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Wednesday, the Fed unleashed the nuclear option - printing money. Or in Fedspeak - quantitative easing. To the tune of 1.15 trillion bucks.

China knew this was coming when Premier Wen Jiabao said "I request the U.S. to maintain its good credit, to honor its promises and to guarantee the safety of China’s assets." And Bernanke also had his PR moment on 60 minutes last weekend (the last time a Fed chairman did this was in 1987). But it's not really a major surprise he'd do this since Bernanke had said he'd do this in 2002.

Deciding to print money is pretty much the final desperate move. Why did he finally choose to do it now? Because otherwise Treasury interest rates would go through the roof. Treasury demand has been falling for the past several months. Foreign investors sold a net 43 billion dollars in long-term US securities in January. 3 mo MA of long-term securities have been falling for almost a year. In order for rates not to rise, the Fed would have to buy Treasuries, since nobody wants them now at these low rates.

What does this mean for the average US citizen? The money in our pockets are losing value. So, instead of a visible taxation on our income, we now have an invisible hand taking away all our money.

As the saying goes "there is no free lunch." And I don't think this will all end out well (I'm thinking Zimbabwe).

Links:
Helicopter Ben finally hauls out the helicopter
The Fed End Game
I'll be watching you
Wikipedia on QE
Quantitative easing explained


Posted: 2009-03-20 15:49:53


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