Posted by: John Gilmore | September 16, 2006

Fed in Bond-Buying Binge to Spur Growth

I mentioned a few months ago that we’ll enter a new phase of this crisis if/when the Fed begins buying U.S. Treasury Bonds (monetizing U.S. debt). That phase started yesterday when the Federal Reserve announced it would begin buying Treasurys and mortgage-backed securities. What does this mean? It means that the Fed will begin creating trillions of dollars to buy these securities – essentially flooding the system with dollars.

If there’s one thing we’ve learned over the past few months – when we’re given a number – in this case $1.5 trillion dollars (amount of securities to be bought by the Fed) – the actual number will be much bigger. $1.5 trillion is an astronomical number – but I believe it’s only the beginning.

What are the real world implications? If you own Treasurys and know you have a guaranteed buyer (creating artificial demand) – what affect would this have on prices? You would expect prices to increase – and that’s exactly what is happening. In the world of bonds – if prices increase (due to demand) – yields fall – since the owner of the bonds doesn’t need to offer as much interest to sell them – and we see yields falling for Treasurys across the board – which in turn, drives down interest rates for you and me.

There are other consequences. Everyone is anticipating an additional $1.5 trillion dollars in the system over the next few months. What affect would you expect this to have on the value of the dollar? Significantly more dollars in the system should result in a drop in the value of the dollar – and that’s exactly what we’re seeing. If everyone expects the value of their fiat currency to decrease – where does everyone invest to hedge against this loss of value? Gold. Gold prices increased 6% yesterday after the Fed announcement and are up another 8% today.

With trillions of additional dollars flooding the system – would you expect inflation to decrease or increase? You would expect inflation to increase significantly in the coming months with such an increase in dollars.

So – in the coming months, we should expect to see the following things happen:

1. The value of the dollar will decline – and the decline will be significant.
2. The value of gold will increase – and the increase will be significant.
3. There is a very strong possibility that Inflation will increase significantly – leading to a hyper-inflationary spiral – which will eventually destroy the value of the dollar – completely.
4. When the U.S. is unable to finance its growing budget deficits because the world will no longer purchase our debt (possibly leading to short-term Treasury auction purchases by the Fed) – interest rates will rise – and the rise will be significant.
5. The instability of the world’s financial system will continue – leading to a continuing decline in the world’s stock/bond/derivatives markets.
6. The housing market cannot ‘recover’ from this crisis in this environment – housing prices will continue to decline – and the decline will be significant.
7. We should expect more Central Bank ‘actions’ and more ‘stimulus’ packages from governments around the world – but these actions will only delay the inevitable collapse of the world’s debt-based monetary system.
8. Due to these issues – expect world leaders to eventually offer a final ‘solution’ to the crisis – a solution that will involve a new, heavily regulated, global monetary system.

I believe we’re in a relatively calm period (compared to our future) – before things begin to really head downhill. So – you need to consider the following now:

1. Due to the Fed actions mentioned above – interest rates are temporarily low. If you are in an adjustable rate mortgage of any kind – now is the time to refinance to a 30 year fixed rate – if you can. The current window of low interest rates is going to close very soon.
2. If you believe your home’s value is going to increase at some point in the near future – it’s not going to happen. Don’t think that your home’s future value is going to solve financial problems – it’s all downhill from here.
3. If you have stocks/bonds/derivatives in any type of portfolio – brokerage, 401(k), etc. – sell them. Very soon – they will not be worth the paper they’re printed on – and I believe these markets will decline much more rapidly than the value of the dollar. If you’re worried about penalties – don’t be. Better to pay a 10% penalty now than to keep letting it ride in the stock market. Just like Vegas – sooner or later – the house is going to win.
4. Buy gold if you can – coins, etc. It’s difficult to find at this point. If you can find some – buy it. As I mentioned above – when the world’s fiat currencies decline significantly – the world will move to gold as its default currency for a period of time – just as it always has. If you can’t buy physical gold – move your investments into a Gold ETF (Exchange Traded Fund).
5. Imagine a world where prime interest rates are 20+%. With U.S. budget deficits projected in the trillions in coming years – there is a very high probability of this happening – and soon. If you are considering purchases that require a loan – keep this in mind.
6. Keep more non-perishable food on hand than normal. Nothing crazy – just shop every few days – instead of once a week. If something catastrophic happens (stock market crash, etc.) and people begin to panic – you don’t want to be one of the many people who are going to open their pantry and see 2 cans of soup. You will want to be able to avoid a mad rush to the supermarket.
7. Keep in mind that taking these precautions will only help you short-term. When the system collapses – all bets are off. We’re going to go through some chaotic times. Mentally prepare yourself for seeing things in this country that you never expected to see. More importantly – as I’ve said many times – you must be prepared spiritually. Faith is required to stand against what’s coming.

I’m reiterating the points above because things are getting very serious. If the Federal Reserve feels it necessary to pump $1.5 trillion dollars into the system to keep it going – it’s serious. If the Federal Government finds it necessary to pump $800 billion dollars into the system – it’s serious. If the Fed and our Government see it necessary to keep ‘bailing out’ large banks and corporations with billions of dollars (AIG, Citigroup, etc.) to prevent a complete collapse of the system – it’s serious.

We’ve been lulled into believing that nothing catastrophic could happen to us because of the recent past. The past 30 years have absolutely no bearing on the next 30. I realize that I’m telling you to do the opposite of what most of our leaders are telling you – which is why I encourage you to research these things on your own.

I don’t like to bring bad news to good people – but I’ve studied this monetary system for over 3 ½ years and the things I spoke about in 2005 – are happening today. There is one and only one end to this system – be prepared for it.

jg – March 19, 2009
MARCH 19, 2009

Fed in Bond-Buying Binge to Spur Growth

Dramatic Plan to Purchase $300 Billion in Treasurys Causes Biggest Drop in Interest Rates Since ’87; Perils of Printing Money

Wall St. Journal


WASHINGTON — The Federal Reserve ramped up its effort to revive the economy, declaring it would buy as much as $300 billion of long-term U.S. Treasury securities in the next few months and hundreds of billions of dollars more in mortgage-backed securities.

The Fed had already cut its benchmark interest-rate target to near zero. Unable to go lower, the central bank now is essentially printing money to raise the supply of credit and thus push down the longer-term rates paid by families and companies on mortgages and other key loans. The impact was immediately felt.

Jon Hilsenrath explains the impact of the Federal Reserve’s decision to buy treasury bonds.
Prices on Treasury debt soared, pushing the yield on 10-year Treasury notes down to 2.53% from above 3% the day before — the largest one-day drop since the aftermath of the 1987 market crash. The rate on a 30-year fixed-rate mortgage for credit-worthy borrowers fell to about 4.75%. But the value of the dollar sank, a reminder of the risk the Fed is running by printing money to give the economy a jolt.

The show of force follows months of internal debate. Fed Chairman Ben Bernanke had argued for staying focused on lending to troubled parts of the financial markets instead of buying long-term government bonds, an unorthodox step taken recently by the Bank of England. But Fed officials decided they had to do more as the economy deteriorated.

Wednesday’s move highlighted the central bank’s ability to move aggressively on the financial crisis without approval from Congress. That flexibility is important at a time of growing political hostility toward devoting more taxpayer money to bailouts.

As expected, the Fed policy-making committee voted unanimously to hold its target for the federal-funds rate, at which banks lend to each other overnight, between zero and 0.25%.
“The Fed is living up to its commitment to do everything in its power to deal with the crisis,” said Deutsche Bank economist Peter Hooper. “Monetary policy is not going to get us out of this mess by itself. But this is effective life support….keeping things from getting a lot worse.”

All told, the Fed will pump as much as an extra $1.15 trillion into the economy via bond purchases. The Fed will buy as much as $300 billion in long-term Treasurys in the next six months. It will increase the ceiling on purchases of mortgage-backed securities guaranteed by Fannie Mae and Freddie Mac to $1.25 trillion, up from $500 billion. The Fed also is doubling potential purchases of their debt, to $200 billion.

Write to Jon Hilsenrath at
MARCH 20, 2009
Secretary of the Fed

Wall St. Journal

In case there was any residual doubt, the Bernanke Fed threw itself all in this week to unlock financial markets and spur the economy. With its announced plan to make a mammoth purchase of Treasury securities, the Fed essentially said that the considerable risks of future inflation and permanent damage to the Fed’s political independence are details that can be put off, or cleaned up, at a later date. Whatever else people will say about his chairmanship, Ben Bernanke does not want deflation or Depression on his resume.

It’s important to understand the historic nature of what the Fed is doing. In buying $300 billion worth of long-end Treasurys, it is directly monetizing U.S. government debt. This is what the Federal Reserve did during World War II to finance U.S. government borrowing, before the Fed broke the pattern in a very public spat with the Truman Administration during the Korean War. Now the Bernanke Fed is once again making itself a debt agent of the Treasury, using its balance sheet to finance Congressional spending.

It is also monetizing U.S. debt indirectly with the huge expansion of its direct purchase program of mortgage-backed securities (MBS). It was $500 billion, and now it will add $750 billion more “this year.” Foreign governments have been getting out of Fannie and Freddie MBSs in recent months and going into Treasurys. Thus the Fed is essentially substituting as these foreign governments finance U.S. debt by buying presumably safer Treasurys.

The purpose of these actions is to keep rates low on both Treasurys and MBSs, and to keep the cost of funds low for banks and especially for home buyers. It worked on Tuesday; long bond and mortgage rates fell.

The case for doing all this is that the Fed needs to supply dollars at a time when money velocity is low and the world demand for dollars is high amid the global recession. As long as the world keeps demanding dollars, the Fed can get away with this extraordinary credit creation. That said, bear in mind that the Fed’s balance sheet has more than doubled since September — to $1.9 trillion from $900 billion. These latest commitments mean it may more than double again, close to $4 trillion. That would be about 30% of GDP, up from about 7%.

The market reaction clearly showed the implied risks, with gold leaping and the dollar taking a dive the past two days. As the economy improves, and thus as the velocity of money increases, the risk of inflation will soar. Mr. Bernanke says the Fed can remove the money fast, but central bankers always say that and rarely do. The Fed statement isn’t reassuring on that point. It says, “the Committee sees some risk that inflation could persist for a time below rates that best foster economic growth and price stability in the longer term.” The Fed seems to be saying it wants a little inflation, which we know from history can easily become a big inflation or another asset bubble. The last time the Fed cut rates to very low levels to fight “deflation,” we ended up with the housing bubble and mortgage mania.

The other great, and less appreciated, danger is political. The Bernanke Fed has now dropped even the pretense of independence and has made itself an agent of the Treasury, which means of politicians. With its many new credit facilities — the TALF and the others — it is making credit allocation decisions across the economy. If a business borrower qualifies for one of these facilities, it gets cheaper money. If it doesn’t, it’s out of luck. Thus the scramble by so many nonbanks to become bank holding companies, so they can tap the Fed’s well of cheap credit.
The question is how the Fed will withdraw from all of this unchartered territory now that it has moved into it. How will it wean companies off easy credit, especially since some companies may need it to survive? What happens when Members of Congress lobby the Fed to keep credit loose for auto loans to help Detroit, or credit cards to help Amex? House Speaker Pelosi yesterday gave a taste, saying the AIG bailout was the Fed’s idea “without any prior notification to us.” Mr. Bernanke, meet your new partners.

Above all, the Treasury and Congress won’t be happy if the Fed decides to stop buying Treasurys and the result is a big increase in government borrowing costs. This was the source of the dispute between the Federal Reserve and the Truman Treasury. The Fed wanted to raise rates amid rising inflation, while the Truman Treasury wanted cheap financing for Korea and its domestic priorities. The Fed prevailed in the famous “Accord” of 1951, thanks to a young assistant secretary of the Treasury named William McChesney Martin. He would go on to become Fed Chairman and create the modern era of Fed independence. The U.S. and the Fed are going to need another Martin, sooner rather than later.

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