Federal Reserve - We'll Buy Everything

The Federal Reserve is coughing up yet another $1 trillion dollars to buy ....

As expected, the Fed kept its benchmark interest rate at virtually zero. But in a surprise, it dramatically increased the amount of money it will create out of thin air to thaw out the still-frozen credit markets that have cramped lending to consumers and businesses alike.

Indeed, the immediate effect on the bond markets was striking, with prices rising and yields dropping sharply on the news. The yield on the 30-year Treasury bond, about 3.75 percent before the announcement, fell quickly to 3.4 percent and remained volatile.

The action also gave a boost to stocks. The Dow Jones industrial average was down about 50 points before the 2:15 p.m. announcement, but within a half-hour it was up 80 points for the day.

The Fed said it would purchase an additional $750 billion worth of government-guaranteed mortgage-backed securities, on top of the $500 billion that it is currently in the process of buying. In addition, the Fed said it would buy up to $300 billion worth of longer-term Treasury securities over the next six months. That would tend to push down longer-term interest rates on loans of all types.

From the Fed press release:

increase the size of the Federal Reserve’s balance sheet further by purchasing up to an additional $750 billion of agency mortgage-backed securities, bringing its total purchases of these securities to up to $1.25 trillion this year, and to increase its purchases of agency debt this year by up to $100 billion to a total of up to $200 billion. Moreover, to help improve conditions in private credit markets, the Committee decided to purchase up to $300 billion of longer-term Treasury securities over the next six months. The Federal Reserve has launched the Term Asset-Backed Securities Loan Facility to facilitate the extension of credit to households and small businesses and anticipates that the range of eligible collateral for this facility is likely to be expanded to include other financial assets. The Committee will continue to carefully monitor the size and composition of the Federal Reserve's balance sheet in light of evolving financial and economic developments.

Printing money.

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To blow my own horn

It was only yesterday that I said the Fed would do exactly this.

They are going to push down long-term interest rates, but they are going to kill the dollar in the process.

Fortunately I listened to my own advice and went long foreign sovereign bonds and commodities yesterday afternoon.

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you did indeed

and while everyone is touting Ben Bernanke and his incredible wisdom of avoiding the monetary mistakes of the Great Depression, scant attention is being paid to the other side of this story, which is risk of default and hyper-inflation.

That's why in mark-to-market on enabling fictional evaluations....I put it in the terms I did, at least it would have kept the fictional money problem in the private sector instead of the U.S. taxpayers pocket.

I love your title of the "race to the bottom on currency evaluations". Just as a "big picture" evaluation doesn't it seem that globalization generally has created a series of races to the bottom? i.e. wages, labor standards, reduce social safety nets, reduce middle class, reduce regulation for secured investments, reduce public trust....

Makes me think of the concept of equilibrium. One has two ponds of different water levels, volume and each pond has a boat. Let's say there was a land bridge between the two pond. Let's say globalization is the thing that blows up that land bridge. The two ponds along with the two boats will flow to each other until they equalize....but overall the water level will not exceed the highest original pond.

i.e. globalization will not raise all boats.

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Not, to blow my own horn

But I believe I beat you to that very subject yesterday. :o) HA!

However, we can all look backwards and point fingers ... yadda, yadda, yadda .... but where are we going?
My suspicion is we are nearing a ginormous currency devaluation.

It has always been about class warfare.

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A worldwide currency race to the bottom

Or to put it another way, Beggar Thy Neighbor Part Deux.

Remember that the dollar was devalued by FDR in 1934 by 60%. The dollar was devalued under Dubya by 40%. Now comes the real devaluation.

It's going to be very hard in the coming years. We are going to see high unemployment AND high prices too. I said it years ago that our fate was the same as Argentina's, and we keep getting closer and closer to it.
When they come for your retirement savings it will be too late. All those 401k's and traditional IRA's that the government has wanted you to get into are going to be sheeple pens.

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Yes, but devalued against what?

In 1934 FDR confiscated gold, and then devalued the FRN against it. Today all currencies are fiat and we are in a competitive devaluation spiral by all central banks. Essentially a zero sum game.

So what do they devalue the FRN against?

It has always been about class warfare.

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Real things

Gold, silver, oil, food, etc.
The laws of supply and demand don't stop just because other nations are devaluing their currencies as well. You double the amount of dollars without increasing the amount of goods, then the price of those goods are going to double no matter what happens to other currencies.

This step by the Fed is a statement that other nations are unwilling or unable to buy our debt as fast as we are issuing it.
Simple as that.

The next step will be when another nation refuses to sell us goods in exchange for dollars. This will probably happen with oil before anything else. I can't pretend to know when it will happen, but it will.

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I wonder if China is thinking it might be

a good time to liquidate some of its treasury holdings before the market get flooded.

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G...you raise the point of

G...you raise the point of doubling quantity of dollars with the same number of goods. How would this impact the surplus supply business, like Overstock, or even a thrift store? In many ways we have so much sheer crap here, much imported. China's excess capacity and global excess productive efficiencies with new automation and the internet seem like a huge problem. Hate to sound like a Luddite. We have been consuming chatchkies at a flea market. Just seems like there are just too many people all needing the basic essentials and now more and more people are not necessary for production.

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