Banks Wait in Silence for the Fall

With all the hoopla over the debt “crisis” there is little attention being paid to the enormous amount of reserves with the Federal Reserve and the potential inflationary damage it can do to the economy. These reserves are up 24,525% from July, 23, 2008.

Why would bankers make 0.05% short term when they could make 4.375% long term?

Traditionally keeping reserves in the Federal Reserve has been as attractive as a Baby Ruth candy bar in the public swimming pool. From 1984 to 2008 reserves have varies from $3.5 billion to $36.8 billion. In normal economic times the money is out in the community building roads, schools, housing, hospitals, and various capital projects.

So why the $1.6 trillion parked over at the Federal Reserve?

What does this say when the best trained private bankers prefer to make 5 or 10 basis points on a T-Bill?

A complete lack of confidence in the future ability to make money at the 4.375% going rate for a 30-year mortgage. The official CPI inflation rate is 3.4%. The MZM money stock has grown 34.8% in the last three years to $10.25 trillion. $15.9 trillion has been loaned out (printed) to foreign banks, who then bail out other foreign banks. The Producer Price Index is up 7.5% the last six months. China is raising interest rates every week, 6.80% last round. And the most educated private sector masters of finance would rather eat 5 basis points (0.05%) to get by on instead of grabbing that 4.375%.

Simply put the Federal Reserve has strangled the private sector with cheap cash that the banking community knows will create inflation in future years making their current 4.375% loans worthless. The banking community has seen this game from Washington before. The inflation of the Jimmy Carter years wiped out thousands of Savings and Loans. The cheap money will not last much longer and the banking community knows it. Better to make 5 basis points for 6-months than get stuck with a fixed 30-year, 4.375% commitment.

In normal times banks avoid parking reserves in the Federal Reserve like character Louis in the movie "Interview with a Vampire" avoids having to live off rat blood

With the Federal Reserve fractional reserve system these banks could theoretically lend out $14.7 trillion dollars. All that money sitting on the sidelines waiting for Bernanke to lose control.

The Republicans and Democrats will “cut” a deal and add $2.4 trillion to the debt to “save” us. We will go further into debt. The debt will be paid with “hard” debt to private individuals, foreign government, and businesses crowding out private sector economic activity, further styfling any hope for prosperity. Some of the debt will be monetized by the Federal Reserve and the PhD wizards of finance creating inflation.

What this debt “deal” represents is a ticket to re-election for both the Republicans and Democrats in 2012. One last attempt to buy votes the old fashion way, pay for them. One last chance to get some suckers to buy T-Bills before the market collapses. One last bubble.

The Obama strategy is the Hugo Chavez strategy, win a couple of elections, then declare himself dictator for life. One last chance at the last $2.4 trillion before the bust, before our money dies.

Bernanke knows his history. He knows when Federal Reserve Chairman Benjamin Strong died in 1928 and his predecessors raised the interest rate 1% the money bubble created by Strong from 1925 to 28 was over. The economy exhaled, inhaled, exhaled, and finally on October 24, 1929 it was all over but the crying. Bernanke, Obama, and the Democrats know this and the Republicans are giving them their much needed chance to prop up the economy and win in 2012. Everything else is smoke and mirrors.