The Fed Moves to Monetize

[zstyles]

The Federal Reserve shocked the financial markets yesterday. The Fed released the results of its just-ended Federal Open Market Committee meeting and the response was immediate — stock market indices went up — and the value of the dollar went down!

While everyone was taking sides on the AIG bonuses, something much more important was happening: The Fed announced it will pump a $1 trillion into the system by buying debt from our treasury. Since they've lowered interest rates as far as they can, this is really a last ditch effort; it's like they put our entire economy up on the roulette table and the wheel is spinning.

To put this in perspective, think of America like a sick patient with a nasty staph infection. The doctors first try Penicillin to cure the patient. When that doesn't work, they try something else. And when all else fails they hook an IV to the patient.

That last line of defense was just hung over "patient America" yesterday, but we were alltoo focused on AIG to notice.

Here's what this means: We're borrowing money from ourselves to pay for programs we can't pay for.

And that's why the price of gold shot up about 75 bucks in 18 hours. Investors aren't stupid. They know the risks this poses, especially to inflation and our dollar.

So let me play doctor here and give you the diagnosis without talking to you like a 4-year-old: The antibiotic we've just been given has never once worked in the history of the civilized world.

Can this time be different? Absolutely, but only if we've got the guts to make some life-changing decisions; decisions that will force us to shoulder some unthinkable pain in the short term, but decisions that may just save this patient's life.

[cannon_fodder]

Yep zstyles.  When you "self fund" debt you get in real trouble.  If managed properly it is no big deal, but it is entirely a trust issue.   Investors have to trust that the government can get its spending in control, will not over inject money into the system, and that the American economy can coupe with this phantom debt.

I'm not an expert on monetary policy, but I know "printing more money" is generally not a good thing.

Some scuttlebutt I read was that this move was in part an attempt to break the Dollar as a world currency.  Since the Dollar is the world reserve it is slow to move and hard to manipulate.  Which makes our exports at a disadvantage and imports cheap, as well as making it hard to manipulate debt servicing to foreign governments.  This weight is a self serving end as far as reserves are concerned - because it is the most common reserve it doesn't move too much and is therefor best suited to be the most common reserve. 

But who knows . . . the internet has been wrong before.

[nathanm]

Um, hate to burst your bubble, but they're doing it in the UK and the Eurozone, also.

Inflation concerns over this are overrated. We've destroyed $20 trillion in wealth in the last few months. The Fed's balance sheet will have compensated by somewhere between $10 and $15 trillion once they buy the treasuries. We'll still be in (monetary) deflation territory without another $5 trillion in money supply coming from somewhere.

We're not in Zimbabwe territory because there are people other than the fed who are perfectly willing to buy the debt. Don't let the gold bugs obfuscate the issue.

[TheArtist]

Um, hate to burst your bubble, but they're doing it in the UK and the Eurozone, also.

Inflation concerns over this are overrated. We've destroyed $20 trillion in wealth in the last few months. The Fed's balance sheet will have compensated by somewhere between $10 and $15 trillion once they buy the treasuries. We'll still be in (monetary) deflation territory without another $5 trillion in money supply coming from somewhere.

We're not in Zimbabwe territory because there are people other than the fed who are perfectly willing to buy the debt. Don't let the gold bugs obfuscate the issue.

Egads those are big numbers.