May 2, 2019

Pat Heller

The Federal Reserve Bank quintupled the size of its balance sheet, from $900 billion in assets to $4.5 trillion, a tactic called quantitative easing, to help bring America out of last decade’s Great Recession. The process of doing so inflated the U.S. money supply.

In theory, this ballooning of the Fed’s assets would be reversed when the U.S. economy was again stable. Although the Great Recession supposedly ended in 2009, the Fed did not begin to reduce its balance sheet until October 2017. Even then, the announced asset reduction plan would take 30 years to complete. At the time I warned that this long of a time frame meant that it would never be finished.

My prediction was on target. At the conclusion of its meeting on March 20, 2019, the Federal Open Market Committee announced that it would end the program to reduce its balance sheet after September 2019. By then the Fed’s assets will be just under $4 trillion.

The problem for the Fed with having such a bloated balance sheet is that it no longer has the ability to use increases of its balance sheet to combat future economic downturns. Therefore, it had to come up with a new means of inflating the money supply where the general public would not perceive that is what is happening.

It looks like the new tactic has been unveiled. On March 6, 2019, economists David Andofatto, Senior Vice President and Economist at the Federal Reserve Bank of St. Louis, and Jane Ihrig, Associate Director and Economist for the Federal Reserve Board of Governors, issued a proposal titled “Why The Fed Should Create A Standing Repo Facility.” You can read this report here.

I’m having some difficulty understanding exactly what the repo facility would do. Somehow it supposedly encourages commercial banks to continue to hold U.S. Treasury debt that could be converted into another form of reserves in the event of a liquidity crisis. At the same time, by having commercial banks holding Treasury debt instead of it being held by the Fed, the Federal Reserve could pretend that it is reducing its balance sheet.

This arrangement would then enable the Fed to inflate the money supply at a faster rate during the next slowdown in the US economy. This would be done by accepting the Treasury debt from commercial banks in return for liquidity injections.

While this arrangement is being touted as a solution to manage a future liquidity crisis, it has the negative impact of inflating the money supply, no matter whether it is disguised by calling it “quantitative easting” or some other obscure term. As such inflation occurs, the value of the US dollar is destined to decline faster than it is now.

As protection against this plan to ramp up inflation of the U.S. money supply, prudent Americans may be well advised to acquire “wealth insurance” in the form of bullion-priced physical gold and silver.