"There is no means of avoiding a final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as a result of a voluntary abandonment of further credit expansion or later as a final and total catastrophe of the currency system involved."
- Ludwig von Mises

Wednesday, November 3, 2010

The Magic Number is $600 Billion


A portion of the FOMC statement:
To promote a stronger pace of economic recovery and to help ensure that inflation, over time, is at levels consistent with its mandate, the Committee decided today to expand its holdings of securities. The Committee will maintain its existing policy of reinvesting principal payments from its securities holdings. In addition, the Committee intends to purchase a further $600 billion of longer-term Treasury securities by the end of the second quarter of 2011, a pace of about $75 billion per month. The Committee will regularly review the pace of its securities purchases and the overall size of the asset-purchase program in light of incoming information and will adjust the program as needed to best foster maximum employment and price stability.
No surprises here.  Actually, the total figure is $100 billion more than the Bloomberg survey of economists last week.   But let's look at the first line above:

"To promote a stronger pace of economic recovery and to help ensure that inflation, over time, is at levels consistent with its mandate, the Committee decided today to expand its holdings of securities."

Let's be honest here.  This is a balance sheet recession.  Who suffers during a balance sheet recession when the private sector is deleveraging voluntarily or involuntarily?  The Banks.  And make no mistake about it, this is a continuation of a bank bailout, as well as a continuation of the ongoing currency war, G20 meetings and communiques be damned.

What's important is how China responds or acts at the upcoming G20 meeting, and how the EU handles their own currency.  EU self inflicted austerity, to a degree, is difficult to maintain when others such as Japan, the US, and the UK are devaluing their currencies faster.  It's going to get more difficult to sell BMWs or Greek olive oil to the US if the Euro keeps rising against the dollar. 

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