By now I'm sure many of you have heard that Fed Chair Ben Bernanke has announced a third round of quantitative easing. The Federal Reserve will borrow or print $40 Billion every month to purchase US Treasury or Mortgage Backed Security (MBS) debt. The difference between this round and the previous two, is that this effort is open ended. No time limit, no cap. The Fed 'hopes' that they can stop this activity by mid 2015 and add 'only' another $1.4 TRILLION to our already $16 plus Trillion debt. Goldman Sachs last week estimated the debt increase would probably fall somewhere in the range of $2 Trillion. This is simply madness.
Without going into how increasing the debt and money supply debases our currency, let's look at what they are really saying here. If the Federal Reserve borrows or prints money and buys MBS debt, they are receiving an asset that should produce cash flow. The Fed should receive monthly principle and interest when the mortgagees pay their monthly mortgage. The cash flow could be used to buy more MBS debt or payoff the moneys borrowed to buy the bonds. If the Fed is saying they are going to increase the debt by $1.4 Trillon in the 33 months or so, they are basically saying they aren't getting ANY of the investment back. That, or the Interest the government will have to pay on the US Treasury's they plan to create out of thin air will wipe out the cash flow received. Or, maybe its a combination of the two. Either way, this is a horrible idea. The American Tax payer is basically subsidizing a housing market that, unfortunately, needs more correction.
How will this put us in the fast lane towards hyper-inflation? There's an old story in the financial industry that goes something like this: An investor calls up his broker one Monday and asks how much a dozen eggs sells for. The Broker tells him $1 a dozen. The investor tells him to buy $1 million dollars worth. The next day he calls and asked the same question and the Broker tells him eggs are now $1.25 a dozen, in which the investor tells him to buy another million dollars worth. By Friday, when the investor calls his Broker and asks what a dozen eggs cost he's told $2.00 a dozen. Happy with this price rise, he tells his Broker "SELL!" The Broker than asks, "Who to? You are the egg man"
The point of the story is that the Federal Reserve is creating these markets and driving up the prices of the bonds with borrowed or created money. If they ever need to sell the securities to decrease the money supply or raise cash, the prices of the debt could implode overnight. This will drive up yields and interest rates, which will drive up costs of borrowing on loans linked to US Treasuries. This will be passed through to consumers by increasing prices on the goods and services they buy. $8 loaf of bread?? Could happen. $10 per gallon gas?? Not out of the realm of possibility. When this bubble bursts, and it will, we are all in for a big day of reckoning.
We need to put representatives in office who are willing to stand up and say "No More!" No more borrowing and printing! No more kicking the can down the road for our children to clean up and suffer for. We need to take our bitter medicine now, before that medicine turns toxic and kills our economy for decades.