|
 Larger Font |  Smaller Font |  Printer Friendly
Fed Running Out of Ammo
By David Paul Krugman
MidasLetter.com
Friday, March 20, 2009
The Fed's decision to purchase $300 billion of long-term treasury bonds is indicative of two things: 1) The U.S. government has lost all sense of value relative to its currency, and 2) The U.S. Federal Reserve is getting desperate and is running out of options.
Far from giving the economy any kind of boost, these tactics are essentially more of the same, which has already proven futile in terms of getting the economy moving again. Major financial institutions are not lending or borrowing much more than they were when the crisis began, and all the Fed is doing is undermining what little value is left in the U.S. Dollar.
Gold's reaction, shooting up $42 upon release of the news, underscores the fact that inflation is now an expectation, and the safe haven attraction of treasuries will now accrue to other asset classes such as gold, silver and oil.
Although oil's price has strengthened recently in reaction to the Fed news as well as OPEC's decision not to cut production, this rally in commodities may be short-lived, especially if the massive inflation of money supply fails to loosen the gears of the global lending apparatus.
A renewed downward contraction of economic output manifested in more lost jobs, more foreclosures, more industrial bankruptcies, and more closed financial institutions would have the effect of sending oil and other consumable commodities (metals, but not gold) on another downward fall.
The likelihood of this happening hinges entirely on the next six months.
It is likely that the Fed will continue to buy its own Treasurys as well as distressed assets, and will continue nationalization of major financial institutions. At some point, however, there will be an end to the number of institutions left to rescue, because the Fed will own pretty much everything. It is at that point the real Great Depression will begin.
What else is there the Fed can do?
The answer to that is absolutely nothing. The U.S. Federal Reserve is a privately held institution with nearly unlimited powers to print money and establish policy. But their ability to act effectively is contingent upon the rest of the world's conviction that the policy matters and the money has value. Increasingly, the paralysis seen in the industrial complex worldwide in terms of monetary velocity and attendant industrial output would seem to suggest that confidence in either value or relevance of policy has, for the time being, been destroyed.
As the institution widely perceived as being at fault for the policy environment and absence of regulation that engendered the over-capitalized and over-leveraged economy in the first place, it is highly unlikely the Fed will be in a position to lead the resurrection of confidence in the global monetary system.
It is more likely, that after the collapse of the United States currency and government, that it will take a coalition of representatives from a wide range across the G7, or more likely, the G20, to render sufficient assurance and integrity to set the wheels of the great global economic machine back in motion.
SOURCE: http://www.midasletter.com/news/09032004_Fed-running-out-of-ammo.php
**************************************************************
|
Treasurys
Sign up for the Midas Letter Free Edition and get a free sample of the "Midas Letter Premium Edition".
