Monday, March 16, 2009

The Fed is printing money.

Part one

Part two

Well, Ben Bernanke last night on 60 minutes confirmed what we all knew. While it is the job of the Fed to control the money supply, the Fed is printing money at an unprecedented rate, and the result will ultimately be inflationary. I had to rewind my DVR to hear him say it again. Imagine if you have a bank account, and you run short of funds. You call up your bank and ask the bank manager if he wouldn't mind just increasing your balance because you are short of funds. What do you think your bank manager would say? Well, this is what Ben Bernanke said the Fed is doing with these failed banks.

Moreover, Bernanke said it is not tax money? Hmmm, maybe not now, but it sure will be. There are two ways this will hit the average American. When there is too much money in the system, inflation occurs. Inflation is a hidden tax that eats at the purchasing power of your money. Second taxes will inevitably increase on everyone when the government cannot pay its increase debt from its massive spending.

"It's not tax money. The banks have accounts with the Fed, much the same way that you have an account in a commercial bank. So, to lend to a bank, we simply use the computer to mark up the size of the account that they have with the Fed. It's much more akin to printing money than it is to borrowing."

"You've been printing money?" Pelley asked.

"Well, effectively," Bernanke said. "And we need to do that, because our economy is very weak and inflation is very low. When the economy begins to recover, that will be the time that we need to unwind those programs, raise interest rates, reduce the money supply, and make sure that we have a recovery that does not involve inflation."

To say that we can have a recovery that does not involve inflation with the amount of money that is being added to the money supply is wishful thinking.

Ben Bernanke did say that one of the major reasons for the Great Depression was because of tight money, and he is right. I just wonder if going down the hyperinflation road of Germany's Weinmar Republic or Argentina is the right answer. The markets apparently liked Bernanke's remarks.

In any event, everyone should watch the 60 minute segment with Bernanke. Alan Greenspan never gave an interview during his tenure.

I do have one recommendation on investing at this juncture. Buy Treasury Inflation Protection Securities,(TIPS). The interest rates are low now but they protect against inflation.

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