The news story:
The Federal Reserve sharply stepped up its efforts to bolster the economy on Wednesday, announcing that it would pump an extra $1 trillion into the financial system by purchasing Treasury bonds and mortgage securities.
Having already reduced the key interest rate it controls nearly to zero, the central bank has increasingly turned to alternatives like buying securities as a way of getting more dollars into the economy, a tactic that amounts to creating vast new sums of money out of thin air. But the moves on Wednesday were its biggest yet, almost doubling all of the Fed’s measures in the last year.
The action makes the Fed a buyer of long-term government bonds rather than the short-term debt that it typically buys and sells to help control the money supply.
The idea was to encourage more economic activity by lowering interest rates, including those on home loans, and to help the financial system as it struggles under the crushing weight of bad loans and poor investments.
Investors responded with surprise and enthusiasm. The Dow Jones industrial average, which had been down about 50 points just before the announcement, jumped immediately and ended the day up almost 91 points at 7,486.58. Yields on long-term Treasury bonds dropped markedly, and analysts predicted that interest rates on fixed-rate mortgages would soon drop below 5 percent.
Get ready for a gigantic bubble which will either burst with a financial crisis which makes the current one look small, or the Fed tightening the screws later this year or early next and knocking us willy-nilly into a double-dip recession. In my long study of history, I don’t think I’ve ever come across a more short-sighted and bone-headed policy move. Imagine the idiocy which figures that if you steal money from the people you’ll be able to create wealth.
Steal? Yes, steal. You see, by waving their magic wand and creating a trillion dollars, the Fed has effectively devalued all of the money outstanding the moment before the Fed acted. This will help bankers and financial speculators – they’ll now be able to obtain devalued currency to pay back loans contracted with pre-devaluation money. It works like this – I borrow $10 from you today. Tomorrow, the Fed devalues the currency by 20%. I borrow this devalued money from the Fed at 0% interest and then pay you your $10 back with $1 interest the day after tomorrow – but you didn’t get $11; you actually got $8.80 because each dollar is worth 20 cents less than it did when you loaned it to me. Its real cool, unless you’re the guy holding the pre-devaluation notes…and guess who is buying up the pre-devaluation notes? Look in the mirror. And thank your Barry for the swell deal.
It’d be nice if, at least, this would work in the long run – but it won’t. Its going to spike inflation like no tomorrow (and we’re talking 10, 20 or 30% inflation, boys and girls) unless it gets cut off real fast, and that means the funds for moving the economy along will be gone…so, welcome to 25% unemployment. Of course, there’s always that chance we’ll get “stagflation”, as we did in the 70’s…won’t 20% inflation and 20% unemployment be a kick?
We’re being swindled – we’re balancing the banks’ books on the back of the middle class taxpayer. And some people wonder why I want us to return to the gold standard…
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