Mad Money

The Obama Administration came to DC town promising to spend everything and the kitchen sink. In this regard, they have not been a disappointment.

Many Americans mistakenly believe the trillions of dollars to pay for Obama’s unprecedented and historic government intervention, entitlements and social welfare is securely stashed away in a big safe somewhere in Washington. There is no vault and there is no cash; there is only “vapor paper” being created out of thin air.

Quantitative easing is a phrase that has come into the lexicon lately. When interest rates are at or near zero and the commercial banks are still not lending money, the Fed injects massive amounts of money into the economy through accounts held by the banks at the Federal Reserve.

The Fed buys bank securities, whether they are loan portfolios, mortgages and/or toxic assets. Quantitative means infusing a large quantity of money; easing means making it easy to access these funds. The problem is this money does not exist. It is created by key strokes on a computer.

To fund the Obama Federal Budget Deficit over the next decade, the Fed must sell a mind-numbing amount of debt . That is, auctioning off the debt to investors and even foreign governments.

The Obama deficits are already projected to be more than $11 trillion or roughly equal to our entire national debt over our 233 year hi s tory; and he has barely gotten started. Since the sheer amount of this debt is so monumental, there will not be enough buyers at the Treasury auctions to absorb it. The Fed will be forced to buy its own paper. In private business you would go to jail for this. This is quantitative easing or vapor paper gone mad.

Imagine owning an art collection that you want to auction off. No one bids on your art so you buy it all back for $1 million. Now you are $1 million poorer and you still have an art collection that is so overvalued nobody wants to bid on it. But you ask for a $1 million loan based on your perceived value of your own art collection.

The U.S. Government seems to think they can solve our debt problem by creating more debt. Monetizing government debt is what third world countries do. Today in Zimbabwe, for example, the government has printed so much money that the smallest denomination bill you can own is $1 billion – enough to buy a single loaf of bread!

China, the largest buyer of U.S. Treasury Bills, has already fired a shot across our bow. The People’s Central Bank of China recently said

“policy mistakes made by some central banks may bring inflation to the whole world” and “major currency devaluations may arise”.

They are talking about quantitative easing and clearly worried their large holdings of U.S. dollars and Treasury Bills are about to get devalued. The scary thing is they are right.

Let’s dig a little deeper. In economics the total amount of money available at any point in time is known as the Money Supply.

M1 tracks the most liquid form of money. It is the currency in circulation including checking accounts. Presently our M1 Money Supply is $1.6 trillion.

M2 is M1 plus saving deposits and time deposits less than $100,000. Our current M2 Money Supply is $8.3 trillion.

M1 and M2 are small potatoes. It is M3 that tells the complete story. M3 is M1 + M2 plus large deposits, institutional funds, U.S. government funds and reserves, eurodollars (U.S. dollars held overseas by foreign banks & governments) and U.S. Treasury Bills. The cur rent M3 Money Supply is estimated at $16 Trillion.

In March 2006 the Federal Reserve ceased to publish the M3 monetary aggregate because the “cost to collecting the underlying data and publishing M3 outweighed the benefits”. This is nonsense. It is because the 20% annual growth in Money Supply is completely out of control.

It is about to get much worse as we must print money to pay another $11 trillion of Obama debt.

There is convincing empirical evidence that the rate of inflation is directly tied to the growth in Money Supply. In other words you cannot simply turn on the allegorical printing presses without ominous consequences.

If dollars were as available as sand on the beach, how valuable would they be? The more you have of something the less it is worth. Nothing too complicated about this. A devalued currency reduces your buying power as inflation soars. It is a form of stealing from you.

I wear a 1930 $20 Double Eagle gold coin around my neck as a symbol of our great country. It is nearly one ounce of 22 carat gold. When President Nixon took the United States off the gold standard in 1971 (referred to as the “Nixon Gold Shock”), the coverage of gold bullion to our paper money had slipped from 100% in 1933 to 25%. Today it is less than 1.5% — whereas my Double Eagle $20 piece is worth over $1000.

The $4 trillion 2009 Obama federal budget is roughly 80% of all the gold that was ever mined in the history of the world.

(The World Gold Council estimates total world gold supply is about 165,000 metric tons, each containing 32,150 troy ounces, or 5.3 billion troy ounces. Today [6/02] gold closed at $980, giving a world value of $5.2 trillion.)

Beware of fool’s gold. The Administration will latch onto any glimmer of hope emanating out of the economy and lavish praise on the wisdom of their massive spending.

The light at the end of the tunnel they are hoping for is a coal train barreling down on us. As a young boy my father would walk with me through a tunnel in Kermit, West Virginia. If a coal train should show up we would jump into a man hole. Seeing the train about to enter the dark, dank tunnel would scare the bejeezus out of me.

The devaluation and debasing of our currency through quantitative easing to pay for debts we cannot hope to ever repay overtakes me with a similar feeling of anxiety and helplessness.

Once a runaway locomotive builds a head of steam, it cannot be stopped unless it jumps the rails. The mad money train has left the s tation. In this train wreck we are about to witness, millions of hardworking Americans will be hurt. And the man hole just isn’t big enough for all of us.

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