This Fed and its Mission - 3 / 18 / 2009

The latest interview of Ben Bernanke which I highlighted in the 3/16 posting said it all, but even the most aggressive pundit could not have predicted yesterday's Fed announcement. Bernanke is really on a tear. He said Sunday that the biggest mistake made by the Fed which led to the Great Depression of the 30's was not forcing liquidity into the markets.

The Fed does this essentially by going into the regional Fed banks' computers and increasing the balances on the regional banks' balance sheets. It then auctions off bonds to any one that will take them at whatever the market rate for the bonds will be. These Bonds are called Treasury Bills and have varied maturities.

Then ultimately the Fed must repay these Bills, and it usually does so by issuing additional bonds in the future, it hopes when the US economy is strong and the faith in the US Economy is sufficient, to issue new Treasury Bonds at better rates. That's like a giant Fed refinancing.

There are no guarantees that this will happen, and no guarantees there will be buyers for them. But so far, with rare exception in my life time, the Buyers have been there and the Fed has been able to refinance itself.

But doesn't this seem to be a bit disturbing? Here we have a bank set up by a vote in Congress attended by very few congressional members in 1913, that essentially has the ability to print money to pay its obligations. And its obligations are covered by you and me in our productivity and in the proceeds of our taxes. Budget short falls at the Federal level are paid for by the US government raising money, primarily through the Fed. And each time this has occurred since we left the Gold Standard, the value of our Dollar becomes less and less.

Some call that inflation. I leaned that way too, until yesterday when in the face of a horrific financial environment created in large part by Fed judgment errors over the course of the Greenspan Fed years, the Fed's only solution is to now print and sell, at any market rate, 1.5 trillion dollars to anyone who will buy them. This, I think boarders on outrageous.

This Fed has now told the entire world that it is deflating the value of the US dollar in order to have the ability to repay its obligations and continue to bail out failed financial institutions. The result of this massive deflationary move will be the devaluing of any and all currencies whose economies rely heavily on the US consumer and the US markets. Which means virtually every world currency. If I were very very liquid I would begin buying gold and Swiss francs immediately.

This level of forced liquidity may feel good in the short run, but if the US economy doesn't return to its former strength and standing in the next 18 months, we as Americans will see near 15% annual inflation rates.

We may not have a choice in the process to recovery, the Fed may not have a choice in its methods for saving the US and the world from a multi year depression. But since most of us are not Russian oil oligarchs, Technology billionaires, Failed US bank CEO's (a bit tongue and cheek), or members of royal families, this Fed move, and it won't be the last, has sealed our collective fates. The US economy must turn around in 18 months or the value of the US Dollar will begin an inevitable run toward $0.50.

Build Value Every Day, and keep in mind the Fed may take half of it.

Brad van Siclen