Now that those moves have failed to provide financial health, the Fed has doubled the size of its open-ended money printing and has announced a plan of information flexibility that virtually insures that they will never bump into limitations, until it's too late. Even though their new policies will create many long-term challenges for the economic climate, the biggest near-term challenge for the Fed will be how you can maintain the momentum going by upping the ante even higher at their next meeting.
The major news is the fact that the Fed is now doubling the amount of money it's printing. Together with its ongoing $40 billion per month of mortgage-backed securities (to stimulate housing), it will now buy $45 billion per month of Treasury debt. The latter program replaces Operation Twist, which had utilized proceeds in the sales of short-term treasuries to finance the purchase of longer yielding paper. The problem will be the Fed has already blown through its short-term inventory, so the new purchasing will be pure balance sheet expansion.
To cloak these shockingly accommodative moves in the garb of moderation, the Fed announced that future policy decisions would be place on automatic pilot by pegging liquidity withdrawal to two sets of financial information. By committing to tightening policy if either unemployment falls below 6.5% or if inflation goes greater than 2.5%, Bernanke is likely seeking to silence fears that the Fed will stay as well loose for too long. While these statistical benchmarks would be as well accommodative even when they had been rigidly enforced, the goalposts have been specifically designed to be completely movable, and hence essentially meaningless. Rare Coins, Silver Coins, Gold Coins, Learn More >> http://www.silverdollar.cc/
Bernanke said that in order to identify signs of correct economic health, the Fed would discount unemployment declines that outcome from diminishing labor participation rates. It's broadly known that a good portion of unemployment declines since 2009 have resulted in the many countless formerly employed Americans who have dropped out of the workforce. But like many other economists, Bernanke failed to identify where he thinks "real" employment is now following factoring out these workers. So how far down will the unemployment number have to drift before the Fed's triggering mechanism is tripped? No one knows, and that is exactly how the Fed desires it.
A similarly loose criterion exists for the Fed's other goalpost - inflation. Bernanke stated that he would look past present inflation statistics and look primarily at "core inflation expectations."
For as long as I can remember (and I can keep in mind for fairly some time) the Fed has stripped out "volatile" increases in food and power, preferring the "core" inflation readings. But in the overwhelming majority of instances, the headline numbers are considerably higher than the core. In other words, Bernanke simply prefers to look at lower numbers. In his press conference, he produced it clear that the Fed will steer clear of taking a look at price modifications in "globally traded commodities,"
These subjective and attenuated criteria give Fed officials far too much leeway to ignore the recommendations that they are putting into place. When the Fed won't react to what inflation is, but rather to what it expects it to be, what will occur if their expectations turn out to become wrong? Following all, their track record in forecasting the occasions of the last decade has been anything but stellar.
The Fed officials repeatedly assured us that there was no housing bubble, even after it burst. Then they assured us the issue was contained to subprime mortgages. Then they assured us that a slowdown in housing wouldn't influence the broader economic climate. I could go on, but my point is if the Fed is as spectacularly incorrect about inflation because it has been about almost everything else, will they have the ability to slam on the brakes in time to prevent inflation from running out of control? And if so, at what cost to the general economy?
The Fed is committing to more than a $1 trillion annual expansion in its balance sheet, an amount higher than the total size of its balance sheet as late as 2008. Most forecasters think that the Fed will have $4 trillion worth of assets on its books from the finish of 2013, and perhaps more than $5 trillion by the finish of 2014. If conditions arise that require the Fed to withdraw liquidity, the size of the sales that would be required will probably be huge. Who precisely does the Fed think will have pockets deep sufficient to take the other side of the trade?
As the biggest purchaser of treasuries, it is not possible for the Fed to sell with out probabilities of collapsing the market. Surely any other holders of treasuries would want to front-run the Fed, and what buyer would be foolish sufficient to get in front of the Fed freight train? The bottom line is the fact that it's impossible for the Fed to fight inflation, which is exactly why it'll never acknowledge the existence of any inflation to fight.
But maybe probably the most absurd statement in Bernanke's press conference was his contention that the Fed isn't engaged in debt monetization because it intends to sell the debt as soon as the economy improves. This really is like a thief claiming that he isn't stealing your car, because he intends to return it when he no longer needs it. To make the analogy more correct, there couldn't be any other vehicles on the road for him to steal.
Without the Fed's purchasing, it would be impossible for the Treasury to finances its debts at rates it can afford. That's precisely why the Fed has chosen to monetize the debt. Obviously, officially acknowledging that reality would make the Fed's job that a lot harder. Without the monetization safety valve, the government would have to make huge immediate cuts in all entitlements and national defense, plus big tax increases on the middle class.
As I wrote when the Fed first embarked on this ill-fated journey, it has no exit technique. The Fed adopted what amounts to "the roach motel" of monetary policy. When the Fed actually raised rates as a result of one of its movable goal posts being hit, the result could be a lot greater monetary crisis than the one we lived through in 2008. The bond bubble would burst, interest rates and unemployment would soar, housing prices would collapse, banks would fail, borrowers would default, budget deficits would swell, and there could be no way to finance another round of bailouts for anybody, including the Federal Government itself.
In order to create phony economic growth and to "pay" our country's debts in probably the most dishonest manner feasible, the Federal Reserve is 100% committed to the destruction of the dollar. Anybody with wealth in the U.S. dollar ought to be concerned that financial leadership is firmly in the hands of irresponsible bureaucrats who're committed to an ivory tower version of reality that bears no resemblance to the globe as it truly is. My recommendation is to buy gold and buy silver to protect your wealth from this disastrous economic money-printing scheme. Buy gold and silver today, tomorrow the prices will be massively higher. How High Will Silver Go? Learn More Kitco Silver >> http://silverdollar.cc