Last night we went to bed reading rumours of Vladimir Putin's plan for a new world reserve currency to replace the U.S. dollar. This morning, we wake up to the news that the Federal Reserve will buy $300 billion in U.S. Treasury bonds and another $750 billion in mortgage-backed securities. Gold was up six percent.
What we have now-with crystal clear clarity-is asset inflation. Bonds and shares will benefit first, if benefit is the right word. If the up-tick rule is reinstated and mark-to-market accounting is suspended, you could see a pretty impressive rally in stocks over the coming weeks and months.
But you'll also see that inflation spread beyond share markets to tangible assets. Do you think this news comforted the Chinese? Will they be glad the Fed is buying long-term bonds? Or will they be selling?
Locally, shares may follow Wall Street and head up on the Fed news. But the real winner already is the Australian dollar. It was up three percent to sixty seven cents against the greenback.
And why wouldn't it be? The Fed is now "monetising" American debt in an effort to bring mortgage rates down and put a floor under Treasury prices. By "monetising" we mean it is trading freshly printed cash for Treasury bonds owned by other investors.
The Fed hopes that cash will shoot out into the credit markets as new loans and un-freeze things. Maybe it will. Maybe it won't. But it's pretty obvious you can't pump up the money supply by a few hundred billion dollars and not expect the general price level to rise.
There are two parts to this story really. The first is the fate of the U.S. dollar and what will happen in the Treasury market. The second is the U.S. housing market. Let's deal with the second first.
The real goal of the Fed policy change is to bring mortgage rates lower and engineer a refinancing boom. How do we know? The Fed said so.
"To provide greater support to mortgage lending and housing markets," the FOMC statement read, "the Committee decided today to increase the size of the Federal Reserve's balance sheet further by purchasing up to an additional $750 billion of agency mortgage-backed securities, bringing its total purchases of these securities to up to $1.25 trillion this year, and to increase its purchases of agency debt this year by up to $100 billion to a total of up to $200 billion."
It's hard to see how re-financing activity leads to a clearing of the huge and growing inventory of new and existing homes. But maybe the Fed thinks lower mortgage rates will kick off new home buying-or at least stabilise the fall in house prices nationwide.
If it did that-a nearly inconceivable IF-it might prevent a lot of those Option ARMs we wrote about yesterday from re-casting into negative equity. It also depends on which mortgage-backed bonds the Fed is buying. Is it buying newer vintage stuff from Fannie and Freddie? Or is it dipping its toe into the toxic pools, hoping to establish a price for this stuff that will give banks and private capital some price clarity? We'll check into that.
In the mean time, the Fed added that, "to help improve conditions in private credit markets, the Committee decided to purchase up to $300 billion of longer-term Treasury securities over the next six months."
"I have a strong feeling," writes our colleague in the States Dan Amoss, "that today's decision has sealed the next big up move in gold, oil, and other valuable tangibles (by big move, I mean multiples of current prices over the next few years). We might have seen the end of deflation scare, or we are at least much closer to the end."
"With the Fed now explicitly supporting the Treasury note and Treasury bond market, how else will the 'bond vigilantes' express their displeasure with the inflationary policies emanating from Fed/Treasury/Congress?
"Who has the guts to short the Treasury market now? I don't think Bernanke is bluffing about monetizing the deficit this time, as bluffed in December.
"So the Chinese and other creditors will probably just accelerate their moves into the small market for tangibles. They can think one step ahead and see the looming dollar devaluation. Maybe they'll hit the Fed's bid in the Treasury markets and plow the proceeds into something of lasting value. They can dump a big chunk of their T-bond portfolio without setting off a violent, internationally destabilizing move up in T-bond rates. Why not?
"Longer term, one wonders how big institutional bond investors will react, knowing that they are investing in a much more rigged market (although since they're all Keynesians anyway -- including Bill Gross -- they like operating in rigged markets).
"Econ 101 tells us that government-imposed price floors (in this case, for Treasuries) lead to persistent gluts/surpluses...think of farm price supports during the Depression and dumped milk. So today's action will unfortunately only encourage the crooks in Congress to float even more Treasury bills for their pork projects.
"We're just that much closer to a Banana republic after today. The only relief valve for today's decision that comes to mind is accelerated decline in the dollar's value against anything tangible.
On a completely un-related note, your editor visited the doctor earlier this week and received some unorthodox advice. "Are you sleeping well," the doctor asked?
"Not really."
"Stop drinking coffee. It wakes you up at night. And if you're reading in bed-which you shouldn't do-put the book down as soon as you get sleepy. Don't finish the chapter. Books are not like television. Television is terrible anyway. But with books, you can start reading at the same spot. You should do that."
"Okay...but about the coffee...how else can I get the same caffeine kick I get from coffee? Should I drink apple juice or something?"
"No. You should laugh."
"Haha. Very funny."
"No really. You should laugh. He he he. Laughter is an excellent stimulant. You can take classes in the parks. People laugh. It's healthy. Laugh. Ha ha ha. Ha ha ha ha ha. See?"
"He he he...uh..ha ha...uh...are you kidding?"
"Ha ha ha! No. Goodbye Mr. Denning! Ha ha ha," he said as he handed us the bill.
Dan Denning
for The Daily Reckoning Australia
P.S. to get The Daily Reckoning direct to your inbox sign up to our free e-mail newsletter or if you prefer to use RSS, subscribe to the Daily Reckoning RSS feed.
Related Articles:
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- Two More Reasons to Sell Treasury Bonds
- Federal Reserve Has Destroyed the Economy
- The Chinese and the Fed Both Buying U.S. Treasury Bonds
About the Author
Dan Denning is the author of 2005's best-selling The Bull Hunter (John Wiley & Sons). He began his financial publishing career in 1997 and has covered financial markets form Baltimore, Paris, London and, beginning in 2005 Melbourne. He’s the editor of The Daily Reckoning Australia and the Publisher of Port Phillip Publishing.
Comment by GaryB on 20 March 2009:
Surely the Chinese wouldn't be happy with this latest bit of grubby self-serving manipulation of the US Treasury bond market, particularly given that it comes hot on the heels of the friendly warning from the Chinese Premier last week.
Comment by Unpopular Truth on 20 March 2009:
Perhaps China should introduce a debt indexation in line with currency volume increases?
"You devalue your currency by x%, then we increase debt by x% across the board on all outstanding amounts".
Comment by john on 20 March 2009:
Well JW's have been telling us for a long time that God's kingdom is the only solution to mankinds problems. Could they be right? This looks like the big one.
John
Comment by Cheila on 21 March 2009:
Obama is a narcissistic DISASTER. America is only starting to see what we dealt w/ here in Chicago...he gets elected, and then does nothing but use the taxpayers' dollar as a travel voucher. He spent more time in Kenya and Somalia first half-term as 'our' Senator, and then the second half running for President. I'd love to know how many of the first 60 days he's actually spent in DC, dealing with the real issues we face. Someone needs to tell him the campaign is over: it's time to GOVERN. But Barry NEEDS a cheering crowd EVERYDAY. See: Castro, Chavez, and Hitler. Today t Publishers are giving him an 'award' today at the White House, and NO media are allowed. WHAT?? See: Castro, Chavez, Hitler. (source: LA Times)
http://latimesblogs.latimes.com/washington/2009/03/obama-newspaper.html
For the record, Congressman Chris Dodd received the most $$ from AIG, then BARACK OBAMA. Pretty amazing, considering he only served ONE TERM as a Senator. Cocktail parties EVERY week serving $100/lb beef, half-million dollar book deals signed THIS week, a half-million dollar 'seperation' bonus for Timmy Geithner??? All while he still hasn't paid the City of Chicago the $1.7 million dollar tab for his victory party: four months later, taxpayers are still carrying Barry's note(source: Chicago Tribune). Folks better wise-up and wake-up to what is happening beneath their noses.
Comment by Peter on 21 March 2009:
OK the US of A is going down...its gonna be ugly ladies!
The US government lit the fuse to the $683 trillion dollar derivative's debt bomb on Wednesday March 18, 2009 with the announcement the Fed would purchase $300 billion dollars worth of US Treasury used toilet paper and an additional $750 billion dollars worth of mortgage backed used toilet paper. In total the commitment to counterfeit over a trillion dollars leaves only $682 trillion dollars worth of derivatives to sort out.
Economics is all about price discovery. No one knows what the real value is of the $683 trillion dollars in derivatives. No one knows who owns what. No one knows who owes what. If left to its own devices, the market would lower prices until all assets had a value to someone. The government in its infinite wisdom has just short-circuited this discovery mechanism.
This is the end of the dollar. Everyone with any sense on earth will be unloading both their treasuries and mortgage-backed crap on the Fed. The Fed has just pissed $1 trillion of counterfeit money into a $683 trillion dollar cesspit. It can't possibly fix the problem. When the world realizes the impact of the Fed monetizing all debt, there will be a total default. And then what happens?
The Mother of All Depressions
Goodnight sweethearts!
Pingback by How prepared is the U.S for a sneak attack on the dollar? - Politics and Other Controversies - City-Data Forum on 5 April 2009:
[...] matter. Dire straits come to the US shores very soon." So, who's buying US Treasury Bonds? Federal Reserve to Buy $300 Billion In U.S. Treasury Bonds [+] Rate this post [...]
Comment by Bruce Barron on 24 June 2011:
.James Madison Quote with Comments - Famous Quotes ...
James Madison quote: History records that the ... James Madison Videos; This James Madison quote is found in these quote Categories: Banking Quotes
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James Madison Quote
"History records that the money changers have used
every form of abuse, intrigue, deceit, and violent means possible
to maintain their control over governments
by controlling the money and its issuance."
Some of our founding fathers understood that a central bank was a one way ticket to tyranny and despotism. Alas, Alexander Hamilton was NOT one of them. That’s why we had a US Bank until a frontier “Hick” and common-sense thinker by the name of Andrew Jackson came along and ended it. We did without a centalized banking authority until progressive Fuhrer Woodrow Wilson came along and created a banking “cartel” that we now call the Federal Reserve. Where’s Andrew Jackson when we REALLY need him?
John Adams:
"All the perplexities, confusion and distress in America arise, not from defects of the Constitution or Confederation; not from any want of honor or virtue, as much as downright ignorance of the nature of coin, credit and circulation."
Thomas Jefferson:
"I believe that banking institutions are more dangerous to our liberties than standing armies. If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks and corporations that will grow up around [the banks] will deprive the people of all property until their children wake-up homeless on the continent their fathers conquered. The issuing power should be taken from the banks and restored to the people, to whom it properly belongs."
In 1916, three years after its inception, President Woodrow Wilson denounced the Federal Reserve System:
"I am a most unhappy man. I have unwittingly ruined my country. A great industrial nation is controlled by its system of credit. Our system of credit is concentrated. The growth of the nation, therefore, and all our activities are in the hands of a few men. We have come to be one of the worst ruled, one of the most completely controlled and dominated Governments in the civilized world, no longer a Government by free opinion, no longer a Government by conviction and the vote of the majority, but a Government by the opinion and duress of a small group of dominant men."
The Federal Reserve-A Corrupt Institution
"Mr. Chairman, we have in this Country one of the most corrupt institutions the world has ever known. I refer to the Federal Reserve Board and the Federal Reserve Banks, hereinafter called the Fed. The Fed has cheated the Government of these United States and the people of the United States out of enough money to pay the Nation's debt. The depredations and iniquities of the Fed has cost enough money to pay the National debt several times over.
"This evil institution has impoverished and ruined the people of these United States, has bankrupted itself, and has practically bankrupted our Government. It has done this through the defects of the law under which it operates, through the maladministration of that law by the Fed and through the corrupt practices of the moneyed vultures who control it.
"Some people who think that the Federal Reserve Banks United States Government institutions. They are private monopolies which prey upon the people of these United States for the benefit of themselves and their foreign customers; foreign and domestic speculators and swindlers; and rich and predatory money lender. In that dark crew of financial pirates there are those who would cut a man's throat to get a dollar out of his pocket; there are those who send money into states to buy votes to control our legislatures; there are those who maintain International propaganda for the purpose of deceiving us into granting of new concessions which will permit them to cover up their past misdeeds and set again in motion their gigantic train of crime.
"These twelve private credit monopolies were deceitfully and disloyally foisted upon this Country by the bankers who came here from Europe and repaid us our hospitality by undermining our American institutions. Those bankers took money out of this Country to finance Japan in a war against Russia. They created a reign of terror in Russia with our money in order to help that war along. They instigated the separate peace between Germany and Russia, and thus drove a wedge between the allies in World War. They financed Trotsky's passage from New York to Russia so that he might assist in the destruction of the Russian Empire. They fomented and instigated the Russian Revolution, and placed a large fund of American dollars at Trotsky's disposal in one of their branch banks in Sweden so that through him Russian homes might be thoroughly broken up and Russian children flung far and wide from their natural protectors. They have since begun breaking up of American homes and the dispersal of American children. "Mr. Chairman, there should be no partisanship in matters concerning banking and currency affairs in this Country, and I do not speak with any. Louis T. McFadden--Speech on the Congressional House Floor
The right of a nation to kill a tyrant in case of necessity can no more be doubted than to hang a robber, or kill a flea.
John Adams
This quote of John Adams,2nd President, easily refers to the Fed and to Obama.
Bruce Barron
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Bruce Barron