At the beginning of the year, I wrote: “The financial system has become so abnormal, the Fed has to keep inflating to prevent the system from literally going off the rails. But the irony is that eventually the financial system dies as a consequence of accumulated inflation.” I then went on to identify three things that everyone needs to watch in 2013.

Two of these events have already happened. I still expect the third to occur this year too. Here they are, with my current thoughts:

1) “The Federal Reserve balance sheet starts growing.”

The Federal Reserve began expanding its balance sheet soon after my article was published. It does this in a process called “quantitative easing”, or QE, in which the Fed creates money “out of thin air” to buy debt instruments.

Its total assets on 9 January, 2013 were $2.93 trillion. In the latest financial statement issued on 19 June, total assets are $3.47 trillion.

So in 23 weeks, the Federal Reserve’s balance sheet has grown by $540 billion, which is a 41.7% annual rate of growth. The inflationary implications are staggering. This monetised debt can be compared to a huge pile of tinder just waiting for a lit match. That spark will likely come from rising interest rates.

2) “The yield on the 10-year T-note climbs above 2%.”

…..continue reading HERE