U.S. Secretary of the Treasury & Free Lunches has done Gold investors an incredible favor. While not benefiting immediately as did those owning bank stocks, we will over time. With the U.S. government now assuming responsibility for financial assets of dubious value, it has committed itself to nearly unlimited funding of U.S. housing market, and every other industry with political clout. One consequence may be that the Federal Reserve loses control of monetary policy. Will the Federal Reserve now need to monetize U.S. government debt in unlimited fashion?

This week’s chart is of the year-to-year change in Federal Reserve credit, essentially the asset side of Fed’s balance sheet. When it buys securities or makes loans to banks, those claims become assets of the Federal Reserve. In recent years, the Federal Reserve has had the luxury of relying on foreign central banks to finance the U.S. economy. The Federal Reserve Credit grew slowly, as did core inflation. With foreign investors now balking at financing doubtful U.S. financial assets, that financing burden will now belong to the Federal Reserve. The recent spike in that chart is the first round of the uncontrolled financing of the bank stock holder bailout plan. The Federal Reserve credit growth rate had already been on a rising trend as the Federal Reserve began financing the questionable assets of the U.S. financial system.With the Federal Reserve now forced to monetize vast quantities of U.S. government debt, Federal Reserve credit will grow rapidly. As that is base from which money is created, the quantity of dollars will grow. As the quantity of dollars rises, the value, or price, of those dollars will decline. As that happens, the dollar value of Gold will rise. The U.S. financial bailout plan in essence puts a rising floor under the dollar price of Gold. Gold may indeed benefit more from the financial bailout plan!

Ned W. Schmidt