Welcome To A Paper Economy
The Fed is opening up another 800 billion dollars of loans. This puts its balance sheet at about 3 trillion, supposedly (I have my doubts about that number). For reference, before the crisis, the Fed’s balance sheet was about 800 billion. In the old days this would have been called what it is: running the printing press hot. This is money made up out of midair, essentially fictional fiat money backed by nothing but the promise that at some point in the future the federal government will either tax enough to pay it all back or redefine money in such a way as to make it payable.
The fact that this is fictional money can be seen easily enough by the fact that the 7.7 trillion or so that has been burned through during the crisis has done nothing much. The real economy is still going into the dumps, big banks like Citigroup are still in trouble and no one wants to lend money to anyone but the government, since they’re the only people who can credibly promise to maybe pay it back.
When you consider that the entire Iraq war cost is running around 575 billion, that’s certainly saying something. Rest assured that if any significant part of that 7.7 trillion dollars had hit the real economy you’d have felt it. 7 trillion, or even 3 trillion, or 800 billion, is real money.
Or rather, it used to be real money. Now it’s just 0’s added to various bank accounts. If it were real money, it could be used to do things, but as it is, all it’s doing is filling a huge hole and racking up promises Americans will eventually be expected to make good on.
And the only way to make good on them will either be through inflation, massive devaluation of the dollar, huge tax increases or changing the definition of what money is so that there’s enough money to pile out from under all of this.
In the meantime, welcome to a paper money economy, where the wheelbarrows of virtual cash are trundling straight from the Fed and Treasury to the banks, to disappear into a bottomless hole.