Something Evil This Way Comes


Drowning Liquidity Flood

Something is going on behind the scenes in the normally secretive back vaults of the Washington based funny farm called the “Federal Reserve”.

Thanks to the St. Louis Fed’s economic research unit, we have various data, graphs and information published from daily to monthly, depending upon the data being displayed. By perusing this data farm, one can get a fair (perhaps not good – but fair) idea of the actual actions of the Federal Reserve which, in all cases, is far better than relying on what the Federal Reserve Chairman says. The two rarely match.

Let’s take a look at the chart (BASE) of the base money supply in the USA, calculated bi-weekly, I believe. First we see what happened during the financial meltdown of 2008.

This chart – shaded to indicate all the action taking place during an “official” recession – shows the absolutely horrifying money pumping that flooded the banks with liquidity (i.e. bailout) to prevent the free market from punishing those TBTF banks for their admittedly criminal acts of fraud through the creation, sale and short sales of MBS, CDOs, and ABCs of all kinds and types.

The Federal Reserve just dumped money on the fire to put it out. Or delay it.

fed base

From mid-September 2008 through February of 2009, almost a trillion dollars were injected into the banks (at no cost to the banks) to keep them financially viable. We won’t go into the moral hazard of such an asinine policy here, but I believe that if they had not done it, those cretinous banks would have been broken up or bankrupted and reestablished as new institutions. The debt would have vanished in a smoke cloud of epic proportions as stockholders and bond holders took a bath. The debt problem would not have been exacerbated as it is today and those same banks would now be perhaps two dozen smaller, more manageable entities. Such is not to be.

Now let’s look at another graph from the same St. Louis Federal Reserve.

monetary base

Once again, this is ‘BASE’ or the Adjusted Monetary base chart of money that the Federal Reserve hands out like popcorn (cooked digitally, of course).

See anything funny here? Well sure you do. Just after the first of the year in January 2011, the Federal Reserve began another PANIC injection of funds into the monetary system. In less than three months they have injected almost 500 billion dollars into the system with obviously no end in sight.

As you can see from comparing the two charts, the volume of money creation over time is on a very close footing between the two which means the sluice gates are open as wide as can be cranked (short of C-130s and helicopters dumping cash in bulk out of rear bay doors).

And now the $1 billion dollar question: What has the Federal Reserve so spooked that they are commencing yet another panic stricken flood of liquidity into the financial system?

And here, dear reader, my crystal ball just shattered and I don’t have a clue other than to say, “Something Evil This Way Comes” and you might take a defensive stand in your investments so when we find out and the markets react, you won’t be caught with your shorts around your ankles.

Financial Sense