JOHN WILLIAMS’ SHADOW GOVERNMENT STATISTICS

Treasury and Fed Rev Up the Currency Printing Presses

Has a Run on the System Begun?

The Problem Remains Inflation, Not Deflation

Treasury and Fed Create New Money. The news continues to be bleak for U.S. monetary discipline and the inflation, but it certainly is not unexpected. After the $85 billion bailout announced last night for AIG, the Fed and the U.S. Treasury today began creating serious new money in the system, a process that eventually will end in a hyperinflation and complete debasement of the U.S. dollar. As announced by the U.S. Treasury this morning:

September 17, 2008
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Treasury Announces Supplementary Financing Program

Washington- The Federal Reserve has announced a series of lending and liquidity initiatives during the past several quarters intended to address heightened liquidity pressures in the financial market, including enhancing its liquidity facilities this week.  To manage the balance sheet impact of these efforts, the Federal Reserve has taken a number of actions, including redeeming and selling securities from the System Open Market Account portfolio.

The Treasury Department announced today the initiation of a temporary Supplementary Financing Program at the request of the Federal Reserve.  The program will consist of a series of Treasury bills, apart from Treasury’s current borrowing program, which will provide cash for use in the Federal Reserve initiatives.

Announcements of and participation in auctions conducted under the Supplementary Financing Program will be governed by existing Treasury auction rules.  Treasury will provide as much advance notification as possible regarding the timing, size, and maturity of any bills auctioned for Supplementary Financing Program purposes.

Whether the resulting cash is placed into the system by the Fed (which seems to be trying to dodge showing an increase in bank reserves while making its assets look a little better) or by the U.S. Treasury, the effect will be the same: increased growth in broad money supply.

Following the announcement, the price of gold jumped by about $50 per troy ounce.

Negative T-Bill Yields Can Signal Run on the Banking System. In the banking crisis of the 1930s, Treasury bill yields actually turned negative. Investors were more comfortable paying the U.S. Treasury to hold their cash than they were leaving their money in the banking system. There apparently are stories in the financial media indicating effective negative Treasury bill yields (presumably based on transaction costs for those dealing through an intermediary) and implications for same. 

For those buying one-month Treasury bills directly from the New York Fed, the constant maturity annual yield stood at 0.23% on Tuesday (September 15th), down from 0.37% on Monday and 1.37% on Friday, more than might be accounted for by any expectations building for a Fed rate cut that did not come. The yield was down further as we go to press. This is an area to watch, at present, as a direct barometer of systemic stability.    

General Outlook Remains Unchanged (Inflation, Not Deflation). First, let me reiterate the concept that the U.S. system faces an inflation problem in terms of prices for goods and services, not a deflation problem. Recession and asset deflation are not at all inconsistent with price inflation, as was seen in the 1970s. There will be no price deflation without a sharp drop in the broad money supply (as in a year-to-year decline). 

Such a decline was not in the works, and current Fed and Treasury activity is promising even stronger money growth in the immediate future.   Messrs Bernanke and Paulson tacitly have confirmed that they will create whatever money they have to create in order to prevent a systemic collapse.

The various markets are about as volatile and dangerous as they can get. With extraordinary crosscurrents from the solvency crisis and various governmental and global central bank interventions in the markets and marketplace, volatility likely will continue, sometimes in directions that may seem irrational. The gold and currency markets, in particular, remain subject to jawboning and both covert and overt central bank intervention, aimed at discouraging investors from seeking safety in gold our outside the greenback. 

All factors considered, the broad outlook remains the same: further intensification of the inflationary recession and a continued deepening systemic and banking solvency crisis.  Growing market recognition of these issues and mounting global political tensions have intensified the risks for continued unstable market conditions, markedly.

Over the near-term, negative major market displacements should follow or be accompanied by intense, broad selling of the U.S. dollar, which may be beginning anew.  An eventual, increasing flight-to-safety outside of the U.S. dollar also should include flight-to-safety into gold.  Despite continuing softness in oil prices, current levels (anything above $90 per barrel) remain highly inflationary. Over the longer term, U.S. equities, bonds and the greenback should suffer terribly, while gold and silver prices should boom.