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Jim Cook



Every once in a while I switch the TV channel from Fox to CNBC to see what the liberals are saying.  After listening awhile I get a deep sense of hopelessness and foreboding for our country.  The most important thing for the left is giving money to people.  They are happy to see the growth of food stamps, disability payments, housing subsidies, free healthcare and all the other welfare benefits.  They utterly fail to see the damage it is doing to the recipients.  Whole cities that once flourished have deteriorated into rotting eyesores populated with shambling hulks of chemically dependent drones.  These people are no longer employable.  They have become incompetent and helpless and the liberals can’t see that it’s their doing.

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The Best of Jim Cook Archive

Best of Michael Pento
June 23, 2010
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The next ease from the Fed will most likely be in the form of ceasing to pay interest on excess reserves. Since October 2008, the Fed has been paying interest on commercial bank deposits held at the central bank. But because of Bernanke’s fears of deflation, he will do whatever it takes to get the money supply to increase. With rates being near zero and the Fed’s balance sheet already at an intractable level, the only viable solution to fight Ben’s phantom deflation fear is for him to remove the impetus on the part of banks to keep their excess reserves laying fallow at the Fed.

If commercial banks stop being paid to keep their money dormant, they will find a way to get money out the door. They may even start shoving loans out through the drive-up window. Banks need to make money on their deposits (liabilities). If the don’t get paid by the Fed, they will be forced to take a chance on the consumer. After all, it has been made clear to them that the Fed and Treasury stand ready to bail out banks’ bad assets at any cost. So why not take the chance once again?

The statement from this month’s meeting of the FOMC will probably not indicate that interest will no longer be paid on deposits by the Fed to commercial banks. However, in the near future this strategy will be the most appealing method for the Fed to increase liquidity. Once Mr. Bernanke assents to the double-dip recession scenario, he will fight deflation by any means necessary.

Deflation is not a possible outcome if a central bank is willing to do whatever it takes to increase the money supply. The fed can buy every house on the market if it so desired and it could buy every dollar of our $13 trillion national debt. And while it is true Bernanke can’t force banks to lend, he can compel them to boost the money supply by removing any compensation involved from keeping the money multiplier in check. And even if there was no banking system or fractional reserve system in place, it would be a specious argument to make that inflation could not occur without having private banks involved.

According to Bernanke’s academic philosophy, expanding the money supply somehow equates to growing the economy. In order to grow the economy credit must be available, but much more importantly interest rates and the value of the dollar must be stable.

The current Federal Reserve Chairman is a student of the Great Depression. Although he will, unfortunately, most likely get a chance to study one first hand, this next one will be marked by inflation rather than deflation. Investors should be aware he will do whatever it takes to avoid a collapse of the money supply and a double dip in the economy. Part of his plan is to ensure there is not only plenty of money printed—that much he has already accomplished in spades—but that banks are also well incentivized to loan it out.