Monday, May 11, 2009

The Death of the Dollar?


First, let me start with a few basic economic terms to get everyone on the same page:
inflation: a persistent, substantial rise in the general level of prices related to an increase in the volume of money and resulting in the loss of value of currency

hyper inflation: extreme or excessive inflation

stagflation: sluggish economic growth coupled with a high rate of inflation and unemployment.
Now, let's get into what's killing the dollar...

It took over 200 years for the United States' monetary base to reach $800 billion, but by late 2008 it doubled to well over $1.6 trillion - which was twice the amount of paper dollars that were in existence in the summer of 2007!

(Click to enlarge)

We were told that all of this money was necessary as an injection into the banking system, so as to keep the banks open and loaning. Yet, only a small amount of all that extra currency shown above has made its way to the banking system and into circulation. But when it does, inflation will inevitably follow (i.e. more dollars in a system means that each dollar is worth less). This is bad news for anyone holding dollars, but precious metals will likely maintain their value.

As can be seen from the chart below, we are printing an unprecedented amount of money and injecting it into the system which - when paired with the mounting unemployment rate - will invariably lead to a "misery index" even Jimmy Carter couldn't ignore.

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To put this in perspective, let's look at how many dollars the banks borrowed from the Federal Reserve through 2007. Note the tallest spike, which indicates the banks had to borrow $8 billion from the Federal Reserve during the Savings and Loan Crisis in the late 1980s.

(Click to enlarge)

Now, here is the same chart, but through 2008. You can't even see the $8 billion Savings and Loan Crisis spike anymore!

(Click to enlarge)

Currently, the banks are around $700 billion in borrowings. Ask yourself this: Are our economic troubles today 100 times worse than the Savings and Loan crisis? If not, then why do the banks need 100 times more borrowings?

The following chart shows the total amount the Federal Reserve loaned out through 2008 - to include the 2008 bailouts.

(Click to enlarge)

At the end of 2007, the Federal Reserve had loaned out roughly $800 billion. By the end of 2008, the Fed gave out $2.2 trillion.

And this is before Obama took office! Compound all of this with Obama's proposed budget:

Then, add all of that to the current $11.2 trillion dollar national debt, and tell me... what do you think is going to happen to the dollar?

Here's a hint: See what Germany was up to... oh around 1923... and then you might have some sense of what lies ahead for America if our government does not curtail it's printing and spending of American currency.
-The Federal Reserve research was provided by the Federal Reserve Bank of St. Louis and brought to my attention by Sylvan Butler.
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