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Why Printing Money Is So Easy for the Fed


By George Leong for Investment Contrarians !ec 12" 2#12

$he %edera& 'eserve is ()sy &oo*ing at what to do ne+t to try to *eep the economic renewa& on trac*" as the centra& (an* meets for the &ast time this year. $he %ed a&so )nderstands its impact wi&& (e hindered (y the ongoing (att&e in Congress regarding the pending fisca& c&iff. $he %edera& 'eserve is spec)&ated to contin)e its third ,)antitative easing -./01 program of ()ying mortgage (onds each month. $he effect wi&& see the %ed increase its ho&dings of mortgage (onds to near&y 23.# tri&&ion" according to a B&oom(erg s)rvey. -4o)rce: 5%ed 4een 6)mping 7p 8ssets to 23 $ri&&ion in 9ew B)ying": ;ahoo< %inance via B&oom(erg" !ecem(er 11" 2#12.1 $he (ond ()ying has he&ped to ease financing rates and drive the ho)sing mar*et higher. $he %ed has spent 23#.# (i&&ion a month to ()y mortgage-(ac*ed sec)rities and" in theory" &ower the financing rates. $he yie&d on the 1#-year $reas)ry stands at 1.=> vers)s 1.?> prior to the esta(&ishment of ./0@so itAs wor*ing. %or the %ed" as the ./0 wor*s its way thro)gh the system" Bo( creation is e+pected to (e a maBor (enefactor. $he %edera& 'eserve recogniCes that the Bo(s mar*et contin)es to (e pro(&ematic and needs to (e addressed" despite the )nemp&oyment rate fa&&ing to D.D> in 9ovem(er. $here are sti&& over 21 mi&&ion 8mericans &oo*ing for wor*. $o date" the s)per-&ow interest rates at (etween Cero and a ,)arter of a percent have he&ped to prevent the co)ntry from fa&&ing into the a(yss. If not for the &ow rates" the

carrying cost of the 21=.# tri&&ion in nationa& de(t wo)&d (e s)ffocating and ma*ing the sit)ation worse" which is why thereAs the fisca& c&iff. 4omething needs to (e done d)ring 6resident E(amaAs second term. 8s I said when ./0 was first anno)nced" the p&an p)t forth (y the %ed sho)&d he&p in theoryF ()t this is the rea& wor&d" and there are other varia(&es that come into p&ay that co)&d hamper the %edera& 'eserveAs p&an. 54trains in g&o(a& financia& mar*ets contin)e to pose significant downside ris*s to the economic o)t&oo*": says the %edera& 'eserve. $his sho)&dnAt (e a s)rprise. /)rope and the e)roCone are in a financia& mess" and China and 8sia are on fragi&e gro)nd. In China" we are seeing m)&tinationa& companies report s&owing in China as cons)mers there c)t spending. 4o whi&e I (e&ieve the %edera& 'eserve was correct in &a)nching ./0" I ,)estion how effective it wi&& (e and fee& the sit)ation is far worse than they want yo) to *now" given the massive de(t &oad and the fragi&e financia& sit)ation of many states. $he (ottom &ine is: the %edera& 'eserve wi&& contin)e to print money to ()y (onds. $he ,)estion is: what wi&& happen when the in* r)ns o)tG http://www.investmentcontrarians.com/recession/why-printing-money-is-so-easy-for-thefed/1125/ http://www.investmentcontrarians.com

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