- Feb 12, 2007
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This is one of the better analyses I've read lately on our current economic woes, and where they are leading. Given the dismal monetary mess the Fed has gotten us into, the likely outcome is 70s style stagflation.
Recommended reading.
...What can the Fed do? They cant lower the federal funds rate because it's already as low as it can go. And this hasnt worked anyway.
This is what the big change in Fed policy was all about.
There was a huge internal fight at the Fed between the anti-deflationists and the anti-inflationists, and the anti-deflationists won. The Fed decided they'd fight deflation through quantitative easing (QE).
With QE -- another tool the Fed has to increase money supply -- the Fed buys Treasury debt (bills, notes, and bonds) from its primary dealers and prints money to pay for it. This puts money directly into the economy.
Its not as if this is something new. From last year through April of this year, the Fed bought $1.25 trillion of debt issued by Fannie Mae and Freddie Mac. They also bought about $700 million of Treasury debt. This put $2 trillion of new money into the economy. This apparently wasnt enough.
The second important thing they announced is that they'll replace their Fannie/Freddie paper with Treasury debt. This seems harmless at first because the Fed isn't increasing its total debt holdings -- yet.
They announced this with a seemingly innocuous statement: that they'd keep their current level of debt at about $2 trillion. In Fed-speak this means they're clearly worried about the sinking economy, and that they'll print as much fiat money as they think is necessary to increase the money supply to induce inflation.
In economic terms, buying Treasury debt is called monetizing debt. In plain English it means that the government prints money to pay for its debts. This policy has been the downfall of many governments who destroy their currency through hyperinflation.
As soon as unemployment starts to go up again, and I believe it will, the politicians will be all over the Fed to do something. That "something" will be massive QE. I'm quite sure that the Fed hasn't figured out how much QE they'll need, and that they're unsure of its impact on the economy.
I have a pretty good idea of where it will all end up. Since they're not dealing with the underlying problems, this papering over of the problems will lead to inflation and economic stagnation, a phenomenon we saw in the 1970s called stagflation."
The Road to Stagflation: Fed Thinks Money Printing Will Fight Deflation, Unemployment | Markets | Minyanville.com
Recommended reading.
...What can the Fed do? They cant lower the federal funds rate because it's already as low as it can go. And this hasnt worked anyway.
This is what the big change in Fed policy was all about.
There was a huge internal fight at the Fed between the anti-deflationists and the anti-inflationists, and the anti-deflationists won. The Fed decided they'd fight deflation through quantitative easing (QE).
With QE -- another tool the Fed has to increase money supply -- the Fed buys Treasury debt (bills, notes, and bonds) from its primary dealers and prints money to pay for it. This puts money directly into the economy.
Its not as if this is something new. From last year through April of this year, the Fed bought $1.25 trillion of debt issued by Fannie Mae and Freddie Mac. They also bought about $700 million of Treasury debt. This put $2 trillion of new money into the economy. This apparently wasnt enough.
The second important thing they announced is that they'll replace their Fannie/Freddie paper with Treasury debt. This seems harmless at first because the Fed isn't increasing its total debt holdings -- yet.
They announced this with a seemingly innocuous statement: that they'd keep their current level of debt at about $2 trillion. In Fed-speak this means they're clearly worried about the sinking economy, and that they'll print as much fiat money as they think is necessary to increase the money supply to induce inflation.
In economic terms, buying Treasury debt is called monetizing debt. In plain English it means that the government prints money to pay for its debts. This policy has been the downfall of many governments who destroy their currency through hyperinflation.
As soon as unemployment starts to go up again, and I believe it will, the politicians will be all over the Fed to do something. That "something" will be massive QE. I'm quite sure that the Fed hasn't figured out how much QE they'll need, and that they're unsure of its impact on the economy.
I have a pretty good idea of where it will all end up. Since they're not dealing with the underlying problems, this papering over of the problems will lead to inflation and economic stagnation, a phenomenon we saw in the 1970s called stagflation."
The Road to Stagflation: Fed Thinks Money Printing Will Fight Deflation, Unemployment | Markets | Minyanville.com