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

Wednesday, November 3, 2010, 1:34 PM

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.

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36 Comments

macro2682's picture
macro2682
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Re: Fed Monetizes Government Debt: $600 QE II Program ...

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.

Carl Veritas's picture
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Re: Fed Monetizes Government Debt: $600 QE II Program ...

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)

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Re: Fed Monetizes Government Debt: $600 QE II Program ...

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?

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Re: Fed Monetizes Government Debt: $600 QE II Program ...

Don't the folks at the Fed get it?

Short term fix for long term disaster...holy cow!

Jeff

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Re: Fed Monetizes Government Debt: $600 QE II Program ...

 

*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

 

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Re: Fed Monetizes Government Debt: $600 QE II Program ...

 

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!

          Cry

LogansRun's picture
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Re: Fed Monetizes Government Debt: $600 QE II Program ...

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.Yell

 

plato1965 wrote:

 

*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

 

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Re: Fed Monetizes Government Debt: $600 QE II Program ...

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.

Travlin's picture
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Re: Fed Monetizes Government Debt: $600 QE II Program ...
cmartenson wrote:

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?

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

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Re: Fed Monetizes Government Debt: $600 QE II Program ...

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.

 

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Re: Fed Monetizes Government Debt: $600 QE II Program ...

plato1965's picture
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Re: Fed Monetizes Government Debt: $600 QE II Program ...

 Lions and tigers and explosive printers.. oh my!!!!

 

 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

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Re: Fed Monetizes Government Debt: $600 QE II Program ...

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
[email protected]
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.

 

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Re: Fed Monetizes Government Debt: $600 QE II Program ...
Travlin wrote:
cmartenson wrote:

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?

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

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.

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Re: Fed Monetizes Government Debt: $600 QE II Program ...

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-dis...

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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Re: Fed Monetizes Government Debt: $600 QE II Program ...

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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Re: Fed Monetizes Government Debt: $600 QE II Program ...

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

 

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Re: Fed Monetizes Government Debt: $600 QE II Program ...

The fed is diluting its gasoline with some water......

Travlin's picture
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Re: Fed Monetizes Government Debt: $600 QE II Program ...
ashvinp wrote:

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.

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 

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Re: Fed Monetizes Government Debt: $600 QE II Program ...

Don't know the time frame.

But the created crash is probably how it will work IMO.  They must crash the reserve currency.  Once they do this, the other currencies will implode.  Even the Yuan a bit.  At that point, they'll use it as the reason for their new currency.

Think about it.  The bankers want to continue their control mechanisms.  The countries are obese with debt from the current bankers methods (currencies).  Countries CANNOT take on much more debt!  So, do they default?  If so, what happens to the bankers currencies?  

It's really not that hard to figure out.  

Timing is the tough one.

Southerner wrote:

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.

[Moderator's note: Dear Logans Run, please read my recent exchange with DrKrbyLuv here and here.  Be advised that everything which I said there applies equally to you.  Thanks.]

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Re: Fed Monetizes Government Debt: $600 Billion QE II ...

Monteary policies for £ and € remain unchanged.

http://www.bankofengland.co.uk/publications/news/2010/084.htm

The Bank of England’s Monetary Policy Committee today voted to maintain the official Bank Rate paid on commercial bank reserves at 0.5%. The Committee also voted to maintain the stock of asset purchases financed by the issuance of central bank reserves at £200 billion.

http://www.ecb.europa.eu/press/pr/date/2010/html/pr101104.en.html

At today’s meeting the Governing Council of the ECB decided that the interest rate on the main refinancing operations and the interest rates on the marginal lending facility and the deposit facility will remain unchanged at 1.00%, 1.75% and 0.25% respectively.

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Re: Fed Monetizes Government Debt: $600 Billion QE II ...
Global87 wrote:

Monteary policies for £ and € remain unchanged.

http://www.bankofengland.co.uk/publications/news/2010/084.htm

The Bank of England’s Monetary Policy Committee today voted to maintain the official Bank Rate paid on commercial bank reserves at 0.5%. The Committee also voted to maintain the stock of asset purchases financed by the issuance of central bank reserves at £200 billion.

http://www.ecb.europa.eu/press/pr/date/2010/html/pr101104.en.html

At today’s meeting the Governing Council of the ECB decided that the interest rate on the main refinancing operations and the interest rates on the marginal lending facility and the deposit facility will remain unchanged at 1.00%, 1.75% and 0.25% respectively.

Great data.  Thanks.

That's not going to help the dollar....of course, there are some schools of thought that think a weaker dollar is the desired outcome by Bernanke et al., and I happen to agree with them.

A weaker dollar is one way, perhaps the only way, "out" of this mess for the US with the least amount of political and financial pain.

Interesting that Bernanke managed to pen an entire oped piece for immediate distribution in the WaPo after QE II without discussing the potential impact on the dollar.  Um, hello?  That's the one thing people wanted to hear about.  

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Re: Fed Monetizes Government Debt: $600 Billion QE II ...

Does anyone know how that $75 billion per month relates to the deficit? I'd read an article that says it's equal to the projected deficit (or public borrowing requirement), which would mean the Fed is printing money to cover all new government debt over the projected period.

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Re: Fed Monetizes Government Debt: $600 Billion QE II ...

Deficit is 1.5 Trillion, hence, $125billion per month.

Printing = 60% of deficit.

You'll probably see a larger printing run during the summer, and a final top-up in Oct-Nov of 2011.

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Re: Fed Monetizes Government Debt: $600 Billion QE II ...

Misplaced the url but each American now owes $1 million of the national debt, I believe.

Get your checkbooks ready.

 

SG

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Re: Fed Monetizes Government Debt: $600 Billion QE II ...

Here's a revamped link:

http://www.usdebtclock.org/

$44k/per capita.

$124k/per taxpayer.

 

 

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Re: Fed Monetizes Government Debt: $600 Billion QE II ...

Let's print jobs....Bubblenomics...

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Re: Fed Monetizes Government Debt: $600 Billion QE II ...
Spot Gold live: US$1,394.61 /oz (record)
The US Dollar is now down 20% against gold in one year,
and down 13.6% in the last 3 months.
and the USD Index is down 3.0% against 6 "hard" currencies in one month.
 
Dave
 

Gold Jumps $50 in 21 Hours as Fed "Prints Money",

Dollar Falls, Stocks & Commodities Surge

4th November 2010

The price of gold leapt at the start of US trading on Thursday, coming within 0.5% of last month's record highs – and gaining $50 per ounce inside 21 hours – as the US Dollar fell in response to the Federal Reserve's re-launched quantitative easing program.

"Currency devaluation remains firmly en vogue," said one London bullion dealer this morning.

The weakening Dollar "is what's helping gold," notes commodity strategist Jesper Dannesboe at SocGen.

Crude oil today hit a 6-month high as the Euro and Sterling both jumped to fresh 10-month highs vs. the Dollar, capping the Gold Price for European investors at a 1-day high.

Asian and European stock markets added almost 2% on average. New York stocks opened the day over 1% higher.

"We remain bullish on gold," says UBS chief metals strategist Edel Tully, because of "inflation expectations on the rise, low real interest rates, the fear of currency debasement, resilient physical demand, and limited scrap sales."

The Fed said late Wednesday it hopes to pump $600 billion into the US economy between now and June 2011, buying $75bn of long-dated government Treasury bonds each month and then reviewing the program.

The US central bank also voted to reinvest (and again into T-bonds) the money it's being repaid from earlier mortgage-bond purchases.

"[That means] bringing the total closer to $800bn," notes Walter de Wet at Standard Bank today. "Given the relationship between precious metals and liquidity, we view this as extremely positive for precious metal prices."

The New York Federal Reserve meantime confused bond-market analysts overnight by "temporarily relaxing" the 35% limit imposed on its purchase of any single issue of US government debt, but moving to breach it in what a press release called "only modest increments".

The New York Fed's operational account – where QEII purchases will be held – already owns 30% of T-bonds maturing between 2014 and 2020.

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Re: Fed Monetizes Government Debt: $600 Billion QE II ...

 

 

Bill Fleckenstein 

http://www.kingworldnews.com/kingworldnews/Broadcast/Entries/2010/11/4_Bill_Fleckenstein.html

 

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Re: Fed Monetizes Government Debt: $600 Billion QE II ...

Remember what Berneke said June 3, 2009...

http://www.bloomberg.com/apps/news?pid=newsarchive&sid=agmj05AcqWHo

“Either cuts in spending or increases in taxes will be necessary to stabilize the fiscal situation,” Bernanke said in response to a question. “The Federal Reserve will not monetize the debt.”

I guess he's getting around that by coming up with this goal of promoting inflation.

Did the economic downturn happen because we didn't have enough inflation before?!?

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Re: Fed Monetizes Government Debt: $600 QE II Program ...
plato1965 wrote:

 

*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

 

Bordo is an idiot

V

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Re: Fed Monetizes Government Debt: $600 QE II Program ...
Jim Hannah wrote:

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.    

We have several options for a single fiscal authority ( currently this is an oxymoron. this moron is for you Davos wherever you are). We have the BIS, WORLD BANK, IMF. If those won't work we have the UN. It was/is the planned world government in the Copenhagen climate gig. One world currency is on the way and as LR said it is not a matter of if it is a matter of when. This is the gobal Neo Feudalism Michael Hudson has been speaking of.

V

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Re: Fed Monetizes Government Debt: $600 Billion QE II ...

After the dollar collapse,  we'll need a police state just to force the people to accept funny money again.    We'll have one world currency alright,   the one kept locked up by the Central Banks, Treasury Departments and the IMF  ---- just in case.

 

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Re: Fed Monetizes Government Debt: $600 Billion QE II ...

Since the Fed is buying $600 billon in Treasury securities that are already in exisitence, and not buying them from the government, are they not in effect printing money and stuffing it in thier own pockets? Are they not supposed to swap dollars for bonds with the government? And didn't they do this with the 1.25 trillion dollar mortagage buying spree recently?

It looks to me that they just conterfeited almost 2 trillion dollars. Is that right?

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Re: Fed Monetizes Government Debt: $600 Billion QE II ...

Although the headline figure for QE2 was $600 billion (over 8 months) the Fed also have (according to Weldon) a further $250 -300 billion of Treasury bonds maturing in that timeframe and they say they will reinvest the funds from that in new bonds (rolling over) This would take them over the limit they hav on what %age of their portfolio is invested in any one asset type so they have suspended that rule - solved !

 
Dave
 
Fed Walks-the-Walk …
5 Nov 2010
 
<snip>
Of great interest is the overlay chart on display below in which we plot the Fed's measurement of US Treasury Securities Held in Custody for Foreign Official Accounts, and the total of US Treasuries Held Outright by the
Federal Reserve Bank  …  including  "projected"  levels  of Treasuries owned outright by global Central Banks  by end-June [2011], based on the last three-months of purchases  by foreigners  (projected  Custody Holdings), and  the amount of Treasuries the Fed has pledged to monetize (Fed Holdings). 
 
Gee, is it any wonder that the yield on the US 5-Year T-Note is pushing 1%, and that Gold soared by more than $50 yesterday ??? 
 
 
 
Digging deeper, when we contemplate  the top-down secular macro-market message to be gleaned by the moves in Treasuries and Gold  …  we  are interested to note the chart below in which we "adjust" the price of Gold, by the yield on the US Treasury 5-Year Note, implying that the level of US monetary debasement has gone "parabolic" since 2009 !!!! 
 
 
 <snip>
The Fed has walked-the-monetary-walk … 
 
… except that  they cannot walk a straight line, after DOSING the markets, again, with their magic-monetary-steroids.  They may have passed the market's "litmus test" … but they will not pass the Money Monitor monetary-steroids detecting "breathalyzer" test. 
 
Several years ago, when Gold first started rallying on the thought that maybe, some day, the Fed would buy bonds and pursue inflation as a policy goal … we would often ask, in the Money Monitor … 
 
… got Gold ??? 
 
That day has come, and we ask again … got Gold ??? 
 
Gregory T. Weldon
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akamai mom
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Re: Fed Monetizes Government Debt: $600 Billion QE II ...

We already have a police state if one is in the wrong socio economic class.

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