Lew Rockwell:

The Federal Reserve System faces a dilemma of its own creation: the doubling of the monetary base. You can see it here.

The only thing that is keeping this from creating mass inflation is the decision of commercial bankers to deposit the bulk of this increase with the Federal Reserve. The banks are not lending out this money. Neither is the FED. This money does not legally belong to the FED.

There is a reason why the banks are not lending money to the public. Instead of taking the risk of lending, the banks are depositing hundreds of billions of dollars with the Federal Reserve. Beginning last October, the Federal Reserve began paying low rates of interest on money above the legal reserve requirement that banks must deposit at the Federal Reserve System. This new policy was not to go into effect until October of 2011, but the banking crisis forced the Federal Reserve to speed up the legal timetable. Congress, of course, did nothing.

Because the banks place their money with the Federal Reserve, this money is taken out of the fractional reserve process. The Federal Reserve System does not lend this money to borrowers. It is not part of the FED’s balance sheet. The FED keeps the money in reserve. The banks were initially paid only 1.25% for these deposits, and this was dropped to 1% before October was over. Because of the Federal Reserve’s new target for the federal funds rate, which is now approximately 0%, banks are not receiving any interest on the money they have on deposit with the FED. Yet they have to pay interest to depositors. So, the excess reserves are causing banks to hemorrhage money. The money is safe, but the losses are guaranteed. The banks have almost no money coming in as interest payments from the Federal Reserve, but they have money going out as interest payments to depositories. This cannot go on forever.

My comment: I am starting to see the bottoming of commodities, The Baltic Dry Index is rising, and various stock markets around the world are bottoming which is indicating to me that the massive inflationary efforts of the entire world are beginning to gain traction. What is happening is analogous to a car stuck in the mud and the driver mashes on the gas and tires are spinning and mud is flying. All the sudden the tires get traction and car goes flying out of the mud hole like a rocket ship. Hopefully when all this money that has been created begins to stick the FED will be able to drain the liquidity from the system and prevent an inflation. However I am not optimistic.

John Polomny
The Real Deal