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Letter Re: Thoughts on Upcoming Quantitative Easing

Mister Rawles:
As many of the SurvivalBlog readers and individuals who are on the inflation/deflation watch have noticed over the weekend is the rumor that the Federal Reserve will begin what is commonly referred to at this point as Quantitative Easing, Round 2 (or “QE2”) , Fed Will Boost Balance Sheet by $500 Billion [1] .

Why is this important for the average American? The opening of the novel “Patriots [2]” lays out a scenario where the Federal Reserve begins to buy U.S. Treasury debt which spirals out of control leading to the implosion of the government. There should be warning lights going off over this very scenario. There is a very real gambit being played by the Fed in which they assume they can increase the size of their assets and eventually exit their position prior to a hyperinflationary situation presenting itself.

We can see a great example of this with a brief analysis of the current FRB balance sheet [3] as well as their income statement. (Follow along at the current FRB balance sheet release Table 1 is the balance sheet in billions, Table 24 income statement in millions, and Table 25 breakdown of interest income in millions.)

The first thing we want to look at is total assets which is currently $2.3 trillion; up from the same time two years ago of $908 billion. That is an increase of 154% and a rumored increase of $500 billion would make the increase in Fed holdings 209% since August 2008. Just over $1 trillion of this increase is attributed to the Fed’s purchase of trouble mortgage backed securities and an increase of held treasury bills/notes and government backed entities from $479 billion in 2008 to the current level of $941 billion. In the inflationary discussion, we have to remember that this increase is not funded by investors but by a printing press.

The most interesting information comes from the income statement. As you will notice, the net income for the first six months of 2010 is $40 billion. This income comes from interest income of which $36 billion was earned on U.S. treasury debt and U.S. backed notes. The catch however is the note at the bottom of the income statement showing the Fed paid back to the Treasury $34 billion. Basically, we have a circle in which the Federal Reserve Bank purchases government sponsored debt but recycles the debt payments back to the government for a nominal fee. (In this case approximately $4 billion annually.)

Again, the probability of a similar scenario to that in Mr. Rawles’ novel is beginning to increase and will only be exacerbated by further increases in the Fed’s balance sheet. While the outcome of the current actions are somewhat up in the air, it is further motivation to prepare in a deliberate and thoughtful way so as to protect your family and community from the ever increasing chances of serious societal upheaval. – C.J. (A bank examiner in a western state.)