Fed Monetizes Government Debt: $600 Billion QE II Program Announced

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With today's Fed announcement of $600 billion more in Quantitative Easing purchases, the United States has officially entered "Stage II" of the crisis.

This $600 billion is in addition to the purchases already underway using the proceeds from the maturation of their massive MBS portfolio.

Goodbye dollar; hello future.  

Here's the relevant wording from the statement: 

To promote a stronger pace of economic recovery and to help ensure that inflation, over time, is at levels consistent with its mandate, the Committee decided today to expand its holdings of securities.

The Committee will maintain its existing policy of reinvesting principal payments from its securities holdings.

In addition, the Committee intends to purchase a further $600 billion of longer-term Treasury securities by the end of the second quarter of 2011, a pace of about $75 billion per month.

The Committee will regularly review the pace of its securities purchases and the overall size of the asset-purchase program in light of incoming information and will adjust the program as needed to best foster maximum employment and price stability.

(Source)

Left unsaid here is exactly why the "pace of recovery" needs to be stronger.  According to the BEA and the Census Bureau, the GDP and retail sales are up quite handily.  The NAR says that existing home sales are picking up. Auto sales are coming in stronger.

Without the Fed being open about the true source of its concerns, we are left to speculate.  

Whatever could be on their minds?  Could it be:

  • Is a Commercial Real Estate nightmare lurking in the shadows that could harm more than a few banks?
  • Have certain foreign purchasers of US debt gone missing from the auctions?
  • Are tax receipts at the federal level below expectations?
  • Are banks more wounded than we've been told?

All we have at this point is uncertainty.  

In the meantime, the information coming from China and India about growth and inflation have to be giving them fits...if the OECD doesn't get itself up off the mat and back into the game, it risks being left behind on the final leg of the World Resource Race Twenty-Teen Open Invitational.

At any rate, the Fed is now openly pursuing a policy of outright debt monetization and funding of excess and excessive government spending.  That's a game changer.

Welcome to the future.  It has finally arrived.

This is a companion discussion topic for the original entry at https://peakprosperity.com/fed-monetizes-government-debt-600-billion-qe-ii-program-announced-2/

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Looks like the FED was spot on with producing a statement in-line with market expectations (which is no suprise, since they flat out asked the market what they wanted).  The FED’s actions don’t move markets any more… It will be other government’s reaction to our FED’s actions that WILL move markets over the next few weeks.

3

Cheap Bank Credit inoculations.    The elixir that sickens the economy is apparently also the cure.    Some are of the belief that if only the politicians themselves are in charge of inoculations, the patient will finally be well. (Think FEMA)

4

As Chris noted, we are left to speculate on what the Fed’s real concerns and motives are.  
a. Why did the Fed so openingly talk up Quantitative Easing recently?

b.  Why is the Fed apparently going to actually do this?

c. Is there a potential future adverse event unknown to us the Fed is trying to mitigate or was their intent to produce a market effect at present?

d.  For our personal preparations, what effects of this monetization should we expect to be impacted by, regardless of the Fed’s intentions?

5

Don’t the folks at the Fed get it?
Short term fix for long term disaster…holy cow!

Jeff

6

 
tinfoil

 I’ve had a suspicion for a while that the Fed isn’t going to make it to 2013… almost as if it was planned this way…

 http://sas.rutgers.edu/news-a-events/achievements/1065-michael-bordo-and-the-federal-reserve-systems-centennial

 

 https://mises.org/Community/forums/p/20752/376574.aspx

 What with Mervyn Baggins proposing the end of Fractional Reserve Banking… strange days…

 http://www.youtube.com/watch?v=CLcUS9c9Kbo

 

7

 

Whatever could be on their minds?  Could it be:

  • Is a Commercial Real Estate nightmare lurking in the shadows that could harm more than a few banks?
  • Have certain foreign purchasers of US debt gone missing from the auctions?
  • Are tax receipts at the federal level below expectations?
  • Are banks more wounded than we've been told?
          Or
  • Are they suffering from a prolonged state of denial about basic mathematical realities and our unserviceable debt?
  •  Do they own precious metals and just want to see them go up as the dollar sinks?
          Or, my favorite -
  • All of the above!
          
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Haven’t I been saying this for over a year now?!?  But everyone said “Conspiracy Theory!”!  
Bottom line:  This IS the plan.  The Fed will be the scapegoat.  They’ll use this to create their solution…the one world currency.

What will you say when my “CT” comes to fruition?  It IS coming…Mark my words.

 

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LR
Will they use a created crash of the dollar to accomplish what you expect to happen?

And in what approximate time frame…1year, 3yrs, 5yrs, etc.

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What about the specter of deflation?  I’m told that is the bogyman the Fed fears most.  Or is that covered under commercial real estate and failing banks?  What other factors affecting deflation could the Fed know about that we don’t? 

Can anyone enlighten me?

Travlin

11

Macro2682 remarked “the FED was spot on with producing a statement”
That was my first reaction too.  But on further reflection, it ocurred to me that the markets were probably manipulated today by the likes of “Girlfriend Goldman” to foster exactly my initial sentiment.  The fireworks may start tomorrow when the finger can be pointed at something like the initial claims or some earnings report that misses estimates.

I’m laying my money that the Treasury auctions have been busting each week, as foreigners are getting out of Treasuries.   Just a hunch, but I sure would buy something besides US Treasuries if I were running a sovereign fund.

 

12

http://www.youtube.com/watch?v=bWsa8OKrKi8

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Good golly, you just can’t find a more complete sense of comedic timing than this (slated for the day after QE II - perfect!):
A Return to Jekyll Island: The Origins, History, and Future of the Federal Reserve - November 5-6, 2010

Federal Reserve Bank of Atlanta and Rutgers University
November 5–6, 2010, Jekyll Island Club Hotel, Jekyll Island, Georgia

This special conference marks the centenary of the 1910 Jekyll Island meeting that resulted in draft legislation for the creation of a U.S. central bank. Parts of this draft (the Aldrich plan) were incorporated into the 1913 Federal Reserve Act. To commemorate the 100th anniversary of the drafting of the Aldrich plan, the conference will take place at the Jekyll Island Club Hotel on Jekyll Island, Georgia—the same building where the 1910 meeting occurred.

The conference's discussions focus on three themes: the origins of the Fed and lessons from the pre-1913 era, how closely the Fed's actual performance has adhered to the original vision expressed by the framers of the Aldrich plan, and what the Fed's almost 100-year track record teaches us about its role going forward.

Conference Coordinator
Lisa Lee-Fogarty
Public Affairs Department
Federal Reserve Bank of Atlanta
1000 Peachtree Street, NE
Atlanta, GA 30309
lisa.fogarty@atl.frb.org
404-498-8267
404-498-8050 (fax)

That takes some real chutzpah, don't you think?  Arranging a conference on the very island that begat the Federal Reserve under a cloud of secrecy so deep that some still claim it's a conspiracy theory to suggest as much?

And here’s the Fed holding a conference there to celebrate the meeting that never happened.  I find this quite amazing. Sure wish I could go.  I bet the desert trolley is to die for.

 

14

 Lions and tigers and explosive printers… oh my!!!
http://www.youtube.com/watch?v=RhnQBuwo19g

 

 Yeah, Greenspan says he’s mozart… but he sounds like… BUBBLEgum…

but… be of good cheer… have faith…

 http://www.youtube.com/watch?v=3HLF3-vGxsE

15

The Fed most certainly knows that additional QE via treasury purchases is not going to do anything about deflation in the general economy (i.e. deleveraging of consumers and businesses).  Some people claim they are trying to create a “wealth effect” by pumping liquidity into the stock market via PDs, which will eventually lead to increasing aggregate demand and sustainable price inflation, but do we really believe they are that naive?

It is much more likely that they are simply doing what they can to keep the banks in operation and the bond market relatively stable, and hoping things don’t get too ugly before the deleveraging process ends and the consumer economy gets up and running again.

16

This is all so surreal…   clearly all the FEDspeak up to the actual moment of  QEII was meant to reinforce to the sheeple populace how “normal” all this is.  It’s not, and nobody should think it is.  If you had suggested this would happen a few years ago you would have been considered a true tin foil hat wacko.  Now… it’s just a case of giving the market what it’s clamoring for.   
I thought this article on ZH today was spot on in terms of explaining the arc of what Chris has called our, “variable rate nation”… and this really does frame the endgame.

  http://www.zerohedge.com/article/detailed-view-maturity-and-duration-distribution-us-treasurys-and-how-fed-has-found-itself-a

I am glad to see the rest of the world bidding up PM’s in the aftermarket… reinforces my view that the FED does not control the whole damn world at least… 

 

 

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I don’t understand how a world currency could possibly work given the implosion coming in the Euro states… if a unified (fiat) currency can’t work on that scale (and it can’t) how could it possibly work on a larger scale.  If it is indeed coming… .then it’s not going to be fiat… or at least not pure fiat.  Single currency without single fiscal authority does not work.    

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Whatever could be on their minds?  Could it be:

  • Is a Commercial Real Estate nightmare lurking in the shadows that could harm more than a few banks?
  • Have certain foreign purchasers of US debt gone missing from the auctions?.....
Chris-- How about the $300 TRILLION derivatives market and Black-Scholes model..I understand the derivatives market based on Black-Scholes depends upon INFLATION. If there is deflation, all bets are off and the derivatives market crashes. Have you considered this?   

Here’s my rant on QE2 and a video I found that will help your audience easily understand a little more about Quantitative Easing. 

http://ttbth.blogspot.com/2010/11/fed-gives-americans-middle-finger.html

Thanks for all your great work. --Mike

 

19

The fed is diluting its gasoline with some water…

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Thanks Ashvinp, that helps.  It’s still all about propping up the banks.  It will be interesting to see how this plays out since that consumer economy isn’t going to get, “up and running again.”

Travlin