by James Turk
Federal Reserve completed the latest meeting of
its Federal Open Market Committee. It
re-affirmed its plan to purchase by the end of
the year some $1.8 trillion – yes, $1.8 trillion
– of US government paper, comprising of agency
debt, agency mortgage-backed securities and US
Treasuries. That’s nearly $6,000 for every man,
woman and child in the United States.
While $1.8 trillion is a gargantuan amount of
money, the actual amount is of secondary
importance to the essential, piercing question.
Namely, where is this $1.8 trillion going to
The answer is not pretty. These dollars will
come from the same place that all other dollars
are created these days, namely, out of thin air.
Here’s how Mr. Bernanke explained this monetary
sleight-of-hand before he was appointed as
chairman of the Federal Reserve. “The U.S.
government has a technology, called a printing
press (or, today, its electronic equivalent),
that allows it to produce as many U.S. dollars
as it wishes at essentially no cost.”
Like most central banker statements, this one is
based on half-truths. How can there possibly be
“essentially no cost” to creating all these
dollars? We all know that there is no free lunch
in the real world, so there must be some
significant cost to creating so many dollars,
Please read Mr. Bernanke’s statement again.
There may be essentially no cost to the US
government, but here is what he doesn’t tell
you. There is a very real and huge cost to
everyone who ends up holding these dollars that
were created ‘out of thin air’. It is the cost
of inflation; it is the onerous cost burden
arising from the reality that the purchasing
power of the dollar is being continuously
eroded. And the more dollars that are created
beyond the need for dollars in normal commerce,
the worst the inflation becomes. The $1.8
trillion the Federal Reserve will soon be
creating should cause those remaining
deflationists still arguing their point of view
to recognize that they are looking down the
They argue that deflation is inevitable because
credit is contracting. However, contracting
credit is not deflation. Rather, contracting
credit causes wealth destruction, but does not
necessarily cause deflation in a fiat currency
Deflation arises when the quantity of dollars
contracts, as it did when credit contracted in
the Great Depression. But the quantity of
dollars is not contracting today. It continues
to grow, regardless what measure one uses, M1,
M2 or M3 (which John Williams of http://www.shadowstats.com
estimates to have grown +7.3% over the past 12
Percent change at
seasonally adjusted annual rate:
Percent change at
seasonally adjusted annual rate
3 Months from Feb 2009 TO
6 Months from Nov 2008 TO
12 Months from May 2008 TO
What’s more, the trillions of dollars created
out of thin air for various bailout schemes as
well as this latest $1.8 trillion planned
purchase by the Federal Reserve will make sure
that the quantity of dollars continues to grow.
The result will be that the purchasing power of
the dollar will continue to be inflated away.
It has become increasingly apparent that the US
dollar has caught the fiat currency disease,
where too many units of account are created.
This disease is fatal, and hundreds of fiat
currencies buried in the fiat currency graveyard
throughout history have succumbed to it.
By creating too many units of account out of
thin air, the Federal Reserve has sealed the
dollar’s inflationary fate. Own gold and/or
silver to protect yourself and your family from
this inevitable outcome.