On November 21, 2002 Federal Reserve Chairman Ben Bernanke gave his infamous "Helicopter and Printing Press" speech where he explained the Federal Reserves ability to prevent deflation where he said in part the following:
What has this got to do with monetary policy? Like gold, U.S. dollars have value only to the extent that they are strictly limited in supply. But the U.S. government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost. By increasing the number of U.S. dollars in circulation, or even by credibly threatening to do so, the U.S. government can also reduce the value of a dollar in terms of goods and services, which is equivalent to raising the prices in dollars of those goods and services. We conclude that, under a paper-money system, a determined government can always generate higher spending and hence positive inflation.
First of all apparently the Federal Reserve does not have this power as evidenced by the events of September 17th when the Treasury essentially TOOK over the Fed. After all of the "liquidity" provided to banks over the last 6 months (tens of billions of dollars at a time) by the Fed it has run out of resources to prop up the markets, hence the hat in hand appearance before Congress. We should recall that it is not the Fed who runs the printing press for our fiat currency it is in fact the Treasury under the supervision of the Congress.
Since the beginning of September Federal Reserve Balances have ballooned from $3.8 Billion to 171.5 billion. You ask where did all of that money come from? Hot off of the Treasuries printing press. Under the Fractional Reserve system for lending it represents a monumental amount of DEBT that will manifest itself in our marketplaces as new money. Translation, everything is about to get very expensive (hyperinflated prices).
Using that printing press to prop up the banks does something terrible, it debases our currency and we will very soon begin to see the opposite problem that seem to keep the Chairman up at nights, that is hyperinflation.
Here is how the Supplementary Financing Program is alleged to work. The U.S. Treasury Department sells Treasury securities in a public auction and deposits the cash proceeds with the Federal Reserve. The Federal Reserve thus has "cash for use in the Federal Reserve initiatives".
Sounds simple enough, but do not be fooled! That is only a part of the story. If the Treasury securities were merely sold into the market and the proceeds were loaned to the Federal Reserve, there would be no impact on Reserve Balances or the Monetary Base. Or as Ed Bugos likes to say, the liquidity would be "sterilized". In other words, the operation would merely represent a shift of existing money supply within the financial system, not an injection of new cash. Yet what we have witnessed in the past few weeks is a massive increase in Reserve Balances to the tune of over $160 billion.
And that can only mean one thing: the Fed is now monetizing bank assets, or at least is preparing to do so, on behalf of the Treasury. This is a bona fide helicopter operation, the first of its kind during the current credit crisis and certainly the largest in the history of First World central banking since the Great Depression. What we don't know is if these Reserve Balances will turn into Federal Reserve Notes and get stuffed under the mattress as panicked depositors continue to withdraw cash from the banking system or if these Reserve Balances will get loaned out by the banks whose assets are being monetized. If the former, the hyperinflation will be delayed until the cash is taken back out from under the mattress, which will happen once the bank runs have abated. If the latter, hyperinflation could come fast and furious.
In effect, what's really happening is that the Treasury is borrowing money into existence at the Monetary Base level. This is exactly the same thing that Weimar Germany did. What the Germans (and the Argentinians, Zimbabweans, etc.) found out, and what our "benevolent" leaders will also soon discover, is that the printing press is a slippery slope to oblivion. The worst-case outcome of giving into this temptation is almost unfathomable.
from wiki: Zimbabwe Economy
Inflation rose from an annual rate of 32% in 1998 to an official estimated high of 11,200,000% in July 2008 according to the country's Central Statistical Office,[65] a state of hyperinflation, and the central bank introduced a new 100 billion dollar note.[66] Local residents have largely resorted to buying essentials from neighbouring Botswana, South Africa and Zambia. IMF economists estimated inflation at about 150,000% in Dec 2007.
In short, this is the middle of the beginning of the end of the dollar and our current banking system.
Expect within a few days as the 50 basis point Central Banks interest rate cut falling flat a call for an international "bailout" plan to prop up those Central Banks that are so large that their own countries cannot afford to do so themselves (think Switzerland, Ireland, and Greece). $700 billion is not even a speed bump towards the crisis that will justify a new global bank/currency that is going to make the International Monetary Fund look like a philanthropic society and the G8 look like a child's tea party. (For more on that I suggest reading Naomi Klein's book "The Shock Doctrine: The Rise of Disaster Capitalism"). Global corporatism/fascism and debt based "free market" monopolistic "capitalism" here we come!