Inflation Fears Grow After Fed Prints $1.2 Trillion

[dkf]

The Federal Reserve's remarkable announcement on Wednesday that it would print $1.2 trillion to buy bonds and mortgage-backed securities will yield some short-term benefits, namely lowering rates on mortgages, credit cards, and other loans.

As justification for the move, the Fed said in a statement that: "Job losses, declining equity and housing wealth, and tight credit conditions have weighed on consumer sentiment and spending. Weaker sales prospects and difficulties in obtaining credit have led businesses to cut back on inventories and fixed investment."

What the Fed didn't say is that the long-term risks of its actions, known as quantitative easing, are substantial. Printing money often leads to inflation, and printing large amounts of money often leads to significant inflation. (There's also the question of whether it's desirable or feasible to attempt to prop up asset prices, namely real estate.)

Fretting about higher prices -- more precisely, devaluation of the dollar -- might seem odd when stock prices, housing prices, commodity prices, and other prices have been sliding.

But inflation remains a possibility in the not-so-distant future. "The question is at what price?" wrote analysts from Germany's Landesbank Baden-Wurttemberg. "Bottom line is the Fed is adding a trillion dollars to their balance sheet. In the long run, the price for these massive rescue measures might be inflation as once the economy recovers the Fed might be not able to raise interest rates quickly enough."

http://www.cbsnews.com/blogs/2009/03/19/business/econwatch/entry4877724.shtml

[Craftsman]

1. I hear this and immeditately though of the Weimar republic

This will not end well if we keep just throwing money at it. We do not need another stimulus we need good jobs, the same jobs overseas.

[soothsayer]

2. the uk is doing 'quantitative easing' bigtime.

we are sure to follow suit and do more and more.

[dkf]

3. The UK too?

I haven't been following it.

[Warpy]

4. Right now they're more afraid of deflation

because so much money has simply evaporated into the thin air it represented.

[notesdev]

6. And we should ask why deflation is their "#1 enemy"

Especially since deflation is good for people who did the right thing, didn't lever themselves up on debt, saved money, lived modestly.

It makes the value of savings go up, and the purchasing power of a dollar earned go up.

Deflation is, sans Fed/Treasury tinkering, a natural state of affairs. Productivity rises, there's more stuff per dollar, a dollar can buy more stuff.

So why has the Fed declared war on this natural state of affairs? Who benefits?

I'll tell you who benefits. The same folks on the receiving end of bailout money, the same ones whose first access to money has allowed them to siphon off the wealth of wealth producers (i.e. people who work for a living, you and me).

[dkf]

7. Very true...but there definitely will be consequences

I was surprised how instantly the gold, oil and commodities markets moved on the Fed's latest $1.2 trillion program.

Also I wonder if there is a point where the Chinese will step in to protect their investment.

[RoyGBiv]

5. I wonder ...

Do they write the headlines and then run around trying to find a story that fits it? That's all that makes sense anymore.