Wednesday, December 12, 2012

Fed confirms $1 Trillion new stimulus per year to infinity

As expected, The US Federal reserve has decided continue quantitative easing past this month when the $45 Billion operation twist was set to end. This had been "sterilized", meaning they were using maturing treasuries to buy new treasuries. After December 31st, it will be unsterilized (ie new printing). They will also continue to buy $40 Billion per month of toxic mortgage assets to remove them from bank balance sheets bringing the total to $85 Billion per month or a little over $1 Trillion per year.

From CNBC:

The Federal Reserve met market expectations Wednesday with another round of easing, this time with a pledge to keep interest rates low until unemployment falls below 6.5 percent and inflation tops 2.5 percent.

Economists had been expecting the Federal Reserve to accelerate its debt buying program, known as quantitative easing, to the tune of another $45 billion a month, and the central bank came through.
Coupled with its move to buy $40 billion of mortgage-backed securities a month, that would bring the Fed balance sheet expansion to another trillion dollars or so in 2013 and $4 trillion overall.
The move essentially keeps the Fed in the easing business indefinitely, as the jobless rate has been stubbornly high for the past four years and shows little inclination lower except for statistical gyrations caused by people leaving the workforce.

So, no surprises today but we are fortunate enough to hear from Jim Rickards, the author of Currency Wars, who was on Capital Account with Lauren Lyster today.

If you don't have the 19 minutes to watch, here's the cliff notes:

  • We’ve been fighting deflation and a depression since 2007.
  • Money velocity is very low.
  • Higher inflation makes real interest rates negative (even more than now).
  • Create inflation by cheapening the dollar (making the dollar worth less).
  • A collapse in the dollar can happen very quickly as the Fed raises its balance sheet from $3 Trillion to $5 Trillion.
  • “Inflation” is whatever the Fed says it is. It does not have to be CPI.

So the Fed is explicitly working to cause inflation through a continues devaluation of the dollar. He will not stop until the dollar is pushed low enough to cause inflation. So even if you have not bought gold because you still have not seen enough inflation to motivate you, know that it is coming! If you knew absolutely nothing else but what you learned in this post, it should be enough reason to own at least some gold and silver to hedge the inflation and devaluation of the dollar that will be coming.

The interview is about 19 minutes long and very worthwhile.

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