Before discussing how the FED pursues stimulating the VOM, we must also recognize that QE is very unconventional and considered a sort of last ditch effort when normal manipulations have failed. Under conventional models the FED would simply adjust the interest rate to slow things down or speed things up. If inflation is getting out of hand, raising the interest rate will slow down the VOM, allowing inflation to stabilize. If stagflation takes place, which isn’t necessarily bad from an economic perspective but is not good from a political one, the FED might attempt to stimulate the economy with a drop in interest rates. But when it comes to deflation, central banks are at war. Deflation is the archenemy of central banks because it restricts the VOM.
Central banks need VOM to profit. If nobody is borrowing currency, they cannot profit. It’s as simple as that. With this in mind, credit crises, as long as they don’t blow up, continue to pump value into the FED’s coffers. Remember, they’re providing currency based on a manipulative economic model, not on anything they actually own.
Furthermore, as we’ve recently seen, even if the banks over-loan this currency, the U.S. government, via your taxes, will bail them out. So, it’s a win/win proposition for both the FED and associated banks, with only the taxpayer being milked/bilked.
Under deflation the VOM all but ceases. Nobody wants to borrow during deflation because it becomes more difficult to pay off. Prices decrease, making cash king. This causes people to hoard it. This is the only scenario where putting cash in your mattress makes a lot of sense, because it’s actually growing in value while it’s sitting there. However, with nobody borrowing the FED can’t make a profit, so they won’t stand for it for long at all.
In an effort to stimulate the VOM, they’ll decrease interest rates. This makes it easier to obtain loans, increasing the money supply and, if it goes according to plan, the VOM. Once the VOM has regained some momentum, they can raise the interest rates a little to keep inflation from getting out of hand.
But what happens if they keep attempting to stimulate through such measures? This is where QE comes into play. We’ll discuss how QE is implemented tomorrow. For today, I’ll leave you with this thought: In an effort to stimulate VOM the central bank may do a lot of things; all of them are forms of offering more currency. This is highly inflationary, even if the inflation isn’t realized yet. However, there is a point at which, if the VOM suddenly takes off, the massive amount of stimulation will come crashing down on the economy. This is what happened in Weimar Germany when they faced massive hyperinflation. We’ve seen this more recently in Zimbabwe. And, if our central banks continue their current course, there’s nothing to keep it from eventually happening here.
Finally, consider what the banks will do under such a situation. If all the loans are backed by your property, what is their only recourse? They will repossess everything that’s defaulted on. Banks will call in every note they can in an effort to increase assets and protect their bottom line. And, as we’re seeing today, the central bank will begin amassing assets. Currently they are net buyers of precious metals and are buying mortgage backed securities, both of which increase their asset holdings. Why?
For your prosperity,
J. Keith Johnson
The Gold Informant