The Fed Money Machine Gears Up to Print Trillions

In its effort to alleviate the credit crunch, the Fed yesterday unloaded a few more $100 billion on money markets and therefore ultimately on the tax bills of generations to come.

At 6 AM local time Monday, the Fed came out with a statement on a restructuring of AIG's debt that will inject $40 billion in share capital. The sweet deal for AIG is the rate curve from Libor + 800 basis points to Libor + 300 basis points. Altogether the help was almost doubled to $150 billion. As the government is determined to keep AIG afloat, the Fed will still make good money on it.

New money, money, money was the directive for the whole morning. At 10 AM the Fed money machine revved up. Looking forward to the new year, the Fed will offer $150 in a 17-day repo that matures on January 8. 2009 and sports a minimum bid 0.528%. If one could only get that rate on credit cards.

It's a MMIFF Costing $600 Billion as of Now

The Fed NY meanhwhile updated its information on the Money Market Investor Funding Facility (MMIFF). This new facility - that consists as all other liquidity facilities of nothing but new debt - has a current volume of $600 billion and I consider it a safe bet that we will see a trillion or more to come here soon as well.

After all, there appears to be no other strategy than to give away close to free, so long as you are a bank, GSE, or any other entity that has a good lobbyist at the Treasury. With Hank Paulson basically running the show by himself, chairman Ben Bernanke is degraded to an engineer who has to tune up the printing presses for the next couple of trillions we will see in the next few months alone.

Bloomberg Presses Fed for More Transparency

Information provider Bloomberg, the only critical force among the major newswires, presses ahead in its crusade for more transparency at the Fed. Quoting several protagonists, Bloomberg did not miss out on the fact that Treasury Secretary Paulson said only 2 months earlier he too wanted more transparency. Check out the right sidebar of the link below for proof on video. Bernanke had pledged for more transparency on September 24, another video shows.

Here is the full article.

When Will the $ Default?

Seeing that all dams have broken and the Fed is creating more money in a month than it did before in several years, I am left with no other conclusion that Federal Reserve Notes - backed by nothing - will default in the future. The $100 trillion question is only when, not if.

Comments

[Mr.G:]

"it is a matter of when not if " - how can you default on money which isnt backed by anything? -it is created through thin air and all debts could be paid back tomorrow theoretically - The real question is when does a dollar become worthless ? When the debt is monetized not carried over to new debt seems to be the answer or when no one is willing to buy anymore debt to justify printing more of it .

2008 Nov 11 12:26 PM

[MarvinMBA:]

I suppose this is going to lead to price inflation...probably something the Fed would like to happen anyway...equity values rise and more equity in homes and easy lending and more retail business and get the cycle going again. Of course the debt will be paid back with cheaper dollars that have been grossly inflated. It might cost 10 bucks for a one lb loaf of bread but so what..they will double social security.....the graduated taxes will pay back the suckers that own long term treasuries because treasuries longer than a year will probably be worth considerably less and uncle sam will buy back debt for pennies on the dollar...if you think about this there is no other way...what to do...stay liquid going out under five years and mostly one and two...MarvinMBA

2008 Nov 11 12:38 PM

[Greg Pinelli:]

The amazing aspect of this lurch towards incredible monetizing is that gold remains very subdued. My take is that the counter force of deleveraging is sucking up dollar denominated safe resting spots and the recognition that when the dust clears there's going to be MOUNTAINS of money floating around hasn't hit yet.
The crowd rushing thru the door on the way out will be just as large as the one cramming thru it now..gold and almost any hard asset will go ballistic.
In fact..real estate could once again streak ahead! Cash will once again be trash..literally.

2008 Nov 11 12:50 PM

[The World's...:]

The only tool to combat deflation is inflation. So there you go.

2008 Nov 11 12:52 PM

[cdcaddy:]

The process by which the economy is going thru now [last few months] has me dazed and confused... hopefully someone will lead me in the right direction... the TARP program is meant to buy bad assets - so the $250B isn't really flooding the market - plus it's been infused into banks by buying shares...and the dollar has moved up because the de-leveraging of various financial positions along with fund re-demptions requires dollar denominations - so everyone needs the $$ - yet to conquer part of this - the Fed has to continue to sell more Treasuries [future tax income/earnings] to prop all this up...at some time don't we reach a point of diminishing returns... when so much money is out there...thru real dollars and sold debt that the value of the $$ starts a true decline...and how much of our future tax income can the govt sell before they realize the black hole they have created. With incomes falling plus an erosion in the tax base coupled with a growing senior populace that will require more govt $$$ to support - aren't we at a saturation point that spells trouble??? what gets us out of this mess - you can't fund debt with more debt... do we have one of those moments like in Animal House where after they wreck Flounder's car we tell the world - "hey you screwed up - you trusted us"???

2008 Nov 11 01:29 PM

[whidbey:]

You have seen nothing yet.

When Congress convenes they will pump heavy bucks into pet projects, needed or not, and they will use the economic recovery as an excuse to engage in "redistribution" among the social classes. The party has yet to start, but when it does it will feel good !- then not so good. The first stage of inflation is stimulative, in its later form it leads to utter revulsion.

Great Post.

2008 Nov 11 05:30 PM

[I weep for ...:]

You talk about this "bailout" as if the Government is giving money away to AIG and not getting anything back. It is a loan and they are paying huge interest in return to the taxpayers. The taxpayers will make out. It is better that AIG survives, totally pays us back - plus interest, and stems the collapse of the financial system. Why would you want them to fail? Why wouldn't you want them to spend 25K to get in front of brokers who sold 200 Million dollars worth of their products. Why is the media so obsessed with making AIG the face of greed?!! This is not ENRON, they didn't steal. They insured a bad bet. This not Russia, the government gave a loan, now let AIG run their business and return to being a great American Company.

2008 Nov 11 09:54 PM

[Alex Stanczyk:]

Money, Money, Money!!!

Woot woot, Zimbabwe here we come!

2008 Nov 12 09:14 AM

[Drew Horn:]

It used to be that economists like Ben Bernake counciled that, in a capitalistic economic society, that (business) cycles are normal and necessary to periodically rebalance the system. This remains true but the truth cant make us free of the ignorant people currently in power .

What has happened is that Americans have been sold the idea that they can gratify every hedonistic whim without having to pay the bill. They borrow without any knowlege of or concern for the terms of the loans or much thought about how they will find the money to repay them. The entire finanical /political system has been redesigned to allow Americans to indulge in fantasy.

Now that a few of these problems have been exposed, most of the stake holders, including investors, banks, government, etc are scrambling to save their system that is, in the long run, unsustainable. The people who will pay the highest price to "save" the financial system are those who, paid their bills, and didn't borrow beyond their ability to repay loans and put ny extra money in a bank.

The business cycle has not been repealed. It has been co-opted by a political system only interested in their own short term profit and survival.

If someone leads a revolution to stop this waste of our childrens futures, I will gladly join!

2008 Nov 12 09:58 AM

[Nick Gogerty:]

may be of interest. bailoutsleuth.com/

2008 Nov 12 01:04 PM