Chicago, IL

By A.B. Dada

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People are emailing me like crazy lately asking why gold has shot up nearly US$100 in the past 2 weeks.  I was hoping to see it fall to under $600, based on my assumption that Obama would pick Volcker to aid his battle against economic disfunction.  The opposite happened: instead of battling the supposedly failing economy, Fed Chairman Ben Bernanke has gone on a printing spree.

The H3 bank reserves money supply figure, which is the equivalent of currency and coins in circulation, has exploded.  Based on the Fed’s own data (from their website), the bank reserves that have historically grown very slowly has skyrocketed in the past 2 months.  Here is a graph that shows the explosion, with the history from 1959 to November 2008:

The chart from 1959 to about 2007 looks like a slightly growing chart.  There are some bumps, and a few dips.  What you don’t notice really is what happened the last 3 months of the chart (through November 2008): it SKYROCKETS.  Look at the black portion of the chart all the way to the right.  I put a red line to note where that portion of the chart falls.  From 1959 to about August 2008, the chart went from around $11 billion in 1959 to $44 billion in August 2008.  In September 2008, the figure umps to $102 billion, and in October 2008 it jumped to $315 billion.  The last datum is November 2008, where it rockets to $610 billion.

The H3 figure is bank reserves.  The banks have a ton of money — a TON of money, enough to create about $6 trillion in loans based on the money multiplier effect.  Considering the fact that the Fed is dropping interest rates to zero, and may have even gotten rid of a reserve ratio (pushing it to zero), the commercial banks could theoretically let all hell break loose: money for everyone!

If this isn’t Bernanke’s “drop money from helicopters” scenario, I don’t know what is.  What I do fear is that gold could skyrocket in a heartbeat, and your parent’s retirement dollars could be worthless very, very quickly.  No, not overnight, but over 5-10 years.

Be warned now, the US dollar is not going to make it to your death bed.  Banks are holding on to their reserves, which means there IS a conspiratorial gathering of the minds to do something, at some point.  What that may be is beyond me, probably beyond most economists.  What we do know is that banks with high reserves usually end up lending it out.  Who they’re going to give it to first will be the ones who will be the wealthy in the next generation.  The rest of us will find $20/gallon gasoline, $9 per loaf bread, and $20 per gallon milk.  But by then the minimum wage will be $60,000 per year, so we’ll all be wealthy, right?

 

 

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2. What is wrong with the Federal Reserve?
3. How to fix the Federal Reserve, fiat money, and fractional reserve banking
4. Government market control without the Federal Reserve
5. Ron Paul on ending the Federal Reserve
6. How to get money, if you’re a bank
7. Bank Bankruptucy and Insolvency?
8. Bailing out the Banks: Print Money versus De-hoarding
9. Full Reserve Banking and Home Mortgages
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