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Fed Hints at Printing More Money   May 20th, 2009
My predictions keep coming true, unfortunately       


More observations...

The Federal Reserve today reported a less optimistic view of the economy. It also started hinting that my predictions from a couple of months ago about the Federal Reserve probably printing more money will most likely ultimately be right.

The Fed disclosed plans to begin buying $300 billion's worth of such Treasurys in March in order to try and keep long-term rates down and boost economic activity.

But according to the minutes, some members of the central bank's policy committee indicated they were open to increasing its purchases of Treasury notes and mortgage securities as a way of spurring more lending.

Keep in mind that when the Federal Reserve purchases Treasury notes, that means it is effectively printing money to fund the government's massive deficit spending. Also consider what I wrote two months ago:

Also note that this is just an announcement of what the Federal Reserve intends to do over the next six months. In order to continue funding the deficit spending, it's a pretty safe assumption that the Federal Reserve will end up printing some more money after that. $300 billion isn't enough to make up the shortfall for the proposed $1.7 trillion deficit. So in six months (or sooner, if the government ramps up spending faster) expect to see a similar announcement whereby the Federal Reserve will buy additional U.S. Government securities.

Well there you go. Today wasn't the official announcement that the Federal Reserve is buying more U.S. Treasury notes, but it was the Federal Reserve preparing the market for what I saw as inevitable two months ago.

And as I wrote back then, the Federal Reserve purchasing U.S. Treasury notes isn't about keeping rates low and boosting economic activity--at best that's a nice temporary side effect. Buying the Treasury notes is about printing money so that the government can afford to engage in all of President Obama's stimulus spending and ongoing proposed deficit spending. The government can't find enough money in the world to borrow so it's just printing it.

And the Federal Reserve hinted today that it's willing to print even more.

    Update 5/27/2009: A week after writing the above, the following was included in an article at Financial Times:

    'A $2,000bn deficit and $2,000bn in Treasury supply far outweighs the Fed's planned purchases of $300bn,' said Gerald Lucas, senior investment advisor at Deutsche Bank...

    He said the bank did not rule out the Fed needing to buy more than $1,000bn in Treasuries in order to keep rates low.

    So banks are now speculating that it may not be sufficient for the Federal Reserve to print $300 billion, and the Fed might have to print a trillion. Of course, that's not surprising and I essentially made the same prediction over two months ago. And, despite what the Financial Times wrote, I think it has very little to do with keeping rates low and a lot to do with funding Obama's deficit spending.

    Indeed another article emphasized this:

    Analysts are increasingly concerned about the Treasury's ability to fund costly economic rescue measures that are expected to drive this year's budget deficit to $1.75 trillion.

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