Saturday, July 5, 2014

Simple Reason Why The Federal Reserve Wants Inflation

Thanks to the Mogambo Guru for the link to Agora Financial Services where we learn this little tidbit (in Mogambo Guru's voice):
As proof, look no farther than Agora Financial’s 5-Minute Forecast’s synopsis of the Federal Reserve's weekly H.4.1 statement, which they characterize as “the Fed's consolidated balance sheet,” and found “$4.37 trillion in ‘assets,’ if that's what you want to call them, compared with $56.3 billion in capital. That's a leverage ratio of 77.6- to-1.”

Leveraged 80 times! Imagine you borrowing 80 times as much as everything you own!
And switching to Agora Financial, answering a question from a reader:
“My question is as rates rise and the Fed’s $4.3 trillion load loses value (if they are not sold, there will be no recorded loss), is there any harm done to the rest of the world as that asset drops in value?”

The 5: Well, seeing as the Fed is leveraged something like 80-to-1 — far beyond any of the investment banks circa 2008 — that would render the Fed insolvent and incapable of managing the next financial crisis whenever it comes.
And there you have it.  The Fed has $56.3 billion in capital and $4.37 trillion in assets they've bought.  The Fed is pumping up the world's stock markets because if those markets go seriously down, the Fed goes bankrupt.

I've always said that the reason the banks want "persistent, benign" inflation is that it's better for them.  That's a bit glib and short on detail; this provides some of that detail.

But it's not just the Fed.  Another important detail comes from Zerohedge, where "Tyler Durden" reports:
Another conspiracy "theory" becomes conspiracy "fact" as The FT reports "a cluster of central banking investors has become major players on world equity markets." The report, to be published this week by the Official Monetary and Financial Institutions Forum (OMFIF), confirms $29.1tn in market investments, held by 400 public sector institutions in 162 countries, which "could potentially contribute to overheated asset prices." China’s State Administration of Foreign Exchange has become “the world’s largest public sector holder of equities”, according to officials, and we suspect the Fed is close behind (courtesy of more levered positions at Citadel), as the world's banks try to diversify themselves and "counters the monopoly power of the dollar.
China’s State Administration of Foreign Exchange has become “the world’s largest public sector holder of equities”, as the report argues is “partly strategic” because it “counters the monopoly power of the dollar” and reflects Beijing’s global financial ambitions
The central banks own the stock markets?  (Who else has $30 trillion??)  And the Chinese are "the world's largest public sector holder of equities"?  From there, it's a bit more difficult to see what percentage of the companies they own, but it's pretty close to the central banks and governments owning all the production capacity in the world.  Governments owning the means of production... seems to me there's a word for that... World socialism, anyone? 
"The inherent vice of capitalism is the unequal sharing of blessings; the inherent virtue of socialism is the equal sharing of miseries."
... Winston Churchill


  1. I don't think the Federal Reserve wants inflation. They are playing a game they cannot win called stalling for time on borrowed money. Inflation will leave them with two choices: 1 fight inflation with higher interest rates which will dramatically increase the debt interest payment to a point insuring our bankruptcy, OR 2. allow inflation to run it's course which has never worked out well in all of history. Either way inflation will cook the golden goose.

  2. The Fed has said they're looking for 2% inflation many times, at least since the '90s. See here for example. Of course, they rarely keep it that low.

    They also use crooked data to calculate that inflation making it far worse. For example, they don't include the cost of energy or food and they use "hedonic" adjustments. For example, let's say you buy a new Dell this year. In terms of dollars, you'll pay about the same number of dollars you did last year, but it will be more powerful because processors get better every generation. Therefore, the Fed counts it as cheaper than last year.

    John Williams at Shadowstats, who keeps the data on cost of living the historical way, shows inflation closer to 10%. The dollar has lost half its purchasing power since 2000.

  3. If inflation is 10% per annum, then by the rule of 72, we have lost half our purchasing power since 2007, approximately, not since just 2000. That seems more real. If 10% per annum is true since 2000, we have lost ~75% . (1/2 x 1/2 = 1/4; hence, 75%, again by rule of 72, applied ~ twice!). That seems real, too. Priced in gasoline, bullets, powder, primers, rifles, new or used vehicles, or groceries, 75% seems true, in my world. YMMV. In 2002, I bought a used car for the newest driver in the house for $12k. It was 3 years old. A similar 3 year old car today with similar mileage is about $21k. 75% of 12k is 8k. 12k + 8 k is $21k. The math seems real...

    New Ruger 10/22s were around $149 then, too. They go for around $279, now. Seems real, there, too.


  4. Absolutely right, gb. If you look at the Shadowstats link of inflation, it's not a constant 10%, but has never been lower than 5%, even including the crash of '08. Averaged out by eye, it looks like it ought to come out close to 10%, though.

    The loss of half since 2000 came from somewhere else and I didn't check it.

  5. If there was 10%/year of currency inflation from 2000-2014, then I would expect the price of gold, silver, copper, and steel to go up proportionally: 1.10^14 = 3.797. The financial powers that be might be able to lie about quantities of gold and silver in storage but not about copper and steel.

    Therefore I propose that much of that price increase for cars and ammo components is due to new regulatory compliance burdens, not currency inflation.