this is none other than Mr. Bernanke and Co. at work.
This has been going on and will continue. However, the shift towards overt monetization should tell us that the Fed is stuck and is beginning to panic. The stimulus didn’t work. The last round of asset purchases, totaling nearly $2 Trillion that we know of, only fattened bank balance sheets and did almost nothing to help Main Street. I am inclined to believe that was the whole idea though since the Fed has been incentivizing the banks NOT to expand lending.
One of those incentives is the interest the Fed pays banks on their reserves.

What about consumers?  Won't some of this new money help them out?  More money in the economy usually means higher prices, the very reason the Fed is inflating, making it more difficult for consumers to maintain their lifestyle without borrowing.  Banks love it when you borrow.
. . . much of our ‘growth’ the past few decades has been derived from a service oriented, consumption driven model. The fuel for that growth has been the expansion of consumer credit, so much that consumer credit outstanding and GDP have marched in near lock step since the turn of the century. This tells us that our ‘growth’ has been borrowed, and is in fact, not growth. Throw in the inflation of the early part of this decade and there has been negative growth across the board. The prosperity has been put on plastic and now hangs like a boat anchor around the necks of most Americans.
Graphically, it looks like this:
Sutton adds:
The current contraction, which is showing signs of exhaustion, has only clipped 6.49% off the total consumer debt outstanding.  While this is significant in that it is unprecedented, it is not enough to substantially decrease the costs of servicing the debt for consumers. Since being bailed out, banks have continued to raise rates on many forms of revolving debt to keep profits steady.

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