Thursday, June 25, 2009

FOMC Outlines Quantitative Easing

Concluding their meeting yesterday, the Fed held interest rates at near 0%. This was expected and no surprise to anybody.

They reiterated their plan to continue what quantitative easing is currently underway, but did not add to it, citing some signs of a turnaround in the recession.

Here are the numbers: for this year they plan to buy $300B of Treasury Bonds, $1.25T of agency mortgage-backed securities, and $200B of "agency debt." I don't know what agency debt is, but I'm guessing both that and the mortgage-backed securities have very little market value so this amounts to a $1.5T infusion of cash into the economy, which can't be good if you have a savings account. The government is probably good for the treasury bonds, so the purchase of them with printed currency amounts to a $300B increase in money supply that will remit over the course of the bond.

More information about the mortgage-backed securities and agency debt is needed before any firm conclusions can be reached. Does the money for their purchase originate with printed currency or Treasury Bonds? And what recourse is there for the defaults? These will need to be known to determine how inflationary this policy will be.

And, although $1.5T is a lot of money ($10,875 T*Bux), the total money supply of dollars is somewhere around $10T, around 90% of it is debt, and that is all under heavy deflationary pressure at the current time.

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