Who would have guessed there was such an easy solution to the recession/depression we're experiencing? It turns out that all we need to do is print more money - lots more money!
That's the tonic prescribed by Dr. Ben Bernanke and his fellow Federal Reserve Board governors and according to media reports it appears the rest of the world is ready to swallow the same medicine. The logic seems to be that if low interest rates aren't working (and they can't go any lower in the U.S.) then maybe flooding the system with cash will do the trick.
That's really what Wednesday's surprise announcement from the Fed was all about. Of course, no one in officialdom put it in such stark terms. Instead, the formal statement said that the Open Market Committee has decided "to increase the size of the Federal Reserve's balance sheet further by purchasing up to an additional $750 billion of agency mortgage-backed securities, bringing its total purchases of these securities to up to $1.25 trillion this year, and to increase its purchases of agency debt this year by up to $100 billion to a total of up to $200 billion". The move is intended "to provide greater support to mortgage lending and housing markets".
On top of that, "to help improve conditions in private credit markets, the Committee decided to purchase up to $300 billion of longer-term Treasury securities over the next six months".
When you add up the numbers, they total $1.15 trillion in what amounts to new money - and that's on top of the $600 billion previously committed! No wonder the gold bugs went crazy on Thursday, pushing up the price of bullion by almost $70 an ounce! In one fell swoop, the Fed set the stage for a devaluation of the U.S. dollar and opened the door to a new inflationary cycle that could conceivably make a bad situation even worse.
The Open Market Committee appeared to shrug off the inflation threat, saying in its statement that it expects cost of living increases to remain "subdued" and adding that it sees "some risk that inflation could persist for a time below rates that best foster economic growth and price stability in the longer term".
In other words, let's slay one bogeyman at a time. Right now we have to stop deflation dead in its tracks.
Well, printing truckloads of cash can do that. The trick is to know when to turn off the spigot and that requires a great deal of finesse. History is full of cases where the financial manipulators got it wrong. When that happens, the consequences can be devastating. Let's take a quick look at some possible scenarios that might flow out of this.
Mild inflation. A little inflation is a good thing. Almost every economist will tell you that. There was actually some cheering from Bay Street when Statistics Canada announced on Thursday that our CPI jumped by 1.4% (annualized) in February. "A little bit of inflation is good news," the Globe quoted economist Douglas Porter of BMO Nesbitt Burns as saying. One of the effects of the inflation bump may be to encourage people who have been delaying spending on big ticket items in hopes of further price declines to open their wallets. That would be good news for the economy.
High inflation. The problem with inflation is that it can get out of hand very quickly and when it does it is hard to put on the brakes. Think back to the 1970s and 1980s when CPI increases in the high single digits were common and we even topped 10% at times. Anyone who lived through that period will remember how unpleasant and difficult it was.
Stagflation. High inflation is bad enough but when it is combined with a stagnant economy the result is toxic. That's what happened for a period in the mid-1970s. Prices skyrocketed while household incomes stood still or even declined. It was stagflation that prompted the Trudeau government to introduce wage and price controls in 1975, the only time that has happened in Canadian history. Given the weak state of the global economy, another round of stagflation later this year and into 2010 cannot be ruled out.
Hyperinflation. This is the ultimate financial disaster scenario. Prices increase so fast that the cost of a meal may literally double between the time you start to eat and the time the bill comes. Paper currency loses all value. Governments print bank notes with face values in the billions, but they are actually all but worthless. If you want to know what life is like under such conditions, just read the latest news reports from Zimbabwe.
This is the kind of fire the Fed is playing with in their desperate attempt to pull the U.S. out of its slump. Hopefully, they can keep it a controlled blaze. But as we have seen in the real world, controlled fires sometimes get out of hand, causing havoc. Let's hope it doesn't happen this time but to be on the safe side, add some gold to your portfolio.
That's the tonic prescribed by Dr. Ben Bernanke and his fellow Federal Reserve Board governors and according to media reports it appears the rest of the world is ready to swallow the same medicine. The logic seems to be that if low interest rates aren't working (and they can't go any lower in the U.S.) then maybe flooding the system with cash will do the trick.
That's really what Wednesday's surprise announcement from the Fed was all about. Of course, no one in officialdom put it in such stark terms. Instead, the formal statement said that the Open Market Committee has decided "to increase the size of the Federal Reserve's balance sheet further by purchasing up to an additional $750 billion of agency mortgage-backed securities, bringing its total purchases of these securities to up to $1.25 trillion this year, and to increase its purchases of agency debt this year by up to $100 billion to a total of up to $200 billion". The move is intended "to provide greater support to mortgage lending and housing markets".
On top of that, "to help improve conditions in private credit markets, the Committee decided to purchase up to $300 billion of longer-term Treasury securities over the next six months".
When you add up the numbers, they total $1.15 trillion in what amounts to new money - and that's on top of the $600 billion previously committed! No wonder the gold bugs went crazy on Thursday, pushing up the price of bullion by almost $70 an ounce! In one fell swoop, the Fed set the stage for a devaluation of the U.S. dollar and opened the door to a new inflationary cycle that could conceivably make a bad situation even worse.
The Open Market Committee appeared to shrug off the inflation threat, saying in its statement that it expects cost of living increases to remain "subdued" and adding that it sees "some risk that inflation could persist for a time below rates that best foster economic growth and price stability in the longer term".
In other words, let's slay one bogeyman at a time. Right now we have to stop deflation dead in its tracks.
Well, printing truckloads of cash can do that. The trick is to know when to turn off the spigot and that requires a great deal of finesse. History is full of cases where the financial manipulators got it wrong. When that happens, the consequences can be devastating. Let's take a quick look at some possible scenarios that might flow out of this.
Mild inflation. A little inflation is a good thing. Almost every economist will tell you that. There was actually some cheering from Bay Street when Statistics Canada announced on Thursday that our CPI jumped by 1.4% (annualized) in February. "A little bit of inflation is good news," the Globe quoted economist Douglas Porter of BMO Nesbitt Burns as saying. One of the effects of the inflation bump may be to encourage people who have been delaying spending on big ticket items in hopes of further price declines to open their wallets. That would be good news for the economy.
High inflation. The problem with inflation is that it can get out of hand very quickly and when it does it is hard to put on the brakes. Think back to the 1970s and 1980s when CPI increases in the high single digits were common and we even topped 10% at times. Anyone who lived through that period will remember how unpleasant and difficult it was.
Stagflation. High inflation is bad enough but when it is combined with a stagnant economy the result is toxic. That's what happened for a period in the mid-1970s. Prices skyrocketed while household incomes stood still or even declined. It was stagflation that prompted the Trudeau government to introduce wage and price controls in 1975, the only time that has happened in Canadian history. Given the weak state of the global economy, another round of stagflation later this year and into 2010 cannot be ruled out.
Hyperinflation. This is the ultimate financial disaster scenario. Prices increase so fast that the cost of a meal may literally double between the time you start to eat and the time the bill comes. Paper currency loses all value. Governments print bank notes with face values in the billions, but they are actually all but worthless. If you want to know what life is like under such conditions, just read the latest news reports from Zimbabwe.
This is the kind of fire the Fed is playing with in their desperate attempt to pull the U.S. out of its slump. Hopefully, they can keep it a controlled blaze. But as we have seen in the real world, controlled fires sometimes get out of hand, causing havoc. Let's hope it doesn't happen this time but to be on the safe side, add some gold to your portfolio.
