Wednesday, March 18, 2009

Monetization

The Fed announced today that it is going to buy Agency bonds and long term US Treasuries. This is buying our own debt. This is monetizing the US debt. This will lead to inflation. I have been a firm believer in the deflation camp, and I think the asset deflation we have experienced is now a "price" deflation issue, so maybe this is the way to go. Regardless of what is going on now, this will lead to inflation in the future. I guess gold at $900 was too cheap, we needed to make sure it went higher.

The losers in this are going to be consumers who just saw some relief in commodity inflation and other necessity inflation in the last 6 months. Yes, job losses have been horrific, but the other 92% of America that has a job has seen food and fuel costs decrease helping their bottom line. If this monetization is just getting cranked up, we could see those 'savings' evaporate. The massive crack up boom of commodity prices in 2008 was a prime factor in grinding economic growth to a halt.

This is not reassuring to the Chinese, Japanese or oil exporting nations about payments of US government debt back with decent dollars. This also feels like a desperation move by the Fed. This also feels like our leaders, as well as a decent chunk of American society, are unwilling to face the facts about how we got here and what we have to do to get out. Like many addicts we must first admit there is a problem, then face that problem head on.

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