Does Bernanke have a QE4 exit plan, or will Fed become insolvent and cause worldwide hyperinflation?

Dec. 17, 2012 - PRLog -- Thomas Jefferson said, “"If the American people ever allow private banks to control the issue of their money, their children will wake up homeless.”

The U.S. Federal Reserve banking system was created in 1913 to make the U.S. banking system safer by stabilizing the business cycle. However, it did the opposite. It created a credit expansion bubble in the 1920s, which resulted in the 1929 stock-market crash. It created a dot.com bubble during 1997-2000 and a real estate bubble during 2000 to 2007. Quantitative easing is currently creating a derivatives bubble, which some hedge fund managers such as Kyle Bass, believe will cause a sovereign default by Japan and the break-up of the Euro. In 1913 the official price of an ounce of gold was $20.64. Today, an ounce of gold is $1,700. The dollar has been devalued in purchasing power of gold by 88%. Financial adviser Marc Faber believes the U.S. will lose its reserve currency status, and the dollar will reach zero in value.

Quantitative easing, or QE, is an unconventional monetary policy used by central banks to stimulate the national economy by pumping more money into the financially system, when interest rates are already at or near zero. In 2008, Federal Reserve Chairman Ben Bernanke launched QE1 and purchased $1.55 trillion in mortgaged-backed securities (MBS), and Treasuries. In 2010 the Fed enacted QE2 and purchased $600 billion of long term treasuries. In September 2012 the Fed announced QE3 with an open-ended purchase of $480 billion a year in MBS, and operation twist, the selling of short term treasuries and purchase of long term treasuries. In December 2012, QE4 stated operation twist would end, and the Fed would buy $1 trillion a year in MBS and long term treasuries, until unemployment dropped to 6.5%, or inflation exceeded 2.5%.

The Fed, like most central banks, is rather thinly capitalized. As of September 2012, it had capital of some $55 billion, about 1.9 percent of its assets of $2.825 trillion. It has sold most of its short term treasuries during operation twist, and is accumulating risky long term MBS and long term treasuries. The Fed now has a $3 trillion balance sheet loaded with long-term bonds, and is undercapitalized with a leverage ratio of 53:1. By the end of 2014, the Fed balance sheet could reach $5 trillion, and a leverage ratio of 100:1.

The Fed is committed to printing money, and increasing the banking monetary base until the economy recovers. As the economy recovers, excess reserves in the banking system, through the fractional reserve, can be multiplied up to 100 times. From August 2008 to August 2012 the Bernanke Fed exploded the monetary base by $1.74 trillion (from $908 billion to $2.64 trillion). Theoretically credit could expand by $174 trillion.

Under the Fed exit strategy it will reverse quantitative easing as the economy recovers, by buying treasuries and reducing the money supply, in mid-2015. The problem is the bigger the Fed balance sheet, “the riskier the exit becomes, “ Richmond Fed President Jeffrey Lacker states. The Fed is currently monetizing President Obama’s trillion dollar deficits. The U.S. government is currently annually spending approximately $3.5 trillion with $2.4 of revenues. This creates $1.1 trillion deficits. If the Fed exits QE, and sells bonds, interest rates will rise and the value of bonds will drop. A decrease in the value of bonds will quickly eliminate the Fed’s capital account. A 100 basis point increase in interest rates in 2015, would cause the market value of the Federal Reserve’s assets to fall by about 8 per cent, or $400 billion. This would give the Fed a negative net worth of approximately $350 billion. It is clear the Fed will run out of treasuries and MBS, before they are ever able to totally exit their QE purchases. 　　　　

In effect the Fed has no practical exit strategy from QE easing. In addition if the Fed leaves its current zero interest rate policy (ZIRP), it will impact the cost of U.S. government debt. If the national debt reaches $20 trillion by the end of President Obama’s term, a one percent increase in interest will add $200 billion to government interest cost. If interest costs for U.S. sovereign debt reach 5 percent, the annual interest on the national debt will be $1 trillion. According to Kyle Bass, the Keynesian end point is when government revenues can not cover the interest on sovereign debt.

It appears the Federal Reserve balance sheet will have a negative net worth when it tries to exit quantitative easing. However, it will not be insolvent as long as the market excepts fiat federal reserve notes. However, the Fed employs 500 economists, 20,000 employees, and has annual expenses of $4.7 billion. The central bank of Zimbabwe became insolvent when it could not afford the cost of printing bank notes with paper currency. Dr. Gideon Gono, Governor of the Reserve Bank of Zimbabwe believes fiat money is unsustainable to the demands of government, and the temptation of politicians to plunder. He recommends currencies backed by gold.

Financial advisers Kyle Bass and Marc Faber believe a monetary melt down will end in war. Ezekiel 38 declares Russia, Germany, Turkey and Iran will invade the Middle East in the end times. Revelation 6:8 states one quarter of the Earth’s population will be destroyed in a World War. Many believe China will invade the Middle East, and Revelation 9:15 states one third of the world’s population will be destroyed. Revelation 13:4 states a dominate world ruler will come out Eurabia, a 10 nation combination of Southern Europe’s Club Med nations, North African nations, plus an Assyrian leader from Iraq‘s Babylon.  

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