The Federal Reserve controls the number of dollars in circulation; they are a liabiity on the Fed’s balance sheet. The Fed holds assets as well that offset their dollar liability. The Fed’s balance sheet has grown from $871 billion on May 21, 2008 to $2,165 billion on May 20, 2009. U.S. Treasuries were the main asset backing the dollar one year ago. Today, the Fed’s balance sheet contains $523 billion in toxic assets parked in its Maiden Lane LLC. Treasuries comprise only around $400 billion of the Fed’s total assets, down from around $700 billion last year. Finally, the St. Louis Fed’s adjusted monetary base was up a record 113.4% from the same period last year. The monetary base – basically currency plus bank reserves – is the Fed’s primary tool for affecting growth in the money supply.

Now here’s the important part. The general price level is a function of money supply and the velocity of money (how many times per year a dollar changes hands). Currently, money supply is exploding (dollars backed by toxic assets) but the velocity of money has been falling, leaving inflation at a low level for the time being. However, as soon as economic activity picks up (dollars start moving through the economy) inflation will rise sharply unless the Fed is able to remove dollars from the system very rapidly and in a timely manner. The Fed will need to find buyers for those toxic assets and/or remaining Treasuries at a time when the economy is expanding and inflation is rising. A very difficult assignment to say the least.

High levels of inflation are almost a given at this point. The only real question is the actual timing of the tragedy as it plays out.

Best Regards,

Christopher R. Norwood, CFA
Biechele Royce Advisors, Inc.
http://theknowledgeableinvestor.blogspot.com

I wish I knew what to do?? I own a self storage facility and plan to purchase several more but unsure of how to read into this.

Casey Cavell
http://www.AlwaysOpenStorage.com

For instance the last paragraph is extremely important but is kind of muddy for me.

“the insanely high levels of federal borrowing and spending, most of which will not start until 1010, will throw us into a period of high inflation and a “echo” recession in two to three years from now.” clarification?

These blogs are great

Casey Cavell
http://www.AlwaysOpenStorage.com