Breaking News...Fed buys $600b in treasury bonds

A report that the Federal Reserve Bank was going to buy billions in bonds this month was reported in 2010 by the CIA. It appears that purchase has taken place. (Click on the Economy section at https://www.cia.gov/library/publications/the-world-factbook/geos/us.html.)

What does this all mean?
On June 21, 2011, I spoke with Jean Tate, APR with the Federal Reserve Bank in Atlanta concerning the Fed's recent actions. 

"The buying of the treasury bonds was an action done by the Federal Open Market Committee which is a group that is made up of the members of the board of governors and each of the 12 federal reserve bank presidents," Tate said.

"The treasury bond purchases have been going on for some time. That's an action called 'quantitative easing' that the Federal Reserve announced many many months ago. It has been a long process and is not something that just began in June."

(Check out the quantitative easing videos to the right.)

According to Investopedia, "Often, central banks use quantitative easing when interest rates are already zero bound, or at near 0% levels. This type of monetary policy increases the money supply and typically raises the risk of inflation." With the action, money is printed and the Federal Reserve takes on toxic bank assets hoping banks will lend money to businesses and individual borrowers.

This could lead to hyperinflation and lessening of pressure on banks. If used improperly, this tactic could make the dollar worthless. For more info. on quantitative easing, go to: http://www.businessinsider.com/what-is-quantitative-easing-2010-8.

What is your response? Does this herald a depression?

Response from Ivory Johnson, * CFP ®, ChFC
Director of Financial Planning,
Scarborough Capital Management, Inc.
"The definition of inflation is a depreciating dollar, such that you need more of the same devalued currency to buy the same loaf of bread. The additional money supply was not dispersed throughout the economy and was instead invested in the stock market by the receiving banks who sold their treasury bonds to the Federal Reserve. That’s the reason the markets increased after quantitative easing. For what it’s worth, if we calculated CPI today the same way it was measured 30 years ago, it would already be close to 10%.

"Hyper inflation would instead be caused by a weak dollar due to our unsustainable budget deficit and insatiable appetite to buy things we can’t afford, namely entitlement programs and a military that spends five times as much money as China. The threat of the debt ceiling not being raised by August 4th which may constitute a technical default by the U.S. certainly doesn’t help matters.

"Were a sovereign debt crisis to spread throughout Europe, given Greece’s chances at default, and eventually find itself on our shores, paper money not backed by anything of value would be worth much less, the fixed income markets could spark a liquidity problem and the economy would suffer. The severity cannot be certain, but it would most likely be unpleasant.

"The global economy is dependent on debt from wealthy nations who print money through a variety of fiscal gimmicks and borrow resources from what they term emerging market nations, a policy that cannot continue unabated. My guess is there will be ensuing hardships, private enterprise will create innovations and then our feckless leaders in Washington will find a way to screw it up all over again."

©2011 Tomi Johnson. All rights reserved.

Picture of Fed. Reserve: Creative Commons Attribution-Share Alike 3.0 Unported license.