Thursday, March 19, 2009

The Federal Reserve Opts for Inflation

The headline from the front page of the Financial Times tells it all - "Fed Purchase Plan Stuns Investors". Yes, the Fed has decided to pursue a policy of quantitative easing - printing money out of thin air.

The Fed has opted for the easy route out of the massive debt dilemna -inflating out of it and paying the debt back with a debased currency. This move should have come as a surprise to no one, except for the deflationist dummies who bought the snake oil that Wall Street and CNBC were selling.

The Fed announced that over the next 6 months they would purchase up to $300 billion of US Treasury Notes with maturities between 2 and 10 years. The Fed also announced that they would be purchasing $750 billion of mortgage securities.

This brings the total of mortgage securities to be purchased by the Fed to a staggering $1.45 trillion. Once all the purchases are made, the Fed's balance sheet will be approaching a once undreamed of $4 trillion! And keep in mind - it is almost assured that after the initial 6 months, the Fed will purchase even more Treasuries.

The reaction in the financial markets was swift and telling - the US Dollar plunged while gold soared. Bonds also soared as the Fed was placing a floor underneath the market. Stocks also rose as stock trading CNBC-zombies never look beyond the very short-term.

The long-term implications of the Fed's actions will be future inflation, a debased US Dollar, higher commodity prices and a lower standard of living for Americans.

I sure that the Fed's actions has the holders of massive positions in Treasuries, such as China and Japan, deliriously happy! These countries have not been able to sell their Treasuries for fear of causing a panic.

Now these countries have a ready buyer - the Federal Reserve. They will be able to sell at a good price and not cause a panic. These countries will be relieved as they finally can get rid of the albatross around their neck of being forced to hold US debt.

Longer-term, this means these countries will not be purchasing Treasuries in vast quantaties. This is bad for the long-term health of the US economy, but of course the CNBC-zombie stock traders never think about the long-term.

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