Fed rolls printing presses

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For more than three decades, savvy world investors have feared that in any serious deflationary crisis, the U.S. would panic and open the floodgates of printed fiat currency, writes Richard Maybury.

Maybury believes that the deflationary crisis has arrived; dollars are being created by the Federal Reserve at an astounding rate. The steady upward slope of BASE, the St. Louis Adjusted Monetary Base has become vertical.

Since officials don’t know the location of the threshold that would trigger an inflationary crisis, making the U.S. dollar worthless, they are dropping money into the economy in increments instead of one huge infusion.

Americans see each of the smaller injections as a failure. Thus, each one makes them more fearful. The velocity of money falls, nullifying the inflationary effect of the injections, Maybury writes (U.S. and World Early Warning Report, Special Bulletin #3, 10/10/08).

The only silver available for purchase is in 1,000-oz. bars. One explanation, suggested by Arthur Robinson, is that Americans are so frightened that they have bought up all the silver coins.

Nonetheless, “we have the tools to manage the crisis,” writes Paul Volcker reassuringly (Wall St J 10/10/08). Volcker was Federal Reserve chairman from 1979-1987. “Financial authorities, in the United States and elsewhere, are now in a position to take needed and convincing action to stabilize markets and restore trust.”

If confidence is restored, the game can proceed. At least for a time.

The international confidence-builders have had an “unprecedented crisis” come up at a most awkward moment: Just after World Bank president Robert Zoellick called for a “radical revamping of multilateral organizations in light of the global economic meltdown,” it was found that the security of the World Bank Group’s computer network has been compromised by cybercriminals. Intruders have had access to the Bank’s most sensitive systems for at least 6 months. Officials have been scrambling to find the cause of the problem, while also trying to keep news from leaking to the public.

Maintaining the Bank’s information infrastructure costs about $280 million per year. One disgruntled staffer complained that it doesn’t even have an internal search engine that works. But investigators found that intruders were “downloading anything and everything.” Among other problems, spyware had been covertly installed on workstations in the Bank’s Washington headquarters (Fox News 10/10/08).

As President Bush told Americans, the crisis is global.

Neither the Federal Reserve nor the World Bank is offering a confidence-inspiring path to financial stability.

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