The Flinchum File
Thoughtful Economic Analysis and Existential Opinions

Fire Up the Printing Presses . . . Again

11/03/2010

Today, the Fed announced another round of quantitative easing, which means they will buy Treasury bonds, which means the Treasury then gets that amount of money ($75 BILLION per MONTH over the next 8 months) deposited into Treasury’s checking account, which Treasury can then use to write checks for Social Security, infrastructure, anything . . . even interest payments to the Fed for having bought the Treasury bonds. In other words, the right pocket buys the bonds in the left pocket. Of course, it is all “smoke & mirrors”, but it can have huge economic effects.

Milton Friedman, father of Monetarism, believed that inflation is caused by “too many dollars chasing too few goods”. Another way of saying this is . . . if money supply increases faster than productivity, you will get inflation.

The Fed is worried about deflation. So, today’s Fed action does make sense!

Plus, the Fed handled it well. You can tell . . . because the stock market barely reacted. That means the Fed properly telegraphed with market. When it doesn’t, the market over-reacts, which is what it does best!

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