Friday, July 10, 2009

Agency Debt

Today the Fed will buy nearly $4B of "agency debt"—the first of an earmarked $200B. $7B was offered for sale to the Fed, of which only about half of that was taken. It appears they are starting slow.

By "agency," they mean the GSEs: Fannie Mae, Freddie Mac, and the Federal Home Loan Banks. As for "debt," it would be packages other than mortgage backed securities since that has been distinguished separately. Bonds perhaps? It still seems rather vague but may clarify in further press releases.

It's small potatoes now, but if the Fed starts buying, with printed cash, debt that has no chance of being repaid, from agencies where no recourse will be demanded, that would constitute a pure infusion of cash into the money supply, which would reflect a permanent devaluation of the dollar by the relative percentage the money supply was expanded.

This is in contrast to credit-driven bailout measures (i.e. funded by Treasury Bonds), or any easy credit, which is only a temporary devaluation of the dollar. It also contrasts to taxpayer-funded bailout measures which does not devalue the dollar at all but simply shifts cash from taxpayers and the usual tax money recipients to those who receive the bailouts. A poor investment at best.

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