Monday, February 4, 2013

The Fed's Worst Fear

The New York Sun
The Fed's worst fear is that despite its long-term commitment to buying up government debt, it will lose control of interest rates anyway. That's why the early-January upward blip in bond yields flashed caution. If Treasury bond prices decline significantly from the artificial levels massive Fed buying has supported, several things will happen, none of them good.

First of all, government borrowing costs will rise, making it even more difficult to control the deficit. Second, the Fed's gargantuan and growing $2.6 trillion portfolio of Treasury and government agency mortgage bonds will lose market value. It won't take much of a fall to wipe out the system's capital ...

[T]he Fed faces a cruel dilemma. It can reduce market support, let bond prices fall and suffer the unhappy consequences. Or it can keep on its present course of trying to satisfy the beast by buying up further trillions of dollars in Treasury paper....

That course inevitably leads to inflation.
Stock up on canned goods. Five years from now a can of beans
will still be a can of beans, but a dollar won't be worth a nickel.