Wikinvest Wire

What's another $1.15 trillion?

Wednesday, March 18, 2009

The Federal Reserve announced today that they will join the central banks of England and Switzerland, printing money out of thin air to buy long-term government debt so as to keep interest rates low and boost lending in their ongoing attempt to revive an economy that is faltering badly due to an orgy of credit and debt a few years ago.

Apparently the gold market and currency markets have heard the news (the chart to the right will be updated as needed over the next hour or so)

Update #1 - from $925 to $932 complete @ 12 PM PST
Update #2 - from $932 to $947 complete @ 1 PM PST

The printing presses will be working 'round the clock to fund purchases of up to $300 billion in long-term Treasuries over the next six months which, in combination with an increase in purchases of mortgage backed securities and agency debt also announced today (an additional $850 billion total), should see the Fed's balance sheet swell to once unthinkable levels.

Lest anyone think that any of this is getting a bit out of control, the central bank also provided assuring words that they will keep an eye on the "size and composition" of their balance sheet in light of economic developments.

In what appeared to be just an afterthought, relegated to the third paragraph after occupying the top spot for years, the Fed also announced that short-term interest rates will be left at the freakishly low level of between zero and 0.25 percent and that they won't be going up anytime soon.

The policy statements from the last two meetings are shown below.
IMAGE And if this doesn't work, we might just see the Fed's balance sheet hit that $10 trillion level that someone mentioned the other day.




Anonymous said...

Govt is the only entity that turns useful commodity like paper, worthless.

-Von Mises

I am glad that now everything is electronic. Now at least paper holds up its usefulness.

Anonymous said...

I used to joke about $20 loaves of bread. The way it's going, $20 may soon not be enough.

Roach said...

Any "growth" we have in the months ahead will have to be discounted since much of it will simply be nominal increases in prices to reflect the increasingly profligate paper coming out of the Fed.

Hey, we had a nice run for 37 years of fiat money. I mean, all those granite countertops should be useful for armoring up our homes from bands of zombies, scavengers, and the like.

We're so fucked.

Anonymous said...

Isn't this what we call monetizing the debt?

Anonymous said...

Yes, it is monetization of debt. But the attempt is to bring down the interest rate and probably not to provide free check for spending. Fed is kind of providing price support for these securities. Of course, at higher level than what market is willing to pay for. Possibly, it is an attempt to increase inflation expectations and an attempt to increase the velocity of money. Personally, I doubt that this is precursor to coming hyperinflation.

John S said...

Has any cash-free society experienced hyperinflation? I imagine debit cards would be okay, but credit cards companies won't extend you 30 days credit if money is depreciating at, say, 25 percent a month. And would a store even take a debit card? Do they get their payment from your bank immediately? Historically, hyperinflation leads to a cash-only economy. Has the Fed taken measures to be able to print billions of million dollar bills?

John S said...

On a related note: I noticed that the national debt clock ticked past $11 trillion within the last day or so. Was this before or after the Fed action? I'm guessing that debt doesn't include the other $10 trillion in bailouts and assorted guarantees.

Martin, the Netherlands said...

I think a cash-only economy is only an intermediary stage in a hyper-inflation. When things get really out of hand, even cash will lose its function as "intermediary" in enabling transactions involving different types of goods and services. The next step is barter. This is what happened in Germany in 1923. Alternatively, some sort of commodity can be used as a substitute for cash. I understand that cigarettes were used in this way in Germany in 1945. (Incidentally, this also explains why all central bankers of German origin, including those now with the ECB, aren't too keen on inflation. Some of them may remember stories of how their great-grandfathers had to sell their daughter's bodies...)

Michael J. Bernard said...

The nightmare of Weimar 2 is coming, probably faster than we can imagine. G20 meeting will be a determining factor...


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