Why the Fed., Inc. can’t prevent a deflationary depression:
The Money Printing Secret – A Collapse in the Money Multiplier
The Fed is printing money as fast as it can and cramming it into the vaults of the banks. This ‘printed money’ is known as the monetary base and includes Treasury Bills for bank reserves, currency, coins, etc. If we look at the broader measures of the money supply, we see that large portions of our money are actually private agreements created in the marketplace, such as deposits at banks, money market deposit accounts, and repurchase agreements. These private agreements are called commercial bank money. In a fractional reserve system, “new commercial bank money is created through loans.” We referred to these ‘money substitutes’ in March of last year.
In a banking crisis, these additional private agreements are not necessarily entered into. Instead, fearful bankers pile up excess reserves (monetary base) and refuse to lend.
The money multiplier, the rate at which bankers take the Fed’s printed money and multiply it into commercial bank money, collapses (chart below). This leads to a contraction in the money supply, which is deflation.
Therefore, the Federal Reserve is unable to prevent a deflationary Depression because the amount of money base it prints becomes less and less effective in boosting the money supply. More Fed printing at this point will lead to more fearful hoarding by bankers and the two opposing sides are locked into the deflationary spiral.
“Privatize the gains, but socialize the losses. Having the public bad bank buy the bad assets of the big money center banks and financial ponzi schemes and take all the losses is a thinly disguised act of theft and injustice on an almost incomprehensible scale.” –Jesse