How Money Became Debt Became Money Again

Where you shocked when you found out that the US Federal Reserve pumped $7.7Trillion in banks around the world in 2008 and 2009 to stop a complete financial meltdown?  Did you know that if they didn't do that, I would not be posting this blog and you would not be reading it?  Civilization as we know it would have ceased to exist by 2011.    2010 would have been martial law around the world and soon thereafter it is Mad Max and the Thunderdome Society.

So don't get so pissed if a few bankers made big bonuses from the Federal Reserve cash infusion.  They saved your ass and your way of life.   You should be thanking them.

So if the Federal Reserve "printed" $7.7Trillion why don't we have hyperinflation?  Because that amount of money was just enough to offset a massive deflationary spiral.  A commodel Coriolis effect of epic proportions drawing the turd of modern society into the septic tank of oblivion.

Deflation?  What Deflation?

The same deflation that is crushing Europe, the EU and the Euro right now.  You see, a financial institution will show "cash and cash equivalents" on their balance sheet.  Do you know what a cash equivalent is?  Well, one type is sovereign debt.  So Italy floats bonds and banks buy them and put them on their balance sheet.   If that bank owes money to some other bank, it can pay that bank with cash equivalents.  Or in this example, settle the payment by transferring Italian government bonds from their institution to another.  So-- Debt is Money.

These same institutions can utilize fractional reserve banking to multiply the leverage effect of these cash equivalents by creating loans using these government bonds as collateral.  Thus creating more money out of debt.  In fact, the more money a government borrows the more money a bank can create!  

UNTIL...those government bonds lose their value.  When interest rates on government debt rises (like 7% for Italy) then the bond's face value decreases and affects every other outstanding bond too.  This means assets (these cash equivalents) on the balance sheets of banks lose their value - fast.   And that means the likelihood of bank default increases.

Now you know what is going on in Europe.  A massive deflationary spiral is in progress.

Back to the US.  It is not when a US bank owns any European Government debt that puts it at risk.  IT IS IF YOUR US BANK IS OWED ANY MONEY AT ALL BY ANY EUROPEAN INSTITUTION- GOVERNMENT OR FINANCIAL.  Because- the deflationary spiral has made them all insolvent.

Now really back to the US... US banks in 2007 had massive amounts of Mortgage Backed Securities on their balance sheets due to the "housing bubble".  These MBS are "Cash Equivalents"!  That means banks can use them as if they were cash and they can make loans against them.  Guess what-- house prices collapsed, MBS rapidly lost their value and the US banking system became insolvent.

How bad was it?  Well $7.7 Trillion to be exact.  Ben Bernanke created that much money and pushed it to the banks.   And that is why the US banking system is solvent today.

And that is how money became debt became money again.