Tuesday, September 21, 2010

Fed Tries To Ease Quantitatively And Quietly

Shhhhhh . . . don't tell anyone, but the Fed is trying to execute a slow-motion, low-intensity form of inflation to speed the erasure of the enormous federal debt.  It includes signals like this:

The Federal Reserve signaled Tuesday that it's worried about the weakness of the recovery and is ready to take further steps to boost the economy if needed.

This comes on the heel of announced MBS purchases disguised as innocent cash management techniques.  The Fed is walking a very thin tightrope.  If it prints money too slowly or not at all, the economy slips into a noticeable double-dip and asset deflation resumes its destruction of Baby Boomer retirement assets.  If it prints too quickly, China gets spooked and unleashes the nuclear option - an immediate selloff of Treasuries that causes a run on the dollar. 

The Fed has no good options left and the Chinese central bank knows it.  Other foreign investors are starting to figure out the impossibility of the Fed's success at this act, which is why the U.S. is sinking as a place to invest in this Bloomberg poll of finance professionals.  We will see whether the Fed's tightrope strategy is working if the next Treasury auction has full Chinese participation.