Monetize Or The System Collapses

Posted: June 3 2009

Re-emergence of dollar vulnerability has taken almost all professionals by surprise. That has been prompted by the expansion of the Fed’s balance sheet, the upward movement in interest rates and the massive monetization that has been underway for some time. The Fed like many other central banks has been extending money and credit for the past 5-1/2 years. Those who watch closely were well aware of this. That is why the Fed has not published M3 for three years. Official Fed interest rates may be zero but real market has them higher than 3-1/2% in the long end of the market. Investors have finally fixated on the massive monetization in progress. If the Fed does not monetize the system collapses. In order to save the system the dollar has to be sacrificed. This needless to say is a very distasteful choice for the Fed. They can no longer have it both ways. The perceived result is hyperinflation, which we have forecast for some time.

This past week the Fed and the Treasury via the “Working Group on Financial Markets,