Bernanke has lost it [updated]

It's now official, Bernanke and his friends at the Fed have decided to shoot their last bullet by targeting rates from 0.00% to 0.25%. Deciphered, this statement means that they are going to try to kill the US dollar, and if they are successful, the US might face the same fate as Argentina or more recently, Iceland or Ecuador. By stating that they will print to buy government bond, what they are really saying is that they are defaulting on their debt and printing to pay it back. The market is not that stupid, as the USD felt 3% against the Euro just today, bringing the total loss to 10% for the week. These are massive moves for forex, and specially for mature economies... The Fed can drive the interest rate on a 30-year bankrupt US government bond to zero, but it cannot prevent the USD from collapsing...

The good news is for China and Japan, they have a great opportunity to get rid of their Treasuries and hopefully convert the proceeds into gold, silver or oil...

[update:] Please note that the real rate of the Fed funds have already been around 0.00% for quite some time, as I have already mentioned it here, early October.



From Bloomberg:

“The Fed is sending a message that it will print money to an unlimited extent until it starts to see the economy expanding,” William Poole, former president of the St. Louis Fed and now a senior fellow at the Cato Institute in Washington, said in an interview with Bloomberg Television. Poole is also a contributor to Bloomberg News.

The statement noted that the Fed has already announced it will purchase the debt issued or backed by government-chartered housing finance companies, and said the Fed is ready to expand the program. The central bank said it continues to weigh the potential benefits of buying longer-term Treasury securities.

The official press release from the Fed (emphasis mine):

Release Date: December 16, 2008

The Federal Open Market Committee decided today to establish a target range for the federal funds rate of 0 to 1/4 percent.

Since the Committee's last meeting, labor market conditions have deteriorated, and the available data indicate that consumer spending, business investment, and industrial production have declined. Financial markets remain quite strained and credit conditions tight. Overall, the outlook for economic activity has weakened further.

Meanwhile, inflationary pressures have diminished appreciably. In light of the declines in the prices of energy and other commodities and the weaker prospects for economic activity, the Committee expects inflation to moderate further in coming quarters.

The Federal Reserve will employ all available tools to promote the resumption of sustainable economic growth and to preserve price stability. In particular, the Committee anticipates that weak economic conditions are likely to warrant exceptionally low levels of the federal funds rate for some time.

They are confusing "economic growth" with "monetary expansion" (= inflation).

The focus of the Committee's policy going forward will be to support the functioning of financial markets and stimulate the economy through open market operations and other measures that sustain the size of the Federal Reserve's balance sheet at a high level. As previously announced, over the next few quarters the Federal Reserve will purchase large quantities of agency debt and mortgage-backed securities to provide support to the mortgage and housing markets, and it stands ready to expand its purchases of agency debt and mortgage-backed securities as conditions warrant. The Committee is also evaluating the potential benefits of purchasing longer-term Treasury securities. Early next year, the Federal Reserve will also implement the Term Asset-Backed Securities Loan Facility to facilitate the extension of credit to households and small businesses. The Federal Reserve will continue to consider ways of using its balance sheet to further support credit markets and economic activity.

Of course, the best way to get out of insolvency and excess debt, is to get more into debt. That should be obvious to anyone who has lost their mine.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; Christine M. Cumming; Elizabeth A. Duke; Richard W. Fisher; Donald L. Kohn; Randall S. Kroszner; Sandra Pianalto; Charles I. Plosser; Gary H. Stern; and Kevin M. Warsh.

In a related action, the Board of Governors unanimously approved a 75-basis-point decrease in the discount rate to 1/2 percent. In taking this action, the Board approved the requests submitted by the Boards of Directors of the Federal Reserve Banks of New York, Cleveland, Richmond, Atlanta, Minneapolis, and San Francisco. The Board also established interest rates on required and excess reserve balances of 1/4 percent.

So it's not just Bernanke who has lost it, all his friends at the board are as incompetent and insane has their Chairman.