Fed to bolster the economy with $1 trillion purchase - a.k.a. the road to hyperinflation
I wrote a post about 3 weeks ago about the alarming news that I had heard from a bond trader friend of mine on how the Fed was trying to control the yield curve by buying at the long end and selling at the short end and how that gets us to hyperinflation. They did just that but in a massive scale - today comes the news that they are going to buy $1.2 trillion of long term government bonds.
Typically, the Fed buys and sells short term bonds to control the money supply. This is an unusual action in its size that significantly increases the money supply in the market - a lot of U.S. dollars all of a sudden appear out of nowhere.
This new infusion of cash in theory should lower the interest rate spread of treasuries and lending rates (i.e. banks will make loans at lower interest rates) and stimulate economic activity (i.e. people would start borrowing again to buy stuff).
On the other hand, increasing the money supply devalues the dollar. DJI went up 1.23% today but the JPY gained 2.47% against the dollar, the Euro went up 3.54% so actually today net net was a down day in the market for all of us.
The Fed is taking a big risk that could dilute the value of the dollar further and set the stage for future inflation. We still have to borrow and that is a lot harder to do with a weaker dollar.
