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Mini Hyper-Inflation?


Velocity of money, interest rates too low.

Fed policies aren't working, and they're pulling out their last card a little more quickly than expected. I'm sure they're surprising their G20 buddies, and not in a good way. Mr. Bernanke is panicked about something.

Yesterday, the Fed announced they'll print dollars to buy $300 billion or so of US government debt, and another $750 billion in distressed assets from banks and the GSEs. The Treasury's needs will require them to issue $1.5 trillion this fiscal year (and another $1.5 trillion next year), having the effect of decreasing liquidity in the markets and economy as dealers swap cash for bills/notes/bonds. The Fed's purchase of them in the open market adds liquidity back into the market by swapping cash for bills/notes/bonds.

$300 billion vs. the Treasury's funding needs of a minimum of $1.5 trillion is only decreasing the amount of liquidity withdrawal by those needs. It's not at all the case that the Fed is hyperinflating - to say nothing of these Fed purchases being, of course, a drop in the bucket to the trillions that have been and are in the process of being wiped out.

The velocity of money is falling so rapidly (people trying to save money), that the Fed has had to try to counteract that by creating more. Mr. Bernanke apparently needs a course in logic. If people have just a little savings and are in fear that they won't have enough to retire, the more they can earn on investments, the more they'll be able to spend. Earning zero on investments means they'll have to spend less and save even more. The problem remains that interest rates are too low.

And one more point: if an inflationary monetary policy in a fiat system played an instrumental role in creating the fertile background for credit expansion and implosion, it's unlikely the same procedures will result in a cure. More likely, upon a weakening of the traction gained on this latest move, given high-powered monetary units account for only around 1% of total global liquidity, the conditions will be set for potentially a complete loss of confidence in the financial infrastructure and capital markets.

To break the cycle of delation what needs to be done is to actually raise interest rates and let markets (you and me investing our own money) correct the immense imbalances. This will quickly destroy bad debt (bad times), but it will much more quickly right the imbalances that the government seems to insist on making larger not smaller. Equity, which is really already worthless, would get wiped out in big banks.

So what? Higher rates would encourage savers to finally lend at a decent rate and allow new banks to start up to take the place of already dead big banks.

Yesterday as stocks rallied and people cheered, the dollar fell even more. Thus no wealth was created. It's like scoring a touchdown in the last quarter when you're behind 50 to nothing.

Policy makers are doing the wrong thing and are inept. Lawmakers didn't even read the bill that allowed AIG (AIG) to pay bonuses by contract. They're operating from fear and ignorance.

Risk is high.
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