The Federal Reserve is starting to purchase long term U.S. treasuries to bring down borrowing costs. This is a rare move, the first since the 1960s when the Fed wanted to make adjustments in the yield curve.
The Federal Reserve is not alone in this policy. The governments of Japan and the U.K. are also purchasing government debt in an effort to get credit flowing again after cutting interest rates to near zero.
The Fed, however, is caught in a catch 22. On the one hand they are buying US treasuries to loosen credit, but on the other hand they must also issue $2 trillion in securities over the next 18 months. Selling bonds and notes has the effect of pulling money back to the Fed.
The 16 primary dealers who work closely with the Fed will be eligible to sell Treasuries to the Fed, both for themselves and for customers.
This strategy of buying US treasuries carries a high risk of inflation. Some people believe that the Fed is monetizing the debt which is the main culprit of inflation.
Do you believe that the Fed's actions will cause inflation?
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Reader Comments (Page 1 of 1)
3-27-2009 @ 8:36PM
william lindblad said...
Can the Fed's action cause inflation? Yes, but probably not. For sure, having a pseudo government agency purchase government debt and also be in charge of the disbursement of government currency is a very strange arrangement. However, I would put this particular move as very low on the inflation thermometer. The reason is simple in the fact that they have company from other large economies and so far, the major trading currencies are well within trading parameters.
Another area that I find more of concern is that of the Fed move to buy ABS, or asset backed securities. If only I were a cartoonist! In 2005 ABS stood for the initials of a black plastic pipe mainly used for waste and vent function. Today, it stands for an economic function that is just about the same thing. Both share a similarity - the word Sewer.
Right now the economy has the attention of all of our leaders, not that they realize what is going on, but they do know that the public is mighty unhappy. We do not send the brightest to Washington. I fear them more than inflation as it equates to getting on a bus and thereafter, finding that the driver is blind!
To stay with the gist of the blog - inflation is in the cards and probably massive. I prefer to look between fuel and food as the drivers nor do I think that the stock market is going to hold it's upward momentum for more than another couple months.
I really wish that I had a better outlook but I have to yet to see any significant changes that will alter my opinion.
3-29-2009 @ 1:07AM
Beltway Greg said...
The Obama administration is for better or worse fighting a war utilizing economic disinformation in much the same way that the Bush administration fought a psuedo war in Iraq. Basically, they keep the bullcrap coming until things get better. In the case of the Obama folks they didn't destroy the economy. Here's the truth.
a. Despite what they say in public a strong dollar isn't in America's best interest.
b. Inflation is the endgame. The learned and old man history are well aware what they're trying to do but no one wants to be honest about the end or the means.
c. Low energy prices are bad for America and the world. If energy prices stay depressed many countries will be destabilized. The world needs $70-80 dollar oil.
d. Birds gotta fly and fish gotta fry and people have to spend. With 70% of American GDP dependent on consumer spending a spike in the savings rate could kill any chance of economic recovery for the foreseeable future so get out and buy an IPhone beeooches.
e. China will finance our debt. True dat. Unless of course they want a billion or so peasants showing up in Beijing looking for a job. Who do you think is going to buy their products? Nigeria? Securitize it and they will come.
f. TARP I, II, III, or IV may fail and they know it. However, they can't simply nationalize banks in a wholesale manner without making an effort to save as many as they can without your tax dollars.
g. Interest rates are going up sooner rather than later. See inflation above. Better refinance soon.
h. Chrysler and GM are doomed.
3-30-2009 @ 1:16AM
Beltway Greg said...
To quote the Cutting Crew, Chrysler "Just died in your arms tonight," so much for that one.
A few more observations. To refer to Citi and BOA as zombies would be an insult to all Haitian zombies and the cast of Michael Jackson's thriller video. They're history. In retrospect maybe John Thain deserves a bonus because whoever can pull off what he did should become Sec. of the Treasury and sell the public and the world on whatever plan it possesses. Also, there's a market for the toxic debt and somebody
is a fixin' to become very wealthy when the toxic crap is priced and moved into financial purgatory. I'll wager that 10 of the top 20 banks are history. I'll also wager that two of them aren't Wells Fargo or JPM. It was reported that Jamie Dimon visited the White House the other evening and had a check for a cool $25 billion in his pocket.