A new chapter in the financial crisis

[wimpy77]

every good investment should have gold.

 

[Paulie]

But these reserves are not inflationary (do not increase the money supply) until they are lent or invested into the economy.

Which basically leaves us between a rock and a hard place, because if they simply sit on the money forever and don't lend it, the economy stays stagnant for a significant period of time until prices correct and people put their newly acquired savings to work. But if they take that unprecedented monetary base and lend it out and invest it, we're looking at staggering inflation.

So it begs the question...the Federal Reserve is necessary, why?

I hope you Gold bugs give it up soon.

Now is the time to be buying quality stocks.....and NOW is the time to be buying some oil if you are into the commidity thing....but ditch your gold.

How do you acknowledge that inflation is going to be a real threat and then say ditch gold? That's foolish at best.

 

[gonegolfin]

Yes, it seems that a number of sources are worried about the current tripling of the money supply, and the coming inflation.

These sources need to understand the difference between the monetary base and the money supply. The money supply has not tripled. In fact, neither has the monetary base, but the base has had impressive growth. The money supply is actually up only modestly since extensive bank reserve creation has commenced (last September).

Brian

I presume, since they're NOT just printing up money, but instead borrowing it, that this inflation everyone is so fearful of is NOT going to happen.

No. It has not happened yet because the Fed does not directly control the money supply. The banks do. The Fed can print all the money it wants, but this does not increase the money supply.

Also, it is the Treasury that borrows. The Fed has announced plans to support the Treasury market (as I stated in the title post) by monetizing Treasury debt (printing more money). But the Treasury must auction debt to fund the deficits.

Brian

 

[gonegolfin]

The 30-year Treasury bond (long bond) tumbled yesterday at auction, reflecting investor concern about the US Dollar, Fed monetization of US Treasuries (Fed purchases of Treasury debt), the amount of debt the US Treasury must auction in the coming year, and longer term inflation expectations due to all of the above. Quite simply, investors on the longer end of the yield curve are demanding more yield. As a result, longer term treasuries at auction and sales in the secondary market are fetching less (yield on the 30-year closed today at 4.29%). It should be noted that the Fed thus far has monetized very few treasuries with maturities of 10+ years (total Fed purchases are at $92.215 billion thus far). Historically it prefers to keep the bulk of its portfolio in the 3->4 year maturity. But discounting pressure at Treasury auction may change that and meanwhile, the Fed is already holding plenty of long term mortgage-backed securities (MBSs) and purchasing more.

Treasuries Tumble as Bond Sale Draws Higher-Than-Forecast Yield - Bloomberg.com

Brian

The significant Fed monetization of government debt that I have been expecting and writing about for several years is now upon us. Today, the Federal Reserve announced that late next week a program of purchasing $300 billion of longer dated treasury debt will commence. Given that the Treasury will need to issue well north of $1 trillion (and maybe $2 trillion) in government debt over the next 12 -> 18 months, this is assuredly the opening salvo for the Fed. Foreign official institutions will not have the reserves to consume such supply and domestic savers will not fill the gap. Enter the Fed with a program to purchase massive amounts of longer term Treasury debt in the open market. The program will target the purchases of Treasury issues mostly with maturities between two and ten years.

And so there is no confusion here ... contrary to what many information sources would have you believe, the Fed does not lend directly to the Treasury/Government. The Fed has no authority to lend directly to the Treasury and thus cannot participate in Treasury auctions or purchase government debt directly from the Treasury (except in the case where maturing issues in the Fed portfolio need to be rolled over into new issues). When the Fed makes outright purchases of Treasury debt, it does so through its team of primary dealers usually via competitive auction.

If that is not enough, the Fed has increased its commitments to purchasing mortgage-backed securities backed by Fannie Mae and Freddie Mac (Agency MBSs). The Fed earlier announced a program to purchase $500 billion of these securities. That has now been upped $750 billion to a staggering $1.25 trillion. Additionally, purchases of Agency debt have been retargeted to $200 billion from $100 billion. The combination of the purchases of long term Treasury debt along with signification subsidzation of the mortgage securitization market will result in artifically low mortgage lending rates for a period of time and an artificial floor under housing prices.

Gold saw over a $60 reversal from its lows today.

I will write more about this in the coming weeks as it unfolds. Of particular interest will be how quickly and how much of this new reserve creation makes its way into both narrow and broad money supply.

Fed to Buy $300 Billion of Longer-Term Treasuries (Update4) - Bloomberg.com
Statement Regarding Purchases of Treasury Securities - Federal Reserve Bank of New York

Brian