Deflation or Inflation...Take Your Pick

Talk of economic problems in the USA continue to bubble to the surface.  Today the Senior Economist for Europacific Capital was on Yahoo Finance.

Watch the video/article here; http://finance.yahoo.com/blogs/daily-ticker/michael-pento-central-bankruptcy-why-qe3-inevitable-105819637.html

In short he says that either the Fed will NOT continue printing money and we will have a deflationary depression.  And if they DO continue printing money we will have an inflationary depression.  Either way...the pain is coming.  And to top it off he says what we have been saying, either way the middle class is going to get clobbered.

Why?  Because if you are poor, you are already poor.  And the rich will always figure out a way to stay well fed and keep gas in their yachts.  It's the middle class that has some money but is getting pinched by rising food costs, medical costs, gasoline costs and the demand for higher taxes on everything we buy that is going to get crushed.

And we all know the societies devoid of a middle class are terribly unhealthy societies.

But as the size of the Fed's balance sheet ballooned, the dollar amount of capital held at the Fed has remained fairly constant. Today, the Fed has $52.5 billion of capital backing a $2.7 trillion balance sheet. While the size of the portfolio expanded three fold (and the quality of its assets diminished), the Fed's equity ratio plunged from 6% to just 2%. Prior to the bursting of the credit bubble, the public was shocked to learn that our biggest investment banks were levered 30 to 1. When asset values fell, those banks were quickly wiped out. But now the Fed is holding many of the same types of assets and is levered 51 to 1! If the value of their portfolio were to fall by just 2% the Fed itself would be wiped out.


The Fed acknowledged this insolvency risk on January 6th when it modified its accounting rules to ensure that it never technically runs out of capital. In a system that would make Enron jealous, the new gimmickry allows Fed losses to be booked directly as Treasury liabilities. In other words, just throw it on the deficit pile with the rest of the Federal red ink. But fictional solvency has nothing to do with its ability to successfully withdraw liquidity.

Yep...just throw the whole mess on the deficit pile with the rest of the Federal red ink!  That oughta work for a while....right?

Hat tip to Mike S. and Jared F.