March 22, 2009

How Big Is It?

Bernanke announced repurchases of $1.2T of various forms of debt with U.S. cash last week, financed by the printing of money. The move was noted in the press in passing, as a side note underneath the AIG executive bonus scandal.

The world's relative silence on the huge infusion of cash is riveting. The lack of news on the buyback represents a remarkable success by the Fed: after announcing a massive quantitative dilution of U.S. dollars, the dollar has lost barely more than a couple pennies of value.

How can a couple points of devaluation be considered a success? Because the trillion-dollar repurchase is an experimental economic shock-and-awe, a daring and unprecedented maneuver that carries the risk of sparking a fundamental crisis in confidence.

How big is it?

Consider: at 1.2 trillion dollars, the Fed move last Thursday was 60% larger than the Recovery and Reinvestment Act that took Congress months of debate and wrangling to assemble - and the Fed acted without a single whisper of legislative debate.

The Fed move is something that could not have been done through a trade move - at 1.2 trillion dollars, the infusion of cash is about equal to the total sum of all U.S. exports of goods, and 50% larger than our massive trade deficit.

The Fed move to print dollars counters China's history of slurping up U.S. dollar cash to keep its RMB low - the 1.2 trillion dollar infusion equals about 63% of total Chinese foreign reserves, counterbalancing approximately three years of foreign reserve accumulation by the Chinese. Will we be buying our treasuries back directly from the Chinese?

The U.S. GDP is about $14 trillion, so if each of the new dollars get spent once this year, they will contribute to 8% of GDP. This huge amount would be more than large enough to counterbalance the 6% GDP shrinkage that is currently being measured by economists.

The U.S. Money supply - M2 - is about 8 trillion dollars. So in one move, Bernanke has expanded the money supply by 15%.

This week Bernanke has done a bit of monetary ballet, showing us how to issue 15% more paper while attracting little more than a below-the-fold eyeblink in the news.

Posted by David at March 22, 2009 09:40 AM

> The move was noted in the press in passing, as a side note underneath the AIG executive bonus scandal.

This reminds me of an infamous scandal in the UK when a government aid decided 9/11 was a "good day to bury bad news". Try searching for that phrase and you'll find lots about the scandal. So politicians in the UK are very wary about rekindling any memories of the scandal.

Posted by: RichB at March 22, 2009 03:44 PM

Tiny Tim Geithner and Helicopter Ben Bernanke are going to ruin this country. They both need to GO!

Posted by: TalithaTwoBlade at March 22, 2009 09:48 PM

"cost barely more than a couple pennies" is not too shocking. Friedman says historically there is an 18 month lag in the US inflation rate due to changes in M2. The real result will be in September of 2010

Posted by: Roger at March 25, 2009 04:03 PM
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