On a Golden Ark During the Money Flood

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Was the Fed action already fully priced in the marketplace? Had investors anticipated the Fed’s latest move and already bid up stocks and gold?

No!

The New York Times explains more of the Feds’ action:

The [Fed’s] action was the second time in a year that the Fed had ventured into new territory as it struggles to push down long-term interest rates to encourage borrowing and economic growth. In a statement, the Fed said it was acting because the recovery was “disappointingly slow,” and it left the door open to even more purchases of government securities next year.

The Fed is an independent body, its policy decisions separated from the political pressures of the day. But it acted with a clear understanding that the United States, like many other Western countries, seems to have taken off the table many of the options governments traditionally use to give their economies a kick, particularly deficit spending.

The Republicans regained control of the House for the first time in four years in part by attacking the stimulus plan – begun by the Bush administration and accelerated by President Obama – as a symbol of government spinning out of control, contributing to a dangerously escalating national debt.

This political reality has left Washington increasingly reliant on the Fed to take action, though its chairman, Ben S. Bernanke, has said the Fed cannot fix the problem alone.

Ordinarily the Fed’s main tool for spurring economic growth is to lower short-term interest rates. But those rates are already near zero. With no more room to go, it has to find another route to stimulate demand.

While the Fed step was telegraphed to the markets in recent weeks, most experts had expected $300 billion to $500 billion in purchases of Treasury debt. Still, the pace – $75 billion a month for eight months – disappointed some investors.

..in total, the Fed will buy $850 billion to $900 billion, just about doubling the amount of Treasury debt it currently holds.

So, what did investors make of it? The Dow shot up 216 points yesterday, after investors had time to consider what the Fed had done.

As for gold, it gained more in a single day than the entire price in 1971. That year you could buy an ounce of gold for $41. Yesterday, the price of an ounce GAINED $45.

Gold market investors figure they know what happens next. The Fed will pump in nearly $1 trillion more in this go-’round. If that doesn’t revive the economy and lower the unemployment rate, they’ll pump in some more. And they’ll keep pumping until they can’t go on.

When will that be? Nobody knows exactly. But if they keep this up, eventually the dollar will collapse and gold will soar. Maybe to $3,000 an ounce. Maybe to $5,000.

The point is this: the Fed has set its course. It has no reliable maps. Its captain doesn’t know where he is going. As for the navigator, first mate and other hands, they are a bunch of misfits, malcontents, and meddlers who have given no indication that they know what they are doing. Do you think they will arrive at their destination?

We don’t. But we’re sure they’ll end up where they ought to go.

That’s the great beauty of a real economy! It rarely takes you where you want to go…especially if you’re an activist central planner or an interventionist finance minister. But no matter how much you struggle with it…no matter how badly you manipulate it…no matter how much you try to stitch it up with rules and regulations…

…it ALWAYS takes you where you deserve to go.

Look at what happened back in ’71. Nixon’s move to take the US entirely off the gold standard was hardly noticed. Because he announced something even stupider that day. He told the world that henceforth prices and wages would be controlled by the feds. No kidding. His wage- price controls were designed to put a brake on inflation.

Did they work?

Ha…ha…do you have to ask? If you could control inflation by executive decree…well, it would be a lot different world than the one we live in. You can’t do that. And when you try to do that, you don’t get a world of stable prices, growth and prosperity. What you get is what they got in the Soviet Union, when they controlled the price of everything. They got a lot of nothing…

…nothing on the shelves…and nothing worth buying.

We remember visiting Poland in 1977. It was a delightful place for a driving holiday because there were no cars on the roads. People didn’t have cars. And the trucks were usually off the roads too. They were broken down…usually alongside the road with their hoods up.

There were no hotels either. And no restaurants worthy of the name. You just had to make do.

You’d go into a shop. It was drab. Empty. There were usually two or three dozy clerks…but nothing to sell. Just a few cans. What was in the cans? It was hard to tell. But since that was all there was, you bought it and ate whatever dreadful thing was inside.

Later, in the ’80s, we took a trip to the Soviet Union. On the plane with us, on a flight from Moscow to Minsk was a woman with a toilet seat in her lap. It turned out that she had been raised in Tennessee and had a twang to her English.

“What are you doing with a toilet seat,” we wanted to know.

“Oh… I just bought it in Moscow,” she explained. “There aren’t any toilet seats for sale in Minsk.”

“But isn’t that an expensive way to get a toilet seat? I mean, this is a three-hour flight.”

“No… The flight is priced in rubles. And the ruble isn’t worth anything. It actually cost me more to buy the toilet seat than the roundtrip ticket.”

See what central planning produces? Absurdities. Monstrosities. Imbecilities. Coming soon…to your neighborhood.


Bill Bonner,

for The Daily Reckoning Australia

Bill Bonner

Bill Bonner

Best-selling investment author Bill Bonner is the founder and president of Agora Publishing, one of the world's most successful consumer newsletter companies. Owner of both Fleet Street Publications and MoneyWeek magazine in the UK, he is also author of the free daily e-mail The Daily Reckoning.
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