Inquiring minds are looking at tomorrow’s WSJ and seeing the PIMCO’s CEO Gross may have actually underestimated The Fed. In an article for tomorrow’s edition, The WSJ is reporting that that The Fed is buying back $600 Billion worth of treasury bonds.
But don’t be concerned…it is only being called a “Hail Mary” pass by Ben Bernanke.
But a year and a half later, he confronts an economy hobbled by high unemployment, a gridlocked political system and the threat of a Japan-like period of deflation, or a debilitating fall in consumer prices.
The Fed left open the possibility of doing more if growth and inflation don’t perk up in the months ahead. The $75 billion a month in new purchases of Treasury debt come on top of $35 billion a month the Fed is spending to replace mortgage bonds in its portfolio that are being retired.
This massive buy, with already huge deficits, creates problems of its own:
There are immense unknowns and many risks.
In essence, the Fed now will print money to buy as much as $900 billion in U.S. government bonds through June—an amount roughly equal to the government’s total projected borrowing needs over that period.
In normal times, a Fed spending spree on government bonds would be highly inflationary, because it would flood the economy with money and raise worries about too much government spending. The mere worry of too much inflation in financial markets could drive long-term interest rates higher and cause the Fed’s program to backfire.
Prices in commodities markets have marched higher since late August. Crude-oil futures prices, for instance, have risen 15% since then, to $85 per barrel.
Yes, that is one slight problem…everything costs more afterwards. Remember Gross said it would push prices up 20%.
Many analysts see the immense danger in doing this:
Michael Pence, a top Republican in the House of Representatives, said the Fed was taking an “incalculable risk.”
Thomas Hoenig, the president of the Federal Reserve Bank of Kansas City, who described the move before the meeting as a “bargain with the devil,” was the lone dissenter in a 10-1 vote of the Fed’s policy committee. He said the risks of additional government bond purchases outweighed the benefits.
Remember when The Fed said with a straight face that they would never monetize the debt? What’s one more lie when you are halfway to Hell via the Primrose Path.
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