A Recent Alert - Fed Prints a Trillion

Friday, March 20, 2009, 7:55 PM

Below is an alert I sent out on Wednesday evening.  I want everyone to see what is at the forefront of my thinking right now.

I am busy writing up my next layers of thought around this development and will make that the basis of my next Martenson Report or two.  

Why?  Because this recent action by the Fed is a "game changer."

In a shocking development that I frankly hoped we’d never actually see, the Federal Reserve dropped a bombshell yesterday and announced that it is going to create an extra $1 trillion dollars out of thin air to support the spending desires of the US government and to drive down interest rates for mortgage borrowers.

Of course, this will continue to punish savers and pension plans, but those, frankly, are of no concern to the Fed.

Below I explore this outrageous turn of events. Please note that I have not had much time to digest this incredible news and that I reserve the right to add to (or amend) my thinking over the next few days.

Fed to Buy $1 Trillion in Securities to Aid Economy

WASHINGTON — Saying that the recession continues to deepen, the Federal Reserve announced Wednesday that it would pump an extra $1 trillion into the mortgage market and longer-term Treasury securities in order to revive the economy.

As expected, the Fed kept its benchmark interest rate at virtually zero. But in a surprise, it dramatically increased the amount of money it will create out of thin air to thaw out the still-frozen credit markets that have cramped lending to consumers and businesses alike.

The dollar took a massive hit.


Gold, down some $25 on the day prior to the announcement, finished up $50.


Stocks rallied while the long bonds (10, 20 and 30 years) were bought hard driving yields down by massive amounts before giving back ~ 50% of the move.

Given the recent revelations that Goldman Sachs and other well-connected players in the AIG scandal got billions of dollars directly from the US taxpayers for their side-bets with AIG, I will not be at all surprised to find out in a few weeks or months that Goldman Sachs, JPM, and others were magically positioned to make a killing off of this move. That’s just raw speculation, but it fits with the general pattern of conflicted enrichment that has stalked every move in this grand looting operation so far.

In fact, the constant drip-drip-drip of news about self-dealing by insiders with zero legal consequences for the perpetrators leaves me with the queasy feeling that every attempt at finding a legitimate resolution to this crisis will be thwarted by a crowd of Wall Street insiders who simply cannot resist an opportunity to redirect money into their own pockets. But that’s another story.

For now the main plot line is the fact that the US has just decided to openly print up another trillion dollars in order to buy more dodgy debt from itself.

Here are a few dots related to this action that we might connect.

  1. On Wednesday of last week China via its premier expressed its desire to see the US take care to safeguard the value of China’s investments in US dollars.
  2. Over the weekend the G20 meets to discuss the financial crisis. It is a near certainty that this new move by the Fed was discussed at that meeting.
  3. On Wednesday the 18th, the US Federal Reserve thumbed the nation’s collective nose at the Chinese.

I think this will be frowned upon by the Chinese.

However, I think this move is also a tacit admission by the US that it can no longer depend on the rest of the world to meet its borrowing and expenditure desires. As I outlined in a blog post yesterday (Funding Nightmare for the US), there’s been an extremely dramatic outflow of foreign money from the US that all but guaranteed this recent Fed move was a certainty.

Here’s a chart showing the net foreign capital flows to the US. After hitting a dramatic peak late in 2006, there has been what can only be described as a collapse in foreign purchases of US financial assets.


This chart is about as scary a chart as you could ever want to see if you happen to hold a lot of US dollar debt, as does China.

This chart foretold the move by the Fed today to attempt to print our way out of trouble (no money was available anywhere else) and it tells us that the prospect of a dollar crisis is a very real concern for the future.

The reason why can be captured by a very simple calculation.

(US government deficit spending) + (trade deficit) - (domestic savings) = (Need for positive foreign capital flows)


($2.5 trillion) + ($500 billion) – ($0) = ($3 trillion)

Unfortunately, not only is the right side of the equation not equal to $3 trillion, but it was negative $150 billion in January. Where we need $3 trillion to flow in, we saw $150 billion flow out in a single month.

The extent there’s an imbalance in this equation is the extent to which the dollar will lose value. I think that reality just caught up with the markets.

Today we saw a mighty decline in the dollar. Here it is again.


That’s just huge. Maybe not if it was the stock price of a company just announcing poor earnings, but absolutely gigantic for the reserve currency of the world. Trillions just sloshed out of one currency and into all the others. Such movements are almost certainly injecting a huge dose of stress into an already strained system. Such wild gyrations are certain to result in an incident sooner or later.

My read on the dollar is that it is an exceptionally overproduced and (still) overvalued piece of paper. That’s just on the basis of how many have been produced and sent overseas over the past few years as compared to the productive capacity of the US.

Now that another trillion of them are going to be exchanged for debt that’s already in existence only adds fuel to this fire.

This move by the Fed to print up another trillion comes on the heels of an announcement by the IMF that it plans to issue “Special Drawing Rights” which are nothing more than irredeemable bits of paper that central banks can pretend have value amongst themselves.

The International Monetary Fund is poised to embark on what analysts have described as "global quantitative easing" by printing billions of dollars worth of a global "super-currency" in an unprecedented new effort to address the economic crisis.

Here’s a great explanation posted to the forums a few days back by Machinehead:

Here is one way to look at [Special Drawing Rights or SDRs], via a simple example. Let's say that you and I, while hanging out at the strip club, exchange million-dollar IOUs scribbled on cocktail napkins. If I can discount your IOU at my bank for a $1 million loan to me, and you can discount my IOU at your bank for a $1 million loan to yourself, then we have jointly created 2 million dollars, in what is essentially a chain-letter scheme.

The vast expansion of international reserves during this decade also resembled a chain-letter scheme. The U.S. trade deficit piled up dollars in China, which became international reserves for China. China then recirculated these dollars to the U.S., providing the expanding volume of debt financing which is essential to keep a Ponzi scheme expanding. There is no numerical limit, other than the economy's ability to service the debt, to prevent this cycle from endlessly repeating.

In recent months, the drastic shrinkage of the deficit has slowed this runaway transmission belt to a crawl. Reviving trade is going to take years. If one's objective is to restore the heady 20-percent annual growth of international reserves during the Bubble II years, then new reserves must arise from some source other than expanding trade.

Enter the IMF, with its SDRs. SDRs are acceptable as international reserves, because nearly all countries belong to the IMF club. SDRs can be created out of thin air as derivatives of existing national currencies and then handed out to central banks, in a process exactly like our exchange of cocktail-napkin IOUs. Central banks in turn can exchange SDRs among themselves to settle trade debts, meaning they can buy real goods with these thin-air paper derivatives. And that's the very definition of inflation -- purchasing power created from nothing, with no corresponding increase in investment or production. So all purchasing power gets diluted accordingly.

That sums it up beautifully. The SDRs are nothing more than a derivative currency issued by a bank-like entity that answers to no single government and therefore to none at all.

Together, the IMF and the Federal Reserve have embarked on a joint program to reinflate the world at any price.

I am certain they have the best of intentions and hope to be able to reel all this bogus funny-money back in at just the right moment to preserve whatever economic activity has been spawned by the thin-air bonanza while avoiding overshooting and igniting an inflationary inferno. But history suggests that the chance of this outcome is 0%.

From here, I am expecting several things.

  1. A continued decline in the dollar, possibly turning quite ugly at some point over the next couple of months
  2. A continued increase in gold (but with heroic attempts to cap its price by various central banks and their proxies)
  3. For commodity price increases to begin soon (due to a falling dollar and massive printing by Japan, the Bank of England, Switzerland, the US, and the 150 other countries that are now scratching their heads and wondering why they shouldn’t just print up a few thousand pallets of their own currencies).
  4. Bonds will continue to behave counter-intuitively (that is, to rise in price when they should be falling)

Finally, I am expecting this latest “bold initiative” by the Fed to fail, and fail spectacularly.

More on this later as events develop. Today was a stunner. The game has now shifted to a new set of rules.

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Davos's picture
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Re: A Recent Alert - Fed Prints a Trillion


dvdshw's picture
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Re: A Recent Alert - Fed Prints a Trillion

Great report Chris! Thank you.

I have had this daydream for the past few months...

I am lying on a beach staring up at the clouds on a beautiful day when I realize that I don't hear the waves breaking onto the shore. I look up and see that the surf has gone far out to sea and all that remains is a sandbar. The air is still and there is no sounds of wildlife.

I realize I need to find a very tall Palm tree and fast... 

bill.flinn's picture
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Re: A Recent Alert - Fed Prints a Trillion

I would like to draw folks' attention to Eric de Carbonnel's  Market Skeptics  blog entry, where he points out that most of the US dollars in circulation are actually held in foreign hands outside the US. The consequence of this seems to be that this injection of more than a trillion dollars will result in a 15-FOLD INCREASE in the  base money supply within the United States.

 Anyone care to comment?

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Re: A Recent Alert - Fed Prints a Trillion

I am aghast and uncomprehending.

The gravity of this move is literally astounding.

Eagerly awaiting the elaborations and further discussion on this...


FireJack's picture
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Re: A Recent Alert - Fed Prints a Trillion

Bernanke Inserts Gun In Mouth


Denninger basically says the opposite:


"The nightmare scenario that is staring us in the face,
right here, right now isn't hyperinflation.  It is in fact a collapse
of monetary systems driving demand for dollars through the roof in a
crescendo of attempted redemptions into collapsed ("no bid") asset
prices - a demand that Ben will not be able to meet, as the collateral
backing those dollars will have all been exchanged for toilet paper. 
Whether Bernanke holds all this trash on his balance sheet or manages
to scam Treasury into exchanging it for T-bills, the result is the same
- there is no collateral behind Bucky and as employment collapses no production to replace it with either.

The mad scramble will be on, and as it happens trade will
be choked off by not a collapsing dollar but other currencies
collapsing around the world. 

Paradoxically, the DX, or dollar index, will skyrocket - not go through the floor - as this plays out.

Unfortunately this shuts down virtually all exports - at a
time when we desperately need them, as we cannot borrow to consume any
more. he economy collapses, along with government funding and our
currency - but not through hyperinflation.  The mad dash to redeem and
sell anything and everything instead collapses pricing (that is, it
becomes out-of-control deflation in an exponentially-increasing
fashion) irrespective of Ben's attempt to halt it.

The "death spiral" ends in the destruction of our monetary
base - not due to hyperinflation but due to the inability to borrow any
more funds, the reduction of the currency's base to a giant circle
jerk, asset fire sales in a mad liquidation dash and ultimately, the
collapse of both the monetary and political systems in the United
States as tax revenues collapse to very close to zero.

This is a national security emergency that quite literally can take down our government and way of life within months or even days, and I'm willing to bet that not one person in Congress understands the seriousness of the matter.

By refusing to confront the bankrupt nature of
institutions under Bernanke's supervision and by choosing instead to
continue to bail them out and take their trash onto his (our) balance
sheet, Bernanke is risking something much worse than a Depression.

He is literally risking the end of America as a political and economic power.

Watch for a bond market dislocation very carefully. "




miranda's picture
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Re: A Recent Alert - Fed Prints a Trillion

can you please explain what is a "bond market dislocation"?



Ragnar_Danneskjold's picture
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Re: A Recent Alert - Fed Prints a Trillion
miranda wrote:

can you please explain what is a "bond market dislocation"?

A sudden/dramatic change in pricing. 

CB's picture
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Re: A Recent Alert - Fed Prints a Trillion

Do not ever forget that the US is the greatest military power ever known with a world wide network of bases and naval stations that control strategic shipping lanes and air space. It has a huge nuclear arsenal with subs, bombers, and ICBMs as well as tactical nuclear weapons. It has the most advanced bioweapons labs in the world. It has a global network of satellites for communications and surveilance. It has access to the worldwide telecommunications network at a very deep level (we need to keep track of those terrorists you know, need to be able to track their financial dealings as well). Why was the US suddenly interested in the names and account details of all US citizens with accounts in that Swiss bank? Why was the US just in a fuss with the Chinese over surveilance near their naval facillities? I know this does happen from time to time - the surveilance plane that had to land in China and was held there a few years back.

The interesting article in Rolling Stone that has been linked to a couple of times suggested that the EU wanted better regulation of the big US banks that were playing in their zone - but a deal was cut that essentially neutered any regulatory effort at all. The European nations have to be more than a little upset by how this is turning out and China can't be very happy either. This latest move by the Fed has the tone of financial warfare and the Eurozone does not seem to be on the same page as Bernanke and Geithner.

Where is the real power in this game and who is calling the shots? I don't think Obama is in on it (though I could be mistaken). It really seems that the financial interests are almost openly running the show now, beholden to no one. Why doesn't Geithner have any staff yet? Could it be that he doesn't want any just now?

I'm not really worried about any of this though...

 Here is the link to the RS article again:


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Re: A Recent Alert - Fed Prints a Trillion

I'm so glad that Chris is posting about this. I've been checking this site hourly hoping he'd write his take on it.

I guess the one hopeful thing is that they haven't printed much of it yet... and maybe once the bad things start to happen, Bernanke will change his plans quickly. Or is it the kind of cliff-dropper that happens so fast there's no time to pull back?

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Re: A Recent Alert - Fed Prints a Trillion
CB wrote:

Do not ever forget that the US is the greatest military power ever

Ha ha, good one!

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Re: A Recent Alert - Fed Prints a Trillion

Does the following mean that Russia is less socialistic than the U.S.?


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Re: A Recent Alert - Fed Prints a Trillion
CB wrote:

Do not ever forget that the US is the greatest military power ever known with a world wide network of bases and naval stations that control strategic shipping lanes and air space.



we are not as powerful as everyone wants to think.......everything we have, with very few execptions is well over 30+ years old. In many cases 50+. We are at a point where it is costing us more to keep things working then if we were to buy things new, yet we can't afford either.

The world wide network is part of the problem, and stretching us too thin, while costing us a fortune. ...

fujisan's picture
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Re: A Recent Alert - Fed Prints a Trillion

Thanks for the explanations, especially the implications of global QE done by IMF.

 Geithner Puts Finishing Touches on Plan to Revive U.S. Banks -


Geithner Puts Finishing Touches on Plan to Revive U.S. Banks 

By Robert Schmidt and Rebecca Christie

March 21 (Bloomberg) -- The Obama administration put the finishing touches on a plan to remove troubled assets from banks’ balance sheets that will be unveiled early next week.

Treasury Secretary Timothy Geithner intends to expand the Federal Reserve’s new $1 trillion Term Asset-Backed Securities Loan Facility to buy frozen assets, according to people familiar with the proposal. The revamped Fed program will sit alongside the Treasury’s planned public-private investment funds, while the Federal Deposit Insurance Corp.’s role will probably involve buying distressed loans, the people said.


The FDIC buying distressed loans ???? with taxpayers money !

Asia Times Online :: Asian news and current affairs



US Fed's move is the bigger problem

By Julian Delasantellis  


So Ben Bernanke decided to give America's Chinese and other foreign investors a good swift kick in the keyster as they headed out the door. 

Meetings of the US Federal Reserve's interest-rate setting Open Markets Committee used to be a lot more interesting back when there were actually interest rates to set. Now, with rates at zero, the Fed has to work extra hard to get the markets to take notice. At Wednesday's meeting, they did. 

After committing another $750 billion for purchases of mortgage-backed securities as part of its program of adding liquidity to the system through "quantitative easing", the Fed had this for those foreigners who apparently think that they can put America over a barrel by refusing to buy its debt.

To help improve conditions in private credit markets, the committee decided to purchase up to $300 billion of longer-term Treasury securities over the next six months.

In other words - foreigners, we don't need your money; we'll print our own! That's what's essentially been done with the short end of the Treasury yield curve since the Fed's rescue operations from last September; it was probably only a matter of time before they would attempt the same with longer-term securities. 

What will this do to the Fed's balance sheet? It will cause it to grow - a lot. From being virtually non-existent a few years ago, the Fed has it soon growing to almost $4 trillion - more than 25% of the country's gross domestic product. 

That's supposed to inspire confidence? 

The potential drawbacks to this approach are obvious. Does Bernanke really think he can convince foreign investors to make new investments in US government securities by threatening the dollar value of their existing securities? The last thing the recovery effort needs is long-term interest rates in an uncontrolled rise. 

A key factor currently holding down inflation in the face of the incredible monetary expansion recently has been a decline in what is called monetary velocity, the rate of which money circulates in the economy. Nothing will ramp up velocity faster than a falling dollar; people will want to get rid of that accursed green thing as soon as possible, before it falls even further. 

In the markets, the effect of the Fed announcement has been entirely predictable. Although yields on 10-year US government securities fell to 2.5% from near 3% before the announcement (entirely expected, what with $300 billion of new buying to hit this market) they were back on the rise by late Thursday. 

With the US dollar, there's been no such ambiguity of effect. The euro rose from 1.31 against the dollar to 1.37 immediately after the announcement, its highest level against the greenback since early January. The dollar also fell five cents against the yen, to under 0.93 cents/yen. Other inflation-sensitive markets also fell in line: crude oil broke above $50 per barrel for the first time since the New Year; gold takes the cake for sounding the alarm bell, up over $77 per ounce just since the announcement. 

But this collective 5% impoverishment of America drew no notice on Capitol Hill. The House of Representatives, in the very rare mode of considering themselves and acting as servants of the plebeians, overwhelmingly voted to seize the AIG bonuses through confiscatory taxation; to have a similar beneficial effect with the currency markets might require a repeal of the laws of gravity. 

I almost get the impression that, like a child with too many toys and who has become bored with his most recent one, the public is tiring of AIG rage. Will they now turn their focus to an actually important public issue? 


"Next, on PowerCableNews, we'll have the experts debating President Barack Obama's NCAA basketball picks!" 


joemanc's picture
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Re: A Recent Alert - Fed Prints a Trillion

Chris - You've been fairly consistent in your thinking that deflation will be the rule for the next 6,8,10-12 months or so before inflation/hyperinflation kicks in. I'm curious to know if you feel that the timeframe for inflation will now be moved up, or if the deflation of assets that needs to occur from a deflating bubble is so big, that deflation will continue along your original time estimate.

I have a feeling your one step ahead of me, but I thought I would ask anyways. I feel like we have a narrow window to take advantage of this deflation and to take the steps necessary for when inflation hits.

If you don't have a subscription, now is the time to get one. I feel the Fed actions the other day are historic and a watershed moment and now is the time to get the subscription's to read Chris's reports and stay ahead of the game. The reports are well worth it.

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Re: A Recent Alert - Fed Prints a Trillion

Firejacks post I think nails it.  Inflation would be a blessing right now.  If the treasury announces on Monday more bailouts for the bankrupt banks, the world may really start to panic.  No country wants to be the last one holding US dollars - if the exodus begins, the only stopping it would be a scenario Chris has detailed before, a complete financial shutdown worldwide.  It is really interesting the timing is two weeks prior to the G 20 meeting in London.  What message is the Fed. sending to the world?  They have to have a plan?

I know this event has made my sense of urgency increase greatly.  I am really interested in reading Chris's thoughts and also all of the good post on this website. 

Thank you Chris and all of the people who are making this site so informative- it is a comfort to log on and have open discussions of what is going on.....Congress and the mainstream media are clueless


CB's picture
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Re: A Recent Alert - Fed Prints a Trillion

that1guy, yes, of course that is so - aging equipment, huge and increasingly unsustainable cost - that makes the current situation more dangerous in my opinion. There is a window of opportunity for a game-changer, but it won't last.

Let me clarify my concern. The US has been spending ~$500B/yr for quite some time now (no one knows exactly how much let alone exactly what is being done with all these funds - it is a state secret). What is public knowledge is more than a little worrying. As computers have become more powerful there has been a great deal of effort put into information gathering and analysis. Programs like Total Information Awareness that were initially overtly set up (run by Iran Contra conspirator Poindexter) were simply hidden again when congress became concerned. One of the efforts - particularly post 9-11 when there was essentially carte blanche for surveilience - was to track the flow of funds world wide. There are many other such efforts underway - mostly secret. We know from the experience of the last 8 years in particular that there is no effective oversight of any of this from congress - only a few members on intelligence committees are told anything at all, and it is unlikely that they have detailed knowledge of any of it. It is run independent of political party by unelected bureaucrats behind closed doors and answerable to who? In theory to the president, but how can an outsider, who can't possibly have sufficient knowledge of all these operations to understand them, their uses and implications, be expected to effectively control them. Only career people can have such knowledge and understanding.

Over the past months we have seen first hand how much raw power two unelected officials have - the treasury Secretary and the Fed chairman. These people have made trillion dollar decisions in the name of the US government and the people, and when asked about details of the use of public funds we are told "trust us, we are wise and telling you would be dangerous". The military and intelligence operations are run exactly the same way - in spades. Congress has almost no control and very little information with which to exercise control even if they were to try.

If we are truly facing a financial crisis (now or in the near future) that could threaten the stability of the government do you think for a minute that this giant military aparatus will sit idly by? Information is power. Who has information about the world financial system? Everyone has a little, but who has the most? When we faced a global financial meltdown last fall (so we were told by those with information) who made the critical decisions about what to do? The Fed chairman and the Treasury secretary and a few close friends, in secret, answerable only to themselves. Do you think that the military industrial complex doesn't have ties to the financial priests who run our economy? In a crisis who will make decisions? How will choices be framed? Who has control of information?

Firejack's post quoting Denninger

"By refusing to confront the bankrupt nature of institutions under Bernanke's supervision and by choosing instead to continue to bail them out and take their trash onto his (our) balance sheet, Bernanke is risking something much worse than a Depression.

He is literally risking the end of America as a political and economic power. "

This quote ignores the fact that the US is also a great military power - for the moment. If the economy crumbles that will threaten the military dominance that exists today.

CB's picture
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Re: A Recent Alert - Fed Prints a Trillion

Let me add this: For the past 8 years the US had a vice president who had been in government service since the Nixon administration. He served in the US House of Representatives, was Defense secretary, and CEO of Haliburton - a company with extensive defense contracts. It was a standing "joke" during the first Bush term that he was running the country. It is undeniable that his estensive experience and access to information gave him great power. Bush's father had been president and head of the CIA. Who is Obama? A junior senator from Illinois - an inexperienced outsider who must depend on others for information and understanding, particularly about military and defense matters (and also, it seems, about financial matters). Bush and Cheny had access to imformation and power through an extensive network of friends and relations with high positions in government, industry, and finance. I think it likely that one reason Greenspan was reluctant to "pop the bubble" was that to do so would have adversely impacted Bush's war efforts. How convenient to have it pop as Bush and Cheny were leaving office and hand the mess off to the opposition.

Who really runs the country? Who has control of information now in this time of great financial crisis?

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Re: A Recent Alert - Fed Prints a Trillion

I caution everyone here to be wary of consensus thinking. While common sense says that we must face a huge inflation in the not too distant future, be aware that you might be wrong.

Having traded commodities using technical analysis for many years, some of my best trades have been contrary to all fundamental and consensus analysis. My study of Elliot Waves and other indicators suggest that deflation is upon us now, and starting to get a full head of steam. 

The Fed's action with quantitative easing was what I have been looking for to verify my opinion. I am now looking for signals to enter a trade long the dollar. My concern is if I am right, will I be able to exit in time to secure my profits and convert to cash before the systems freezes.

I'm not sure about the price of Gold, logic says it will go lower when the scramble for dollars begin. Of course, it could dislocate and go higher from here. I would like to hear other opinions...........GMAN



Davos's picture
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Re: A Recent Alert - Fed Prints a Trillion

Hello GMan:

Your herd thoughts are really intriguing. I agree that the Fed is doing this to stop deflation.

I heard a good pice here and wonder what you think of it. 

Select an Audio Format - Part 1
RealPlayer | WinAmp | Windows Media | Mp3

  • The Weimar Way
  • Resource Scarcity: Water, Food & Energy - All Related 

Personally, I think we have entered the Banana Republic zone. I think this will be confirmed when news of Geithner's money laundering scheme is unveiled (he is transferring the bad assets from the bank to the tax payers, it is as creative as a Mafia laudnry). 

Take care. 



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Re: A Recent Alert - Fed Prints a Trillion

Bonds will continue to behave counter-intuitively.

Bonds ARE behaving very intuitively when viewed from the perspective of a bond TRADER rather than a coupon clipper.

Late October 2008 was the first mention in the news of the Fed's "quantitative easing policy". On November 12, 2008 the US treasury auctioned more than $20 billion 10-year treasury notes. Demand for this treasury issue was of course intuitively high. 

On November 15, 2008  for the cash outlay of $99,727 I received an IOU from the US Treasury for $100,000 plus an additional $187.50 in semi-annual interest payments until November 2018.. I honestly don't care about the IOU because I know the United States is not even going to exist by 2018. I most certainly don't care about the measly 3.75% coupon rate.  These things do not concern me.

What DOES concern me is finding a ready BUYER for my IOU sometime in the next few months at a very handsome profit. The FED has already very publicly promised to buy my bond from me at some price MUCH higher than $99,727.. How much higher you might wonder??

In February, 2009 - less than 100 days after my initial 'investment' I flipped my IOU to some greater fool that is similarly expecting to soon profit in the exact same manner that I have profited. This guy most eagerly paid me $ 109,190 for that same IOU that I paid $ 99,727 for back in November. I didn't even have to tile or paint it first. I pocketed a clean $ 9,462 profit on a $99,727 'investment' in less than 3 months which works out to a ANNUAL return north of 35%.

 Keep in mind this little example of a bond bubble assumed the cash purchase of an individual issue.. With a futures account I only have to put up 25% of bond's market value... This would increase my 35% annual return by a power of 4.

I wished the greater fool well. I am happy with my 35% return and I am sure he will be able to flip his $109,190 'investment' if he has not already done so with this latest Fed announcement. The greatest fool with the deepest pockets has already laid it all on the table for us to take advantage of. The Fed has promised to print money and buy everything the market will ever offer at some price higher than what the market reflects today. 3.75% was simply NOT acceptable in November and 2.75% is similarly unacceptably high in February.. Just how much is the Fed willing to pay for a 10-year treasury note?? 

Who knows- whatever it takes to re-inflate the housing market. A 10 year bond price high enough to drive the 10-year yield to zero as well perhaps.. Move on the to 30-year bond after that?  The original idea is really kind of comical if you think about.. The BIG PLAN for the Fed is to buy up SO many bonds and drive the price of the bonds up SO very high that long term rates get SOOO low that I suddenly decide it would be a GREAT idea to go buy another house regardless of the offered purchase price. An old house being offered at 25times rent- no problem I'll take three of those please - it's free money right?  But I'm sorry Mr. Bernake even if I could get a 30 year fixed rate mortgage of 1%, I am STILL not going to increase my debt load to buy another house to re-inflate the housing market for you. I lost my job back in December. I want LESS debt not more. All the free money I can get it just going to go into paying down debt not taking on new liabilities.

Bubbles are defined as markets that trade in high volumes at prices that are considerably higher than their intrinsic value
During the stock bubble market players ignored the silly notion that a stock price reflects the future discounted cash flow of the underlying company.  During the housing bubble market players ignored the idea that a property was only worth the future discounted cash flow of rental rates. The bond bubble ignores the counter-party risk of the US Treasury, inflation and the 'intrinsic value'  ie coupon yield of the bond. 
The ever increasing rush into the booming US Treasury market is not fueled buy FEAR as the media daily touts.  
"Investors just have no where safe to put their money."
"Investors push short term bond prices up to reflect negative yields because of deflation expectations going forward."
This market is still being driving by GREED. Meaning greed for money-in-hand, short-term profit, not coupon yield but FAST MONEY 'flip-that-bond' real-yield. This is simple momentum speculation fueled by the Fed's promise "drive down rates" through massive outright printing of money and the buying of treasuries. 
Bernake says we MUST have higher bond prices TODAY! Nothing else will do  BUY-BUY-BUY today cause the Fed has promised to pay you even MORE than you originally paid for it in the very near future. 
If only I could convince the Fed to buy my house at 50% over market value instead of these stupid IOU's. THAT might actually not so magically re-inflate the housing bubble.  Expect food and energy prices to march steadily up from here. The jig is almost up.
ralfy's picture
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Re: A Recent Alert - Fed Prints a Trillion

It will no longer matter because the current crisis was triggered by subprimes, which are part of a $500+ derivatives market and a total credit market from which we have Option ARMs and Alt As, whose interest rates may reset soon. Many of these instruments and generally the derivatives market are not regulated by governments.

Bailouts, no bailouts, it won't matter, either. In order for the U.S. to recover, it has to export heavily and import and spend much, much less, and there will have to be much lower wages in order to keep exports cheap. But if other countries are also faring badly, then no one will buy what is exported. What's left is to cut down heavily on many expenses and resource use, plant food, localize, etc.


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Re: A Recent Alert - Fed Prints a Trillion

Interesting perspective Gman.  I appreciate you sharing your  view on what's going on.  Getting caught up in group thinking can happen so easily; it seems like a good idea to at least consider other ways things might be playing out!  Thanks.

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Re: A Recent Alert - Fed Prints a Trillion

Good post, Life.



Gman's picture
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Re: A Recent Alert - Fed Prints a Trillion


Good points from the audio, agree with most but just don't see a major price inflation in the near term.

Consider the following:

Let's say that money = debt and/or

I think we have been experiencing
inflation for decades. We have been experiencing hyperinflation for
the last 5 years. Today we have it on steroids. What I see happening
is a massive amount of defaults, especially when the counter-parties
to derivatives contracts are asked to step up and pay. The result
will be the destruction of money. Money via additional debt and printing that we are creating today is
nothing compared to what will be lost.

Consider the following, with a couple
of excerpts from the article linked below.

Iron Law of the Burden of Debt

“The liquidation value of total
debt is inversely proportional to the prevailing rate of interest.

In particular, halving
the rate of interest by the central bank is equivalent to doubling
the liquidation value of total debt. “

“If the interest rate is halved
serially by the Fed (which has happened in the past, and may happen
again, as interest rates can be halved any number of times without
hitting zero or going negative) then, for example, upon a
ten-fold serial halving,
the liquidation value of the total
debt is increased more than a thousand-fold
(210 = 1024). This
means that trillion is promoted to quadrillion, quadrillion is
promoted to quintillion, and so on, in direct consequence of the
serial 10-fold halving.”

“The result of the bailouts and
stimulus packages will be a vast expansion of government debt, and a
serial halving of the rate of interest to accommodate it, followed by
the escalation of the liquidation value of total debt to the
quadrillion and quintillion dollar range and beyond. Deflation will
sweep through the land making prices and wages fall.”

Read the article, it may give additional insight.



Lifeshort.Deathcertain's picture
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Re: A Recent Alert - Fed Prints a Trillion

Gman- I agree in the sense that that I also don't see "major price inflation in the near term"

But what is 'major' and what is 'near term'?

Before March of next year we will see official CPI greater than 9% with more realistic measures of  CPI such as those tracked by approaching 15%.

Don't get to stuck into thinking that the halving of interest rates is the only "tool" the Fed has to monetize our debt with.
When the Fed states ..."will employ all available tools to promote economic recovery and to preserve price stability."
what they are REALLY saying is that the 2007 pre-crash asset prices is the only acceptable floor price for these assets. In fact, inflation up from that old floor price is not just preferable but mandatory. We MUST have inflation and trust me, we WILL have inflation. And I don't mean in some distant future of 2012-2015. Bernake understands that our system will simply no longer exist in 2011 if he is not successful arresting falling asset prices post haste.
When people speak of all the various "tools" at the Fed's disposal to effect the economy it is important to realize that regardless of what "tool" they chose to utilize there really is only ONE simple lever in the entire economic system that the Fed has any, and in fact they have 100% total control over this lever. It is a binary lever that either says + or -.  
The ONLY thing the Fed actually controls is the notational money supply. And by notational money supply I mean literally it really is just a notation. A single number from which all other values are derived. Your infinitesimal slice of the world economy is literally some percentage of whatever notation the Fed decides to put next to the $$ mark in its ledger. It really is that simple. That really is the only thing the Fed actually does.
So rather than get caught up in exactly HOW or when the Fed will move that lever to + let me give you a recent example of just how simple it is for the Fed to do this.  
Two years ago news stories were circulating decrying the "shortage of coins". Regulations had just recently been past to prevent the exportation and melting of our token coins but of course "These new regulations at best (only) forestall the inevitable for a while...". This quote is taken from a letter published by the Fed explaining in detail that the best solution for "coin shortage" was to simply change the notional value of that token we commonly refer to as a penny. Or as stated in the conclusion of the paper, which I highly recommend everyone to read in the link below  - the Fed intends to one day simply "rebase pennies to be worth five cents."
This December 2006 publication was not in response to any type of worldwide crisis or catastrophic emergency it was simply explaining the obvious outcome of our debt based, inflation dependent economic system. The Fed paper explains how it is "inevitable" that a penny would be worth a nickle and details how to best effect this outcome in the near term. Just as it is inevitable that your house will one day be worth one million US dollars. It really will be that simple.
A feature of our notational money system is that there is no need to pass an executive order outlawing the private ownership of gold and devaluing paper currency by 57%.  Tomorrow morning the Fed can make and announcement that every dollar bill in your wallet is henceforth worth $100 Dollars. 
POOF !  
What bad debts?? 

The huge significance of this recent FOMC statement is that in great detail the Fed is very publicly acknowledging that it is not in any way limited to only monetizing short term government debt. The Fed is not even limited to monetizing government debt or GSA mortgage debt. Everyone's personal debt is notated in dollars. And that little notation next to the $$ symbol on the Fed's balance sheet is arbitrarily set at the whim of the Fed 

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