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March 19, 2009

Monetizing the Debt

Good article about yesterday's (or was it Tuesday's?) Fed buy-up of long term Treasuries, essentially swapping debt for newly-printed cash.

One of the biggest monetary gambles in history.

I don't immediately reject moves like this, because, if there really is a threat of deflation, some inflation is needed to check it.

But it is dangerous.

What is Fed Chairman Ben Bernanke really trying to do? He wants to unfreeze the “credit crunch” that is making it too expensive or even impossible for U.S. consumers and businesses to borrow money, which was the trigger for the current recession. The Fed directly controls only the shortest-term interest rates. But consumer purchases (including mortgages) and business investments are sensitive to longer-term interest rates. QE is the Fed’s way of trying to reduce real interest rates in the 2 to 10-year range of the spectrum.

This is also the biggest experiment in monetary policy in history. Milton Friedman is known for having explained the genesis of the Great Depression in monetary terms. Bernanke, a close student of the early Depression, is determined to prevent the wicked asset deflation of 1930-32 that ruined so many lives. At what cost? Well, the Fed’s balance sheet just grew by $1.15 trillion: it’s now 50% bigger than it was a day ago. That’s a scary amount of inflation.

Oil Hits 2009 High of $52/bbl: As the dollar is cheapened further.

And bear in mind: Oil prices will continue going up due first to inflation and then (hopefully) to increasing demand, assuming we recover, and our TPOTUS and his shit-for-brains Congress has refused to increase domestic drilling by a single drop.



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posted by Ace at 05:49 PM

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