This one is a doozy. I can’t say I understand every bit of what’s going on in this one, but here’s the takeaway. Martenson’s thesis is that the Federal Reserve is monetizing more debt than previously realized, which would lead to inflation faster than previously thought.
The Fed mechanism he proposes is to let foreign central banks swap agency debt for higher-grade U.S. Treasury debt via the Federal Reserve Custody Account. That would serve to shore up everyone’s books while devaluing the dollar by effectively “printing” more dollars (realizing of course that the printing is really a bookkeeping operation).
Many people have said the Fed would have to inflate, but if Martenson is right they’re doing it faster than realized because they’re doing it in a stealthy way that’s escaped attention. This is addition to the non-stealthy way they’ve been inflating the money supply by buying $300 billion in Treasuries this year and reflating the money supply by purchasing over a trillion dollars in bad bank securities and agency debt.
Here are Martenson’s conclusions for what this would mean:
The Federal Reserve has effectively been monetizing far more US government debt than has openly been revealed, by cleverly enabling foreign central banks to swap their agency debt for Treasury debt. This is not a sign of strength and reveals a pattern of trading temporary relief for future difficulties.
This is very nearly the same path that Zimbabwe took, resulting in the complete abandonment of the Zimbabwe dollar as a unit of currency. The difference is in the complexity of the game being played, not the substance of the actions themselves.
When the full scope of this program is more widely recognized, ever more pressure will fall upon the dollar, as more and more private investors shun the dollar and all dollar-denominated instruments as stores of value and wealth. This will further burden the efforts of the various central banks around the world as they endeavor to meet the vast borrowing desires of the US government.
One possible result of the abandonment of these efforts is a wholesale flight out of the dollar and into other assets. To US residents, this will be experienced as rapidly rising import costs and increasing costs for all internationally-traded basic commodities, especially food items. For the rest of the world, the results will range from discomforting to disastrous, depending on their degree of dollar linkage.
Under these circumstances, “inflation vs. deflation” is not the right frame of reference for understanding the potential impacts. For example, it would be possible for most of the world to experience falling prices, even as the US experiences rapidly rising prices (and hikes in interest rates) as a consequence of a falling dollar. Is this inflation or deflation? Both, or neither? Instead, we might properly view it as a currency crisis, with prices along for the ride.
If that concerns you, read the whole thing. I’m still trying to get my head around it, but it would explain some oddities in inflows other people have noted. Here’s the Wikipedia definition of monetization:
Monetization is the process of converting or establishing something into legal tender. It usually refers to the printing of banknotes by central banks, but things such as gold, diamonds and emeralds, and art can also be monetized. Even intrinsically worthless items can be made into money, as long as they are difficult to make or acquire. Monetization may also refer to exchanging securities for currency, selling a possession, charging for something that used to be free or making money on goods or services that were previously unprofitable.
And agencies in this case seem to be Fannie Mae and Freddie Mac bonds.
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