The Fed: "Let's PRINT our way out of this mess!"

Federal Reserve to buy up some Treasury bonds
Kathleen Pender

Sunday, March 22, 2009

Relatively lost in the frenzy over $165 million in bonuses paid to AIG employees last week was an announcement by the Federal Reserve that it would take the highly unusual step of buying up to $300 billion worth of long-term Treasury bonds. Nice piece of slight of hand there! While everyone was looking elsewhere at the AIG mess, the Gubmint announced it's going to dump more fiat currency on us!

Although the Fed regularly buys and sells short-term Treasury bills to set the overnight federal funds rate, it generally does not intervene in long-term Treasurys, allowing the market to set long-term rates.

Except for a small episode during the 1960s, known as Operation Twist, the Fed has not bought long-term Treasurys since 1952. And for good reason.

"It's as inflationary as hell," says Howard Simons, a strategist with Bianco Research.

When the Fed buys Treasurys or other securities, it can pay for them by creating new money, which goes out into the economy. If you have more money chasing roughly the same amount of goods and services, prices go up.

Some worry that having the Fed buy Treasurys could encourage the government to spend even more money if it thinks it has a new, ready buyer for its securities. Duh! Give the Gubmint more money and you expect they'll save it or use it to reduce the debt? Yeah right! Maybe when monkeys fly out your butt!

When the government wants to spend money - on an $800 billion stimulus package, for example - it can either raise taxes, cut other spending or borrow money by selling Treasury securities to investors. The more Treasurys it sells, the higher the interest rate it must pay to attract investors. If the Fed buys Treasurys, the rate should come down.

The Treasury is not allowed to print money because governments can tend to go a little crazy and print too much, resulting in hyperinflation and often, economic collapse.

The Fed can create money, but it is supposed to be the independent, sober-minded guardian of our nation's monetary supply. It is supposed to make sure the money supply is generous enough to encourage growth, but not so generous as to cause inflation.

It is supposed to "take away the punch bowl just as the party gets going," as former Fed Chairman William McChesney Martin famously said.

Simons fears that if members of Congress come to believe that the Fed will buy whatever the Treasury wants to sell, "There will be no limit on what they can spend. When Nancy Pelosi figures this out, 'Whooo, my lord,' " he says.

John Taylor, a Stanford University economics professor and senior fellow at the Hoover Institution, say the Fed's move "raises huge questions about inflation and the independence of the Fed. This is unprecedented." The vast majority of publicly educated Americans are utterly ignorant of inflation and its consequences!

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