The Federal Reserve, at long last, has made the critical decision to monetize the government's debt, starting with this measure:
With the country sinking deeper into recession, the Federal Reserve launched a bold $1.2 trillion effort Wednesday to lower rates on mortgages and other consumer debt, spur spending and revive the economy. To do so, the Fed will spend up to $300 billion to buy long-term government bonds and an additional $750 billion in mortgage-backed securities guaranteed by Fannie Mae and Freddie Mac.
This is banana republic policy, generating oceans of fiat money to buy worthless "assets" (e.g., bad debt that was bundled and sold as investment grade "securities"). I presume this will kick into high gear when foreign central banks stop buying Treasuries.
William L. Anderson writes:
Traditionally, the Fed has limited its securities purchases to government bonds, but bonds that are bought and sold in secondary markets. That means others, be they institutions, individuals, or even other governments, must first have bought the government bonds before the Fed can purchase them. However, what happens when the seller runs out of suckers, that is, when U.S. Government bonds no longer are seen as a worthy investment or that there simply are not enough sellers to satisfy the huge demands of the U.S. Treasury?
Thus, it is Bernanke to the rescue. No longer is the Fed going to have to be constrained to purchasing government bonds in the secondary markets, and then leaving the payments in bank reserves where they might sit because of the dearth of new investment opportunities. Instead, the Federal Reserve has decided to purchase private equities, Fannie and Freddie mortgage securities, and last, but not least, long-term Treasury bonds, the last being a primary market transaction.
This last move is significant because it unleashes the Fed from former limitations to create new money. At the same time, the Treasury no longer is constrained by limitations of taxation and limited incomes of individuals and institutions that traditionally have purchased new government bonds. Instead, the Treasury sells its bonds directly to the Fed, which then credits the Treasury ledgers with new money. The government then spends as it pleases.
The U.S. Dollar is toast.
From another angle, Bill Butler sees the Iraq War as a ruthless yet self-defeating attempt to prop up the dollar as the world's reserve currency:
What if Saddam had gone through with his threat to accept only Euros, so what? What threat is that to the dollar? Well, since
All the lying and murdering in the world cannot change the laws of economics nor, to put the matter in theological terms, stave off the judgment of God.