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Nadeem Walayat Financial Markets Analysiis and Trend Forecasts

The Federal Reserve’s Next Moves …

Interest-Rates / Central Banks Sep 13, 2010 - 08:38 AM GMT

By: Larry_Edelson

Interest-Rates

Best Financial Markets Analysis ArticleWe are now entering a period of time that I’ve been warning you about. A time when the majority begins to recognize that the U.S. and European economies are both plunging deep under water, drowning in debt …

While at the same time, leaders in both the U.S. and Europe face political nightmares … financial markets going haywire … gold soaring through the roof … and central banks beginning, yet again, to pull out their big guns.


And no central bank has bigger guns than our own Federal Reserve.

Make no mistake about it: In the weeks and months ahead, you are going to see Fed Chief Ben Bernanke pull out nuclear-sized bombs to try and destroy the debt crisis that is affecting the world.

But wait you say, hasn’t the Fed already shot all of its bullets?

My answer: No, it hasn’t. The Federal Reserve has far more fire power than almost anyone believes. Mind you: It will not alter the fate and destiny of the economy. But it will alter the way the economy goes down in flames.

Understanding this is the single biggest key you need to know to protect your money — and build wealth — in the months ahead.

The Fed Has Plenty Of Ammo Left

Many believe that since the Fed has already printed trillions of dollars … pushed interest rates to near zero … and supported the mortgage and Treasury note and bond markets — that it is effectively “out of bullets.”

And to some extent, they are right. In the sense that their policies thus far have failed to create any real economic growth.

But the pundits who claim the Fed has no ammo left, are dead wrong. The Fed has some very heavy artillery that it can — and will — bring to the fight against the debt crisis in the weeks and months ahead.

Let me review them with you now …

Fed Weapon #1: The Fed can print as much money as it wants. There is no limit to how much it can print. Everyone knows that, but few believe the Fed will print unlimited amounts of money.

Don’t kid yourself. There is no legal or political body the Fed has to answer to. So it can and will print fiat money ad infinitum.

Ben Bernanke and the Fed still have plenty of tricks up their sleeve in a losing battle against the debt crisis.
Ben Bernanke and the Fed still have plenty of tricks up their sleeve in a losing battle against the debt crisis.

Fed Weapon #2: The Fed could also take some of that money and begin buying stocks and real estate for its own account. There is nothing to prevent the Fed from doing that either.

It could buy a trillion dollars or more of stocks and real estate. It can park those assets on its balance sheet, for as long as it wants. Investors who sell their stocks and real estate to the Fed effectively receive money that previously did not exist.

Moreover, the Fed could even set the prices at which it will buy stocks and real estate, at levels well above current market values. It could, in essence, buy anything it wants, at any price it wants, park the assets on its balance sheet, and wait for as long as it needs to before putting the assets back up for sale.

Mind you, the economy would still continue to sink in the interim. But the Fed is hoping that by buying time, the economy would eventually rebound enough for things “to get back to normal” — so to speak — and then, as I noted, it would unload its assets and drain money back out of the system.

Fed Weapon #3: The Fed could lower the bank reserve requirement — which is currently 10% for all bank liabilities over $55.2 million — all the way down to zero.

In effect, it could tell banks that for every $10 of customer deposits it holds, not one penny has to be parked at the Fed anymore as collateral.

While that does not guarantee that banks will start to aggressively lend again, it does add further liquidity to the system.

But that’s not all …

Fed Weapon #4: The Fed could penalize banks for not lending to the economy! Yes, that’s right. For instance, right now the Fed pays banks 0.25% on the excess funds they park with the Federal Reserve, funds that are above and beyond what is required to be held at the Fed as reserves.

But as we all know, banks have not been in a lending frame of mind. For a variety of reasons. One of those reasons however, is this current policy of paying banks a risk-free 0.25% on their excess funds that they’re keeping with the Fed.

So instead, the Fed could simply do a 180 — and tell banks that it is no longer going to pay them any interest on their excess reserve funds.

The Fed can even go a step further, and effectively tax or penalize banks for not making loans out to the general economy.

Worse comes to worst, the Fed could default on all government obligations by devaluing the U.S. dollar.
Worse comes to worst, the Fed could default on all government obligations by devaluing the U.S. dollar.

Fed Weapon #5: The Fed can engineer a “default on the sly” on all government obligations, effectively inflating away America’s debts, by DEVALUING THE U.S. DOLLAR, forcibly and clandestinely.

Of course, the consequences of the four preceding strategies will likely devalue the dollar.

But lest the value of the dollar does not fall enough, the Fed can print up ever more dollars, sell them in the open market … buy other currencies … and put much more pressure on China to revalue its currency higher (and the dollar lower).

In short, the Fed can do whatever it wants, whenever it wants. It does have plenty of ammo left.

In fact, in my opinion, the Fed’s battle against the financial crisis (and deflation) has barely begun.

Which is all the more reason to own the only real form of money that has always maintained its purchasing power: Gold!

Till next week …

Best wishes,

Larry

P.S. The September issue of Real Wealth Report, which publishes on September 17, will reveal my radical solution to the U.S. debt crisis and financial nightmare. A solution that not only takes the power away from the Fed and Washington, but also puts control of the economy back where it belongs — in the people’s hands.

Don’t miss this upcoming issue. Become a Real Wealth Report member now for a mere $99 a year. Click here to join.

This investment news is brought to you by Uncommon Wisdom. Uncommon Wisdom is a free daily investment newsletter from Weiss Research analysts offering the latest investing news and financial insights for the stock market, precious metals, natural resources, Asian and South American markets. From time to time, the authors of Uncommon Wisdom also cover other topics they feel can contribute to making you healthy, wealthy and wise. To view archives or subscribe, visit http://www.uncommonwisdomdaily.com.


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