Tuesday, October 5, 2010

FRBNY and PPT President Bill Dudley Guarantees QE2

The Fed claims to have a dual mandate: promote prosperity and keep prices stable.  In the nearly 100 years of the Fed's existence it has done neither.  The Fed works against prosperity and against stability.  Fed inflation keeps prices rising and keeps the market chasing after projects that don't make economic sense.  The pseudo-boom it creates results in a recession which it attempts to fix with more monetary inflation.  At Fed headquarters the way to dig yourself out of a hole is to dig the hole deeper.  And dig deeper still when that doesn't work.  The Fed is poised to open the monetary floodgates again by buying more assets, a move it calls "quantitative easing 2," or QE2.

How close they are to executing QE2 was signaled by Bill Dudley last Friday, October 1, 2010, in a speech at the City University of New York's Graduate School of Journalism:
Currently, my assessment is that both the current levels of unemployment and inflation and the timeframe over which they are likely to return to levels consistent with our mandate are unacceptable. In addition, the longer this situation prevails and the U.S. economy is stuck with the current level of slack and disinflationary pressure, the greater the likelihood that a further shock could push us still further from our dual mandate objectives and closer to outright deflation.
The key word is "unacceptable."  That's strong language for a FOMC official like Dudley.  According to former St. Louis Fed president William Poole,
It is hard for me to imagine a stronger statement that Dudley will be arguing for the Fed to buy more assets—the policy discussed at some length earlier in his speech. “Unacceptable” is a pretty strong word.
The Fed's greatest fear is deflation.  It will avoid it at all costs, even if the cost is the destruction of the currency.

Gold reached a new nominal high of over $1,340 today.

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