Fed drops the pretense, buys bonds

The Federal Reserve's new policy 'twist' proves that its old money-printing habits die hard.

By Bill_Fleckenstein Dec 17, 2012 11:25AM

Close-up of Dollar bill © Steve Allen/Brand X/Getty ImagesOur redoubtable Federal Reserve was front and center last week as it continued its wildly aggressive monetary policy ways. It is ironic that the Fed is far more rabid now when it comes to conjuring dollars out of thin air than it was when the financial system threatened to seize up in late 2008, but that is what central planning committees do. They eventually overreact when they don't get the response they want.


That is not to say that the Fed won't get even more forceful, but it is following a time-honored, though inadvertent, tradition. The net of Wednesday's statement is that, not only is the Fed replacing its Operation Twist stimulus program (search on Bing for details) with $45 billion of outright bond purchases, it plans to do so until the unemployment rate hits 6.5%.


Fed fire sale still TBD

That is a wild concept by itself, but when you consider what a lagging indicator job growth is, one can only imagine how much excess paper money will have been printed before we get to the targeted level (assuming we do). I would guess if we do get close to that number, it will take several months -- not just one -- of low levels to be deemed "enough."


The amount of confetti that the Fed is printing is staggering, but that is only part of the mosaic, because the Swiss National Bank, the European Central Bank (after a fashion), the Bank of England and the Bank of Japan are printing massive amounts of money as well.


And after this weekend's election in Japan, the Bank of Japan is liable to print even more yen. I suspect that at some point it will take a page out of the Fed's playbook and target inflation, unemployment or some variation on that theme.


I also noticed that the Fed sneaked into its communiqué the "fact" that inflation is below the Fed's 2% "objective." I did not know that 2% was the Fed's magic number, so perhaps I missed that, but it is yet another wrinkle that shows how warped the world is. The prices of so many goods and services are rising, yet the Fed is not happy because, in general, they aren't rising fast enough.


Just imagine what will happen the Fed finally gets the citizens of the United States (and the rest of the world) to expect regularly rising prices. It will be impossible to put that genie back in the bottle. The Fed has been playing with gasoline in front of a blazing fire for a very long time, and it is impossible to know when the two will meet, but when they do, it is going to be an enormous mess.


Our bonds will be as good as their word

I am of course getting ahead of myself, as I am prone to do sometimes, so I might as well conclude by saying that at some point, after expectations for inflation finally are aligned with what the Fed wants (and then some), the bond market is going to be a train wreck.


I have noted recently that we now appear to be in an interlude between the deflation scare trade and worries about inflation, and I continue to believe that. But when inflation fears get the upper hand, it won't matter how many Treasury bonds the Fed buys, because those will be seen as the problem, not the solution. Then, all hell will break loose and we will head to the funding crisis, with the government unable to find buyers for its debt.


When that occurs -- and how quickly -- I cannot say. I know only that it lies in our future. But for now, money printing is perceived to be the answer to all our troubles, as opposed to the root of all evil.


King World News

I participated in another interview this week with Eric King, during which I go into greater detail regarding some of the points presented above. Interested readers can listen to it on King World New broadcast archive.


Dec 17, 2012 1:56PM
And when our borrowing costs go up on the 16 TRILLION in debt we currently have that will wipe out any defitcit reduction now contemplated.  We will be back where we started only worse - no moves left to make.  Checkmate.
Dec 17, 2012 12:01PM
You cannot PRINT your way to prosperity...

Audit the Fed, and FIRE Helicopter Ben.  The man is stooge.  Obama is Moe, Ben is Larry, and Reid is Shemp... We don't even get a Curly...

Obama believes he can tax us to Prosperity.  Reid believes he can borrow us out of debt, and Pelosi believes we can spend our way to prosperity...  Any wonder why the economy sucks?
Dec 17, 2012 7:06PM
Seems that many people believe the appropriate response to the tragedy in Connecticut is to ban guns.  Based on what's happening at the Fed Reserve, perhaps we should ban all Keynesian economists.

Dec 17, 2012 5:33PM
Lowering manufacturing labor rates to $3.50 per hour is the mission.  Inflate inflate inflate and then with high unemployment depress labor rates from the other end.  And then we have a much lower cost of production in America and the rich go zoom zoom into the ionesphere.  Doesn't seem very complicated to me. And the next generations of Americans work their butts off for a lower standard of living,  but they know no different and in the meantime you and I will become fading memories.  The New World Order in a nut shell. 
Dec 17, 2012 3:49PM
Time to create a new currency and leave the sum total ruined Dollar in a paper bag with some dog poop in it, set it on fire, ring the doorbell at the Fed and run for it. We don't have legitimate currency. Time to expel the Federal Reserve and it's member banks and restore America.
Dec 17, 2012 4:25PM
The FED is a criminal organization that is only interested in bailing out the Criminal Banking Cartel so they can continue to RAPE ,PILLAGE and PLUNDER the American People=SCREW THE PEOPLE ! SAVE THE (TBTF) BANKS ! This is the AMERICAN WAY !
Dec 17, 2012 3:51PM
Dimon and Blankfein... time to call you out.
Dec 17, 2012 9:46PM
The mess will look like Greece.  I think its probably 8 to 10 years out.  Take a hard look at what happened when the greek government and banks couldn't sell debt.  Not pretty.
Dec 17, 2012 6:02PM
"Lowering manufacturing labor rates to $3.50 per hour is the mission.  Inflate inflate inflate and then with high unemployment depress rates labor rates from the other end."

Too bad it won't work. Before we fall completely apart, paper and button pushers will be lining up for food and water. China shows us right now that people don't have to work for organized business nor is it dependent on m****duced goods. A few more years of the same BS here and our own sub-economy will be stronger than the main one. I was just hoping we had decent enough people in our elected offices to realize that they will be staked in the middle of any battlefield created by the gross disparity. You can have all the offshore cash you want, but if we pull the plug on ACH and you have to walk there to get to it... you meet a lot of unfriendly people first. Better to cooperate and start listening to younger voices. 
Dec 19, 2012 9:48AM
We continue to think we can micro manage the economy. Economist think they are a hard science, with parameters in front of their variables, and  independent variables in their models. Despite reality proving economist wrong time and time again. They continue to spout out conclusions from their sophisticated totally useless models,  there are multiple problems with economic models. First, the parameters in font of the variables are not parameters. Currently, The Central Bank is totally frustrated that people are not reacting as they did in 2001-2202 when the FED lowered interest rates. There is an old saying fool me once to get into a ponzi scheme, shame on you,, Fool me twice to get into another ponzi scheme, shame on me.  The second problem is independent variables. There are no independent variables in economics. They are all interdependent and the interdependent relationships are always changing. In other words, C+I+G+X-M is fine if you want a snapshot of the economy, but use that model to draw policy conclusions and you are making a grave mistake.

My interview on the subject:

Dec 17, 2012 7:52PM
What exactly will the "enormous mess" look like?  What happens?  Does the garbage still get picked up?  I say that tongue in cheek.......but...... on a very basic level what might happen?  Could "it" happen as rapidly as The Great Recession started?  Would real estate & stocks tank yet again?

Another column on this site said that a wealth tax of up to 26% to pay down debt might set us on the right tract.......could that actually happen?........it's like Atlas Shrugged coming to life

Thx in advance for any replies

Dec 24, 2012 12:22PM
Don't worry. As more and more people drop out of the labor force because of the lack of job opportunities, the unemployment rate will drop to 6.5% by the end of next year.
Dec 25, 2012 3:47PM
The US Government is buying bonds that were sold to weak buyers in the past, printing money keeps 'weak' buyers in the game!  Buying your own devalued stuff means a loss on the books (somewhere on the Fed Ledger).......Yikes!!!!
Dec 17, 2012 3:33PM
We already knew this Fleck, now go get a haircut.
Dec 17, 2012 11:14PM
ok we all think the bernake is dumb as a rock. But they have a plan. We don't need anyone to buy US debt. The fed can buy it and print the money to do so. Japans debt is worse than ours and yet their rates are lower. That tells me we still have a ways to go before the end comes. The end will come when the fed buys all of the treasury debt all 20+ trillion and then is dissolved by an act of congress. No one gets hurt, no one loses money!! A new central bank is created and we start over with no debt. It is a brilliant plan, but will it work?
Please help us to maintain a healthy and vibrant community by reporting any illegal or inappropriate behavior. If you believe a message violates theCode of Conductplease use this form to notify the moderators. They will investigate your report and take appropriate action. If necessary, they report all illegal activity to the proper authorities.
100 character limit
Are you sure you want to delete this comment?


Copyright © 2014 Microsoft. All rights reserved.

Fundamental company data and historical chart data provided by Morningstar Inc. Real-time index quotes and delayed quotes supplied by Morningstar Inc. Quotes delayed by up to 15 minutes, except where indicated otherwise. Fund summary, fund performance and dividend data provided by Morningstar Inc. Analyst recommendations provided by Zacks Investment Research. StockScouter data provided by Verus Analytics. IPO data provided by Hoover's Inc. Index membership data provided by Morningstar Inc.


Image: Bill Fleckenstein, MSN money

This column is a synopsis of Bill Fleckenstein's daily column on his website, FleckensteinCapital.com, which he's been writing on the Internet since 1996. Click here to find Fleckenstein's most recent articles.



Quotes delayed at least 15 min
Sponsored by:


There’s a problem getting this information right now. Please try again later.
There’s a problem getting this information right now. Please try again later.
Market index data delayed by 15 minutes

[BRIEFING.COM] The stock market welcomed the new trading week with a mixed session that saw relative strength among large-cap stocks, while high-beta names underperformed. The Dow Jones Industrial Average (+0.3%) and S&P 500 (-0.1%) finished near their flat lines, while the Nasdaq Composite and Russell 2000 both lost 1.1%.

Equities began the day on a cautious note amid continued concerns regarding the strength of the global economy. Over the weekend, China reported its first decline ... More


There’s a problem getting this information right now. Please try again later.




MSN Mobile: Go to msn.com in your phone's browser.