When The Fed Has To Print Money, Just To Print Money

Keep Calm - FED RESERVEI’m not an economist, I don’t play one on TV, and staying at a Holiday Inn Express wouldn’t help me one iota. But these days, anytime I hear the words ‘Federal Reserve‘ and ‘print money‘ in the same sentence, I start paying reeeeaaal close attention.

I carved out as much of the economics minutiae in the article below as possible, to make it easier for everyone to follow, …including me.


From ZeroHedge.com

“…we once again refer readers to the paper released yesterday by Morgan Stanley’s Greenlaw and Deutsche Bank’s Hooper, which discusses not only the parabolic chart that US debt yield will certainly follow over the next several decades, but the trickier concept known as the Fed’s technical insolvency, or that moment when the Fed’s tiny capital buffer goes negative [***which the ZeroHedge guys refer to as the “D-Rate” ]. 

In short what would happen is that the Fed will be then forced to print money, just so it can continue to print money.

Hey, THAT doesn’t sound very good! And this sounds worse:

“Ok: so the Fed can’t technically go broke – after all it can print money all it wants,… or as the paper says, “create new reserves” (just so it can go back to its baseline operation since 2008, which is… creating new reserves), right?

Well, not really.


The Fed’s (low-powered) money is good and accepted by banks only as long as these banks deem it appropriate and profitable to onboard the Fed’s liability on their balance sheet. And to do that, the Fed will have to offer ever higher and higher rates on excess reserves.”

And this process will necessarily keep happening, faster and faster. Which begs the question: “how could the Federal Reserve stop this inflationary cycle?”

I’m glad you asked:

Of course, there is a resolution: the Fed simply begins to sell its assets, and in doing so, destroys the reserves created when said assets were onboarded on the Fed’s balance sheet. But there lies the rub: because the second the Fed enters open deleveraging mode, everyone will sell everything they can to lock in the profits generated from the past 4+ years of Fed balance sheet expansion.

Furthermore, at that moment, the market will begin pricing in the unwind of some or all of the $15 trillion in central bank liquidity, which is the only reason the S&P is where it is today.

The result would be a market crash so epic it would make the market response to Lehman and AIG’s failure seem like a walk in the park by comparison.

pyramidmoneyIf this whole thing strikes you as one, big Ponzi scheme, you’re not alone there.

One more quote from the guys over at ZeroHedge

…unless the greater fool comes in and is once again willing to become the bag holder of last and only resort for the smart money, then all those firms, such as the above-mentioned Morgan Stanley and Deutsche Bank, whose chief strategists penned the paper referenced above, will start getting nervous, and asking themselves: how much time is there before everyone else appreciates the risk of the D-Rate, and sells first?

Because while as a Ponzi scheme works on the way up as long as there is at least one more marginal buyer, the inverse is far more troubling, and it is here that the old bastardized Prisoner’s Dilemma comes into place: “he who sells first, sells best.

And the biggest irony is that soon it will be the very act of the Fed continuing to expand its balance sheet at the current breakneck pace of $85 billion per month (or more), that is what will make banks ever more and more nervous.

Could it be that we are finally approaching the end of the lunch, and suddenly the realization that it was never free hits everyone at the same time?

And the answer to “what happens THEN” is pretty simple. To paraphrase Frankie Valli: Greece is the word.


24 responses to “When The Fed Has To Print Money, Just To Print Money

  1. This type of economic discussion make my brain hurt… That said it’s clear that the Fed needs to stop all this quantitative easing BS and get back to sound monetary policy. An audit would definitely be a good first step.

    • My head hurts, too, CTX.
      I don’t profess to be a Big Brain on Economics, but I understand enough to be rightfully scared.

      Since economics isn’t really taught until college nowadays, and even then only barely, most folks don’t have a clue how this all works.
      Add to that Paul Krugman is in favor of just keeping-on, keeping-on…and I’m terrified.

      An Audit is loooong overdue…yet would almost certainly herald the end.
      We’ve got ourselves into a hole where we can’t get out cleanly, and there’s not going to be anywhere to hide.

      • While I get the gist of the main concepts, the minutiae makes my eyes glaze over… But yeah, we’re heading for a reckoning.

        • That’s why I whittled it down as much as I did. If you read the entire article, it gets pretty wonky.

          The big takeaway I think everyone will understand:
          we are now so leveraged, we can only prop ourselves up by making our money less valuable (increase the amount artificially) and make our debt more attractive (artificially), which eventually means that no matter what, eventually, it will cost us more to sell our debt than our debt will be worth to sell.
          That can’t work forever.

          And eventually, as we keep unloading our debt, SOMEONE will say “no”, and then someone ELSE will, …and that’s when the dam bursts.

  2. Everybody knows that this is only happening because of sequestration…or the threat of sequestration…or the idea of sequestration…

    • It’s always the GOP’s fault: they’re the all-purpose Boogey Man.
      Gas Prices? GOP!
      Fiscal Cliff? The GOP!
      Steak overcooked? GOP, darn it!!

      If the Republicans were even HALF that effective, they’d own the world.

  3. The federal reserve is America’s financial loan shark, created to steal and manipulate our money for government. Not to mention lining the pockets of rich banks and bankers, of course they claim otherwise.

    Don’t you ever wonder why they make this so difficult? Why they don’t want an audit? The truth about what they do is the last thing they want, this of course includes most people in government as well.

    • So glad you saw this, Blaine. I knew it was up your alley.
      And yes, the Fed has been offering “deals we can’t refuse” for a very long time.

      It’s really no longer a question of “if” it implodes, it’s “when”.
      This is gonna be uglier than anything we’ve ever seen.

  4. The quantitative easing, or buying back our bonds, or printing money…they all seem to be the same thing. We’re in hock, not only in our federal spending (state and probably local too) but the dollar’s value is now possibly a negaitve number. I just read last week that the fed has purchased more of our bonds than there are bonds.

    This is a disaster.

    Audit the fed! It’s too much of a secret.

    • An audit has been a long time coming, tannngl.

      When you consider stories like this, coupled with claims of disaster from the IRS (in today’s post…), it’s obvious that our Federal Government is living on Fantasy Island, and we’re footing the bill for their right to stay there.

  5. Just watched the youtube. This civil unrest…maybe it’s part of what the fed govt is getting ready for with their civilian FEMA force and all the ammo?

  6. Take away a citizen’s ability to defend against tyranny, increase Gubmint’s “Control” of every aspect of life, de-value the currency, and take everything back to ground zero. It’s the perfect recipe for a dictatorial regime to emerge….

  7. blained13 and livinrightinpgh,
    Our president not only seems to have prepared for a huge takeover in the coming emergency, he and this admin have choreographed the emergency.

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  9. Reblogged this on sally1137 and commented:
    This is the best concise explanation of the Fed’s collusion in ruining the economy I have seen. They say they’re saving it. They’re lying.

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