How much value did our dollar just lose?

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taco's picture
taco
Status: Bronze Member (Offline)
Joined: Jun 21 2008
Posts: 26
How much value did our dollar just lose?

I’ve been looking for a discussion about how much this planned “quantitative easing” will devalue our dollar, but haven’t seen any numbers given. So I figured I would give it a try. Check my assumptions and math and make any corrections necessary:

Assumptions:
1. The fed prints a total of 1 trillion new dollars (buying treasuries and other bonds)
2. All of the money is immediately available to be spent (i.e. it is not locked away as reserves) (is this reasonable? I mean from whom does the Fed actually buy the bonds? banks? foreign central banks? individuals?)
3. Total amount of goods and services available does not increase during this new money creation process.
4. Total money extant (M3, taken from http://www.shadowstats.com/alternate_data/money-supply) is 15 trillion.

Math:
1. The new money supply (before any fractional reserve multiplier shenanigans) is $15T + $1T = $16T.
2. Therefore, $16T is available to compete for the same goods and services that previously only $15T was available to pay for.
3. Hence, $16T * x = $15T; where ‘x’ is a fraction describing the loss in value of each dollar.
4. x = 0.94.
5. Every existing dollar is effectively worth 0.94 cents – a loss of 6%.

Essentially your savings, after suffering a 50% drop in value from the taking market, just lost another 6%. And who thinks the Fed is going to stop at 1 trillion?

Ragnar_Danneskjold's picture
Ragnar_Danneskjold
Status: Silver Member (Offline)
Joined: Feb 23 2009
Posts: 100
Re: How much value did our dollar just lose?

I'm not sure this is correct, but if you look at the adjusted monetary base here http://research.stlouisfed.org/fred2/series/BASE, the Fed has added $800B since Sept.  So, they've basically doubled the monetary base, which would be approx.  50% devaluation or 100% inflation.  Now, they've announced their intention to buy $850 ~ $1250B worth of debt, for which they have no money, so, they'll add that amount to the adjusted monetary base.  Which in the end would represent a 65 ~ 75% devaluation of currency or approx 280 ~ 330% inflation since Sept 2008.

taco's picture
taco
Status: Bronze Member (Offline)
Joined: Jun 21 2008
Posts: 26
Re: How much value did our dollar just lose?
Quote:

the Fed has added $800B since Sept.  So, they've basically doubled the
monetary base, which would be approx.  50% devaluation or 100%
inflation.

Ragnar,

You are correct that the Fed has already greatly increased the monetary base (M1). However, from what I've read, in the recent past when the fed created the money to buy "assets" off the banks, the stipulation was that the banks then use the new money to buy existing treasury bonds from the Fed -- essentialy tying up the newly created money so that it couldn't make its way into general circulation (M2 and M3). This resulted in a depletion of the treasure bonds held by the Fed and a huge surge in M1 -- however it did not effect a change in M2 or M3.

This time, however, things appear different. From my perspective, there is no safeguard or stipulation that prevents the new money from making it into general circulation. Will this new money directly boost M2 and M3? It depends on the mechanism by which the Fed purchases the bonds -- something I am not clear on.

Ragnar_Danneskjold's picture
Ragnar_Danneskjold
Status: Silver Member (Offline)
Joined: Feb 23 2009
Posts: 100
Re: How much value did our dollar just lose?

Ok...I'm following you more or less on what has happened to date with the $850B that has been added to the adjusted monetary base.  However, I'm not entirely sure that the new money is really "locked up" in Treasuries.  Didn't the Fed print the money to buy the Treasuries, which it then traded for toxic assets from the banks?  Wouldn't this action be inflationary to the extent those toxic assets default?  

So, now, they're printing $300B to buy Treasuries, which is entirely inflationary.  And if we just go with the $300B as a given for now, that would be a devaluation of approx. 26% or 35% inflation ([$850B BASE as of Sep-2008]+$300B). 

And after re-reading the announcement, I see they're "only" printing another $600B to buy toxic assets (increasing the $850B they did in Sept to $1450B).  But we don't know how much of the $1450B in toxic assets is going to default.  Worst case, would be a devaluation of 67% or 205% inflation [$850B BASE as of Sep-2008]+$300B+$1450B.

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