The U.S. Dollar: Where's The Woolite?

Yesterday, the stock market euphorically rose by as much as 176 points on the initial news that our Federal Reserve was going to "spend" up to $300 billion in order to buy back $300 billion of it's own debt (See Full Story). If that sounds like double talk, it certainly is! It's sort of like paying off your mortgage with your own credit card and having no money left to do anything when the credit card bill is due. But, if you're the Federal Reserve, you can just float more debt to do what you want to do. It's like creating "new money out of thin air" as noted in this news article: "Fed to pump another $1 trillion into U.S. economy". If you or I did the same thing, they'd call it "kiting" and we'd be serving "20" in some Federal prison. And, for sure, Bernanke and the rest of his gang at the Federal Reserve might be just as criminal in doing what they are doing.

On top of the $300 billion to buy back U.S. bonds, the Fed will use an additional $700 billion as a systemic cash infusion in the credit markets to free up borrowing for homes, cars, etc. Again, this $700 billion doesn't really exist; except, in the minds of the Federal Reserve.

By doing this, its like washing all of our currency in hot water and harsh detergent. Just like a cotton shirt, there will be some serious shrinkage. And, with shrinkage, comes inflation.

There's a big gamble doing what the Federal Reserve is doing. They are trying to combat a deflationary economy by adding in to it their own inflation. You can literally see that there is deflation when you look at home prices having fallen by as much as 50 percent. Deflation is also apparent as retailers are attracting buyers with deep discounts. Automobiles are being sold at losses to reduce inventory. So, by introducing inflation into our economic system, the hope is that prices will stabilize and credit purchases will start moving again.

The problem lies in the fact that the deflated dollar will remain deflated; even after prices recover. Then, the inflation that was used to fight deflation becomes its own problem. The only way to fight this new evil is to seriously raise interest rates; which, in itself, could cause another recession. But, this time with rampant inflation. As a result, simply raising interest rates won't solve the inflation problem. For that to be solved, we will, somehow, have to quickly erase our accumulated debt though heavy taxation so that the Federal Reserve can reverse and undo what they did yesterday by pulling back dollars from the world's debt markets. But, in the wake of all this, we could literally see double digit inflation on everything that we buy; and, for a long period of time.

Just so you know, this kind of thing has been tried before by other countries and those governments don't exist today. They just collapsed. So, this is a big gamble.

In reaction to that potential, the stock market ended today with a loss as the investment community finally saw the risk that exists in this program (See Full Story). Since the announcements of yesterday, gold prices have jumped nearly $80 an ounce as people sought the yellow metal as an inflationary hedge. The U.S. Dollar fell against other currencies; making imports more expensive for us to buy. Oil prices jumped to a new 2009 high of nearly $52 a barrel. If the Fed wanted inflation, it certainly didn't take long for it to start showing up.

Make no mistake about it, this is a seriously desperate move on the part of our Federal Reserve. The risks are high and rewards might be questionable. I can only believe they are doing this because they are seeing statistics and trends that are more worrisome than had been previously thought. Don't forget. This action is independent of the so-called trillion dollar Stimulus Package; which, by all indications, seems to be having a difficult time in starting up.

I personally don't know how we are going pay for all this debt. It just might take over a century or more to do it and that could hurt the future of this country.