A $200 Billion Injection
On Tuesday of this week, the Fed announced a new plan that would inject $200 billion into the struggling banking system. Wall Street loved it and the market experienced its best rally since 2003. And what was the purpose of this injection of paper money? To state it simply, due to years of high-risk mortgages and other faulty loans, American banks are in trouble because of defaulted loans. Some have even estimated that the reserves held in our nation’s banks are as low or lower than they were before the Great Depression – a gift of our fractional reserve banking system. The goal of the Fed is to buy back the bank’s bad debts with paper Federal Reserve Notes (more debt) so that the banks can turn around and make “good” loans (read debt) with the new money. Oh, and this is a coordinated effort with other central banks that have announced similar measures of their own. These banks include the Bank of Canada, the Bank of England, the European Central Bank and the Swiss National Bank. This plan is to begin March 27, 2008.1
In other words, they are using fiat money to buy debt so that more debt can be created. What this actually does is increase the rate of inflation and encourage more debt living while discouraging thrift and saving. Why save your money when its value is rapidly decreasing?
In 1980, gold reached an all time peak price of $850. Today, when factoring in inflation, gold would have to reach a $2,500 an ounce to match the 1980 price. Oh, by the way, for about two hours today, gold passed the $1000 barrier! Just seven years ago, it was trading in at under $300 an ounce.
My guess is that we will see the rate of inflation rapidly increase over the next several years. Although the present situation is severe, this phenomenon is always the end result to debasing a currency. In his telling commentary on inflation, R. J. Rushdoony encouraged people to protect their wealth by “converting one’s monetary assets into gold, silver, land, a home, the tools of one’s trade, and the like.”2 However, these recommendations come with their own caveats. We should avoid acquiring these hard assets through debt. This only compounds the problem. But, if you can liquidate some of your existing portfolio into these more secure assets, you are better hedged against the deteriorating effects of inflation and confiscation by the State.
If you’d like to learn more about how to protect your wealth Biblically, I recommend the materials on economics which can be found at Chalcedonstore.com.
- “Dow Surges 417 Points on Fed Plan,” Briefing.com - March 11, 2008 4:25PM EDT. Here is an excerpt:
On Tuesday, the Dow, S&P 500 and Nasdaq posted their largest one day percent gain since 2003 on the announcement of a coordinated central bank effort to increase liquidity in the financial markets. The major indices finished the day sharply higher, near their best levels of the session, thanks to broad-based buying interest.
The Federal Reserve announced a new Term Securities Lending Facility (TSFL). The Fed will lend up to $200 billion of Treasury securities to primary dealers secured for a term of 28 days, rather than overnight. The borrowers will be able to pledge a variety of collateral ranging from federal agency debt to private AAA rated residential mortgage backed securities (MBS). The auctions will take place on a weekly basis.
Basically, this plan stands to improve liquidity by allowing more thinly traded securities to be used as collateral to borrow highly traded Treasury securities.
The Fed also announced it is increasing its swap lines with the European Central Bank and the Swiss National Bank to $30 billion and $6 billion, respectively. This equates to an increase of $12 billion.
This is a coordinated effort with other central banks, which announced measures of their own. Participating central banks include the Bank of Canada, the Bank of England, the European Central Bank and the Swiss National Bank.
- Rushdoony, Rousas John, Larceny in the Heart: The Economics of Satan and the Inflationary State, Ross House Books (Vallecito, California), 2002, p. 13.
Labels: economics, Fed, Federal Reserve, inflation
