Ease on down the road

(Bernanke is sort of like “The Wiz”, don’t you think?)

The Financial Times has an excellent animated explanation of Quantitative Easing.

As you probably know, yesterday the Fed announced it would purchase an additional $750 billion of mortgage-backed securities (on top the $500 billion already in progress), an additional $100 billion of agency debt (on top of the $100 billion in progress), and $300 billion of long-term Treasuries (which is new).

In other words, the Fed is about to spend $1.15 trillion buying mortgages, Fannie/Feddie debt, and government debt.  Where will the Fed get that money?  From nowhere; they will simply create it.  John Jansen suggests the nickname “Helicopter Ben” should be retired and replaced with “ICBM Bernanke”.

Here is the thing.  They have never done anything remotely like this before.  Nobody has, at least not on this scale.  Will it work?  Frankly, I have no idea.  My point is that neither does anybody else, including the policy makers, and this alone is reason to be worried.

My fear is that this approach will sacrifice the real economy in order to prop up fake asset values, that the best case outcome is now 5-10 years of economic stagnation, and the worst case is an inflationary depression.  But anybody who says they know for sure is lying.  We have just entered not so much a new chapter as a new book.

1 comment to Ease on down the road

  • snoopy

    The FT animation is really cool. Thanks for posting.

    Despite having some concerns about the way GLD might be run, I just put ~30% of my retirement money in it today because of the iTulip’s suggestion to invest about that much in gold. I guess I couldn’t find a better option for retirement funds. If anyone has a better suggestion for investing retirement money in gold, please let me know. Thanks.

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