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Five Things: Fed Fires Final Bullet; Market Shrugs


Time to pass the collection plate.

1. Fed Fires Final Bullet; Market Shrugs

The word came down like a sermon delivered at dawn from high up on a hotel balcony. Which is the kind of thing that when you hear it, depending on your state of mind, you can't quite be sure whether to seek out the collection plate or call the police. For reasons that aren't quite clear, we quickly chose to seek out the collection plate:

"US central bankers decided yesterday to purchase $300 billion of Treasury securities over the next 6 months, concentrated in the 2-10 year part of the curve, and to more than double mortgage-debt purchases to $1.45 trillion."

But so what? That's less than a third of this year's Treasury borrowing requirement. And I suppose that's why the Federal Reserve's desperate decision to step into the open market and buy Treasuries was greeted on Thursday with a collective shrug. Pass the collection plate. Just another sad sermon from a shambling Linkhorn of a preacher.

"I ain't a playin' the whore to no man," preacher Fritz Linkhorn said in Nelson Algren's novel, A Walk on the Wild Side, even though the question itself had been posed by no one.

2. Hyperinflating?

So this desperate move by the Fed, the final bullet so to speak, this is clearly hyperinflationary, right?

Not by a long shot.

Here's the thing: When the Treasury issues debt, it takes liquidity out of the market as cash is swapped for Treasury bonds, bills and notes. When the Federal Reserve buys those Treasuries from the dealers, it is injecting liquidity back into the market. But, because the Fed's announcement will cover less than a third of Treasury issuance this year, all that is taking place is that the Fed is desperately trying to at least reduce the amount of liquidity the Treasury is sucking out of the market.

But wait - there are other, more complicating factors at work.

Household net worth has declined by roughly 20% since peaking in 2007, according to the Fed's own figures. Household "wealth" fell by $5.1 trillion in the fourth quarter alone. Combined with rapidly increasing household savings, the Fed, by moving to artificially suppress interest rates, is inadvertently quashing the very risk appetites it desperately needs to motivate in order to kickstart its own ongoing Ponzi scheme.
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