NEW YORK – Federal Reserve chairman Ben Bernanke is known among some economists as “Helicopter Ben,” for his tendency to hover over developing financial crises only long enough to hurl seemingly endless dollars down on the problem.
With the Congressional Budget Office projecting the fiscal cliff legislation that passed Congress over the New Years Day holiday will add $4 trillion to the federal deficit over the next decade, the Obama administration appears determined to address the crisis by pressing for yet more federal government spending.
The administration evidently believes Keynesian deficit spending will eventually create jobs, without igniting hyperinflation, regardless how high the national debt accumulates.
In December, Bernanke reached a new milestone, doubling the magnitude of U.S. debt since the day he became Federal Reserve Chairman in 2006, as graphically illustrated in a chart published by Zero Hedge.
The chart shows U.S. national debt totaling $8.183 trillion on Feb. 1, 2006, rose to $16.366 trillion on Dec. 12, 2012.
On Dec. 12, 2012, the Federal Reserve officially announced the launch of Quantitative Easing 4, known among economists as “QE4.” It amounts to a fourth annual round in which the Federal Reserve will buy U.S. debt, including both U.S. Treasuries and Mortgage Backed Securities Bonds commonly issued by investment firms and commercial banks.
The Fed announced it would enter 2013 with a plan to purchase $45 billion a month of U.S. Treasury securities and $40 billion a month of mortgage-backed securities, with combined purchases totaling $85 billion a month. It’s part of a continuing Fed plan to depress long-term interest rates and encourage, borrowing, spending and investing, as reported by the Wall Street Journal.
With the December 2012 announcement, the Fed set specific targets, announcing an intention to keep short-term interest rates near zero into 2015, or until unemployment falls to 6.5 percent or lower, and as long as inflation forecasts remain near the Fed’s 3 percent target.
The Fed announced it will fund QE4 purchases by adding reserves to the banking system, a move the Wall Street Journal interpreted as “printing money to buy more bonds.”
“The key point here is that the Fed is now actively running both monetary and fiscal policy because it will now be in the business of funding nearly 100 percent of all the new government deficit spending in 2013,” concluded Chris Martenson of Peak Prosperity. “And it is pumping a bit more than $1 trillion of hot, thin-air money into the economy as it does so.”
With QE4, the Fed appears on track to increase its balance sheet by another $3 trillion to $4 trillion, assuming QE4 will be extended again into 2014. That means the national debt by the 2014 mid-term elections would reach or exceed the $20 trillion mark.
With the U.S. gross national product for 2012 estimated at approximately $15.1 trillion, the nation’s national debt now exceeds 100 percent of GDP, a benchmark traditionally trained economists assume is a tipping point that could lead to hyperinflation if not reversed.
Money supply contracting again
Despite the Federal Reserve’s determination to print money at a rate unprecedented in U.S. financial history, the money supply has begun to contract again after a brief respite of growth in 2011.
Economics reporter Ambrose Evans-Prichard issued a warning last May in the London Telegraph that M3, the broadest measure of the money supply, has been contracting at an accelerating rate in the U.S. and European Union that now matches the average decline seen from 1929 to 1933. The supply is contracting despite near zero interest rates and a continuing QE program under which the Federal Reserve has been purchasing U.S. Treasury debt to fund Obama administration annual federal budget deficits in excess of $1 trillion during each year of his first term in office.
“It’s frightening,” Tim Congdon of International Monetary Research told Evans-Prichard. “The plunge in M3 has no precedent since the Great Depression. The dominant reason for this is that regulators across the world are pressing to raise capital asset ratios and to shrink their risk assets. This is why the U.S. is not recovering.”
John Williams of ShadowStatistics.com commented in his subscriber-only newsletter June 1, 2012, that M3 growth picked up in 2011, peaking at 4.1 percent in January 2012. The rise reflected an annual growth that began in February 2011, only to slow down as 2012 progressed, to what Williams then projected would be a revised 2.5 percent growth.
Williams said in his Dec. 27, 2012, newsletter that the Federal Reserve is engaging in “a monetary-policy cave-in” that is “aimed at providing whatever liquidity would be needed to keep the system from collapsing.”
Williams has predicted that the U.S. is on track to experience hyperinflation by the end of 2014, assuming the Federal Reserve continues to buy U.S. debt in the magnitude projected by QE4.