Thursday, October 16, 2008


Let's think about this: the Treasury has no capital. The Fed is lending the Treasury the capital. Backing the loan is the taxing power of the U.S. government. This jumps the national debt by $250 billion for starters (although it may not be counted as such). If the Fed does not sterilize this by selling debt, the banks' reserves will jump this enormous amount (and the monetary base of which it is a component.) The percentage increase in the base over the past 10 months is 14%, already highly inflationary. If this $250 billion goes into it without the Fed taking some steps to contract reserves in some other way - and I honestly don't know what steps it could take other than selling some other of its debt assets - that will add almost another 30%.

Consequently, we are on the precipice of hyperinflation. The government can avert it by (a) issuing bonds, (b) raising taxes, and (c) cutting other programs, and then paying off the Fed. None of these steps are popular. U.S. government bonds are definitely not a good investment. That market will sell off and yields rise. This will pressure stocks even more. We are looking at very bad markets and at a deep depression. "Very bad" might mean a stock market decline of 75-90% from its highest levels, to 5000 or below.

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