Fed plan: sacrifice the dollar

safe store of value?
Fears of recession have turned to reality in the minds and wallets of every American not named George W. Bush.  Having long forsaken the free market economy to arbitrary powers, Americans naturally turn their economic concerns over to the federal government and the Federal Reserve.  The government has offered them $600 in tax rebates to help boost the economy.  This stimulus is miniscule in the grand scheme of the economy.  The Federal Reserve has taken much more drastic action.

 Fed chair Ben Bernanke recently announced that the central bank will increase its controversial Term Auction Facility loans to $100 billion per month, and said the TAF will remain in place for at least the next six months, and could be raised even further.  In addition, Bernanke said the Fed would be offering $100 billion per month of repurchase agreements.  All the borrowings could be collateralized by mortgage-backed securities, which are widely considered the most toxic investments in today’s market.  Essentially, banks are transferring their bad loans over to the government, to be paid by U.S. taxpayers, by printing money out of thin air. 

In our $12 trillion economy, $200 billion per month represents 20 percent of GDP.  Over the next year, trillions of dollars of worthless money will be tossed around in the U.S. market, and while this increases the number of dollars and helps stock prices, it is detrimental to the value of the dollar.  Stockholders should remember that their stock prices are measured in dollars, and while their stocks only go down some days, the dollar will go down every day with rare exceptions over the next year.

The rules of Keynesian economics are very simple, market corrections in this system are unavoidable, and the U.S. is overdue for a very large one.  Ben Bernanke and the Federal Reserve have decided to avoid the traditional route of depression by filtering it through the dollar first, but this will only delay the suffering felt by Americans.  By the end of 2008, the mighty dollar will have fallen below $0.45 on the Euro (it is now at $0.65), over three million jobs will have been lost in the U.S., the credit crisis will still haunt the market, and mutterings of the word “depression” will seriously enter the political discussion for the first time in many Americans’ lives.


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