What in the world is going on over at the Federal Reserve? Has it gotten to the point where the Federal Reserve is completely and totally out of control? There is increasing speculation in the financial community that the Federal Reserve is on the verge of unleashing another round of quantitative easing. In fact, at their September meeting, Federal Reserve officials hinted very strongly that quantitative easing is very much on their minds when they stated that the Federal Open Market Committee "is prepared to provide additional accommodation if needed to support the economic recovery and to return inflation, over time, to levels consistent with its mandate." You might want to reread that quote a couple of times just to let it sink in. Do you see what the Fed is saying there? The Fed is actually saying that it has a mandate to maintain a certain level of inflation. Not that this is a secret to anyone that has seriously studied the Federal Reserve. Since 1913, inflation has constantly gone up, U.S. government debt has increased exponentially and the U.S. dollar has lost over 96 percent of its value. But for Federal Reserve officials to openly state that a certain amount of inflation is part of their mandate is absolutely stunning.
Even though the U.S. economy is still in pretty decent shape at this point (for the moment at least), the Federal Reserve still seems obsessed with trying to stimulate it.
In the past, the Federal Reserve would just cut interest rates whenever the economy needed a bit of a boost, but at this point the Fed has cut rates to nearly zero. There just isn't any more room to cut rates.
So what else can the Federal Reserve do?
Well, it can create money out of thin air and use it to buy U.S. Treasuries, mortgage-backed securities and other assets. This is known as quantitative easing, and many analysts fear that it is quickly becoming more than just an emergency measure.
Back in March 2009, the Federal Reserve announced that it would purchase $1.7 trillion worth of U.S. Treasuries and mortgage-backed securities over the next 6 to 9 months. That was the first round of quantitative easing and Fed officials believe that it helped the U.S. economy avoid an even worse downturn.
But now Federal Reserve officials are talking about making quantitative easing a regular thing. An article in the Wall Street Journal recently described the current thinking inside the Fed....
Rather than announce massive bond purchases with a finite end, as they did in 2009 to shock the U.S. financial system back to life, Fed officials are weighing a more open-ended, smaller-scale program that they could adjust as the recovery unfolds.
Quantitative easing that is open-ended?
What kind of insanity is this?
Is quantitative easing going to become a permanent part of our financial system?
And what does "smaller-scale" actually mean?
Well, according to James Bullard, the president of the St. Louis Federal Reserve Bank, "small-scale" is actually pretty darn large. According to the Wall Street Journal, a "small-scale" quantitative easing program would be somewhere in the neighborhood of $100 billion a month....
Under a small-scale approach, Mr. Bullard says, the Fed might announce some still-undecided target for bond buying—say $100 billion or less per month. It would then make a judgment at each meeting whether continued action was needed.
If the Fed injected $100 billion a month into the economy through quantitative easing, that would mean that by the end of the year over 1 trillion dollars would have been created.
That does not sound like "small-scale" to me.
In fact, if the Federal Reserve purchased $1 trillion in U.S. Treasuries next year that would be an amount nearly equal to the total amount of new debt that the U.S. government plans to issue during the year.
Can anyone say Ponzi scheme?
When we get to the point where the Federal Reserve is "buying" a large percentage of new U.S. debt with money that is created out of thin air there is simply no denying the fact that the Fed is running a massive Ponzi scheme.
But the truth is that the U.S. government is in so much debt and the U.S. economy is in so much trouble that something must be done. It is really tempting to "inflate away" the debt and to pump up GDP figures with a flood of paper money, and Helicopter Ben Bernanke has certainly shown that he is not shy about pulling the trigger.
Of course more debt, more paper money and more inflation will only make our long-term economic problems even worse.
But right now Federal Reserve officials appear to be absolutely obsessed with the short-term.
Full article HERE