Money

More than ever before in U.S. history, American society absolutely relies on credit in order to function.  In fact, if you cut off all sources of credit to U.S. businesses, most of them would go out of business fairly quickly.  The truth is that when the money supply expands and credit flows freely, the U.S. economy usually hums along pretty good.  But when the money supply contracts and the financial powers tighten credit, it almost always means that an economic slowdown is coming.  That is why recent signals by the Federal Reserve and the major banks in the U.S. are so alarming.

But why would the financial authorities want to contract the money supply and tighten credit just when the U.S. economy is showing some signs of life?

Well, the truth is that nobody can read their minds.  In the long run, the massive size of the U.S. national debt is going to force a massive increase in the size of the U.S. money supply and will eventually lead to hyperinflation.

However, in the short term U.S. financial powers may see this as a chance to further consolidate their power.  There are rumors that they still desire much greater “consolidation” in the banking industry.

So how would this “consolidation” be achieved?

Well, a massive “second wave” of mortgages is scheduled to reset over the next two to three years.  If credit is tight and the U.S. economy is struggling, then another huge wave of mortgage defaults could potentially destroy hundreds of small to mid-size banks across the United States.

The big banks would be in prime position to come in and buy many of them up for a song.

You see, this is very similar to what happened during the Great Depression.

During the Great Depression, the financial powers reduced the money supply, tightened credit and hoarded cash.  The U.S. economy seized up and suddenly nobody had any money.  Those who did have money (the financial powers) were in many cases able to come in and buy assets up for pennies on the dollar.

Not that we are expecting an extended deflationary depression this time.  Instead, it is perhaps likely that they are planning a “consolidation phase” before they really blow out the dollar.

In any event, a reduction in the money supply, the tightening of credit and the hoarding of cash by banks is really bad news for the average American because there will be less jobs and less opportunity as the economy slows down.

The following are 4 signs that this is exactly what we are about to see….

#1) The Federal Reserve is in talks with money-market mutual funds on agreements to help drain as much as 1 trillion dollars from the financial system.  The Federal Reserve is reportedly seeking to “withdraw” some of the record monetary stimulus pumped into the U.S. economy to fight the recession.  But when you withdraw stimulus money from the system, what happens?  That’s right – the opposite of stimulus.

#2) There are persistent rumors that Federal Reserve policy makers are plotting a course for a series of interest rate hikes.  Federal Reserve Chairman Ben Bernanke says that the Federal Reserve may raise the discount rate “before long” as part of the “normalization” of Fed lending.  By raising that rate, Bernanke says that the central bank “will be able to put significant upward pressure on all short-term interest rates”.  When the Federal Reserve raises rates, this has a ripple effect throughout the entire economy.  Higher rates mean that credit will tighten and loans will be more expensive for individuals and businesses.  In turn, this will cause the U.S. economy to slow down.

#3) Recent data suggests that there has been a substantial drop in the “real” M3 money supply, and every time that this has happened in the past it has resulted in a drop in economic activity.  In fact, this contraction in the money supply has some economic analysts now saying that it is not a matter of “if” we will have a “double-dip” recession, but of “when” it will occur.

#4) There are also signs that the major U.S. banks are now hoarding cash.  In fact, the biggest banks in the U.S. cut their collective small business lending balance by another $1 billion in November 2009.  That drop was the seventh monthly decline in a row.

So what does all of this mean?

It means that the collapse of the U.S. dollar will be put off for a little while but that the U.S. economy is in for some hard times ahead.

More people are going to lose their jobs and more people are going to lose their homes.

Eventually though, after this apparent “consolidation phase” is over, the U.S. government and the financial powers will swoop in with another round of bailouts and another round of “stimulus packages” to save the day.  Once again they will be hailed as heroes and saviors.

And this current “consolidation phase” does not change the long term forecast at all.  Eventually the U.S. dollar will collapse and the United States will experience hyperinflation in one form or another.

Just not yet.