Where Will the Cash End Up

We're a few hours away from the Federal Reserve's expected announcement of more quantitative easing for America.

The general expectation is the Fed will buy hundreds of billions worth of Treasury securities and mortgage-backed securities over the coming months. Flooding the world with new dollars, setting the stage for rampant inflation.

But keep this in mind: it's not only how much money is printed, but also where this cash ends up.

And there's many data points suggesting money is not going anywhere inflationary.
In order to create inflation, cash has to get spent on food, gasoline, gold and other goods.

But money is not getting to the people who spend.

Consider this stat announced today in the minutes of the Treasury Borrowing Advisory Committee. Since the fourth quarter of 2007, loans by all securities lenders in the U.S. have fallen from $3 trillion to $1.5 trillion in Q2 2010.

That's a drop of $1.5 trillion in credit in two and a half years. Meaning a lot less money on the street to be spent.

Banks and other lenders are having trouble making new loans. And it's only going to get worse. Under the new "Basel 3" banking rules in America, lending institutions will be required to keep more cash on hand in case of financial hardships. Further reducing the amount available for lending.

This is why we're seeing charts like the one below. Note that the week ended September 22 saw the third-largest ever drop in outstanding loans at U.S. commercial banks. Lending bounced back a little the next few weeks, but is still in a general downtrend.

The Fed can create all the money it wants. But if it ends up in bank vaults rather than in the pockets of spenders, it's a no-sound tree in the forest.

Here's to keeping it in perspective

By. Dave Forest of Notela Resources