Guest Author - Tony Daltorio
The Federal Reserve this week made an extremely important decision which will affect the economic future of every US citizen.
In an attempt to make it easier to pay off the massive debts loads that are burdening everyone in the US - individuals, corporations, governments - they have decided to go down the path of inflation.
The Federal Reserve has adopted a policy which is called quantitative easing. In effect, the Fed is creating money out of thin air to purchase the massive amount of bonds that the US government is issuing to pay for bailouts, stimulus, etc.
The Fed has announced that over the NEXT 6 MONTHS, they will purchase up to $300 BILLION of US Treasuries Notes in the maturity range of 2 to 10 years. The Fed also announced that they will be purchasing an additional $750 BILLION of mortgage securities, bringing the Fed's total purchase of mortgage securities to $1.45 TRILLION!
Once these purchases are made, it means the Fed's balance sheet will approach a staggering $4 TRILLION, nearly a third the size of the entire US economy. And the Fed will be adding to it - after the initial 6 months, they will surely be purchasing even more US Treasuries.
The Implications
The reaction in the markets was immediate and telling. The US Dollar dropped dramatically while inflation-protected bonds(TIPS) and gold both soared. These markets are telling investors that inflation will be coming down the road in a forceful way.
I would look for these long-term trends to continue - a lower US Dollar, higher prices on commodities and a generally lower standard of living.
Historically, whenever a central bank like the Fed resorts to money printing it results in inflation, a debased currency and a lower standard of living for the people of the country.
This move from the Fed I think will make the countries, such as China and Japan, who are massive holders of US debt very happy!
These countries have not been able to sell their Treasuries for fear that a massive sale would cause a financial panic. In fact, they have had to continue buying US Treasuries in an effort to prop up prices and protect their investment.
Now these countries can begin unloading their massive Treasury holdings by selling them to a massive buyer - the Federal Reserve. And they can lock in a great price for their holdings too.
These countries will finally be free of the albatross around their necks of US debts and put the money to use elsewhere. China is already spending massive amounts in locking up sources of badly-needed commodities - oil, metals, food.
For individual investors, I urge them to look for ways to preserve their wealth and protect themselves against future inflation.
Please feel free to contact me directly with any comments or questions.
