Wednesday, March 18, 2009

Financial Woes (continued)

Let's talk about what happened on the financial front today. There are those who say the market has hit bottom and the economic recovery is underway.  Don't hold your breath, sports fans.

The Federal Reserve agreed to buy $1.2 trillion in US Government bonds today. It's characterized as a short-term fix. Where does the Federal Reserve get its money? It prints it.
The bond market and gold market rallied. Long term debt rallied as the number of buyers increased for the same amount of supply so the treasury can offer lower interest rates. Gold rallied do to inflation fears (see above). US Gold rallies $50/ounce on the federal reserve announcement. 

The yield of the ten-year US Treasury note fell 1/2%. A falling yield means a rising bond price (or the price of debt the US must pay).

The problem with the fed buying long term bonds is that it's a LAST DITCH STAND. The potential for this plan to go sideways and to result in massive inflation is huge. Think of firing an unguided missile at a target, hoping it will hit and not blow something else up and you have the idea. That's what happened today.

AT PRESENT: The Federal Reserve is issuing debt and printing money to "buy itself". Over the past six months we imposed some discipline in our borrowing because if the buyers - mainly the Chinese - grew nervous over our spending, they'd stop buying. TODAY we became our own buyers.

According to an Associated Press article today, "But even this best-case scenario, the nation's unemployment rate will keep climbing. Some economists think it will hit 10% by the end of this year." (and when you consider how we come to that number through 'strange math', the real number will be closer to 16%)

Be happy the stock market climbed this week. It won't last. The Federal Reserve plans to print another $5 trillion over the next two years (same AP Article)


Opus #6 said...

This is a good summarry of the problem of overspending. Liberals think that a printing press means that you are rich. Like the blonde wife who thinks she is ok as long as she doesn't erun out of checks. Turning our dollar into Funny Money will hurt us all.

LL said...

It means that you need to cinch down the strap on your helmet because it will be a rough decade.

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