Since 2008, the Federal Reserve has more or less printed over $1.6 Trillion in two rounds of “Quantitative Easing”.  Many have speculated that this has to result in inflation for the simple reason that there are more US Dollars out there than ever before.  That’s based on the most fundamental principle of any market, supply and demand –more of these things called “Dollars” around and the value has to drop, meaning it takes more of them to make a reasonable exchange with something real.

It hasn’t worked out that way.  Inflation remains at around 2% per year as it has throughout the worst part of the Managed Depression, the financial crisis that started in 2007.  How on earth can that be?

The answer is that the number of US Dollars in the world is only one part of the equation.  The “velocity of money”, or the number of times they turn over in the economy, is equally important.  Data since 2007 shows what every freelancer and job seeker knows – it’s a tough world out there, and people are pretty slow to let go of the dough they have.

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The announcement came after the closing bell, after the noise of the day was over.  Moody’s bond rating agency cut the rating for 15 banks in the US and Europe, hitting all of the big ones at one.  JP Morgan, Goldmann Sachs, Morgan Stanley, Barclays, Credit Suisse, Deusche Bank, Société Générale – pretty much every major investment bank was hit with major downgrades.

Reaction in the press was swift. “This has been a long time coming” was one way of putting it, with speculation that “Should any major bank be considered investment grade?”  The entire financial system is downgraded at once and it was something like a big yawn.

But there is a story here.  True, it has been moving in slow motion for a long time, so a downgrade by Moody’s is just one event in a long chain.  But it still means something, and the effects of this may ripple for a long time.

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In the US, when a bank fails the FDIC swoops in to take control.  Often arriving on a Friday, a bank that cannot meet its obligations is often completely re-organized and recapitalized over the weekend and opens for business on Monday as if nothing happened.  The executives are pushed out to the street and new management is found, often another bank that can take over as soon as possible.  They’ve done this 30 times so far this year. It’s all paid for by insurance premiums paid over categories of risk at all banks across the US.

In Europe, they don’t have such a mechanism.  They have something called “Emergency Liquidity Assisitance” (ELA) which is run through the central banks of the member nations.  No one knows which banks are getting this money, and the executives to run them as usual.  The exact amount has been buried in the balance sheets of the European Central Bank (ECB) as “other claims”, so we don’t even know how much it is.  But as money flees Greece and some other nations there’s a whole lot more “other” floating through Europe.  And the secrecy shows just what’s wrong with a banking system set up by and for bankers.

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