Before one considers the Fed's actions not successful, we have to consider what they are trying to accomplish. If you take them at their word that they are trying to stimulate the economy and create jobs then you are correct, they are not getting money lent out. But if you consider that in reality that the economy stimulus is mostly lip service and their main goal as shown by their actions rather than what they say is to protect the banks, then they are accomplishing the devaluation. The banks balance sheets are being propped up. The Fed has been buying trash and paying top dollar for it. The member banks get to dump their turds for freshly minted cash for their balance sheets.

A person needs to consider who owns the Fed. Yes, it is a quasi-government organization in that congress created it and can rescind its charter. The REAL owners are its member banks. They are the shareholders and they are the ones that sit on its board of directors. So the first and foremost concern of the Fed is the solvency and condition of the banking system that owns them. If the economy being stimulated was really the goal our Treasury would have just give everybody a tax refund or some direct stimulus where people had extra money to spend. In my opinion, the Fed has to talk a good game to keep the populace from burning them at the stake but in reality if you actually look at their ACTIONS, everything they have done has been to prop up the banking system, NOT to stimulate the economy. To keep the banks solvent. This debases the currency just as if new money had been printed and sent out to the people to spend, the only difference is the banks get the money and they are not spending it (loaning it out), they are keeping it to strengthen their highly leveraged balance sheets. What this means is that the new money is not being circulated so it is not showing up as price inflation. At least not as much. Now the trillion a year that our government spends in deficit is going directly into the economy so it IS creating price inflation. Where the Fed is buying something like 60-70% of the Treasury auctions, two thirds of that deficit is newly created money going right out into circulation via government spending (payroll and all the government programs). But I digress. That is a different story.

Back to the Fed. The STORY is that as the economy gains traction this "stimulus" money will be drawn back by reversing the process where the Fed will sell the securities (the turds) that they bought thereby sucking that newly money that was created right back up before it can circulate and cause price inflation. Only problem is, they are saying they can stop and go at the same time. They have committed to low interest. To maintain low interest rates they have to be in a position to buy securities. To drain liquidity they have to sell securities. They can't do both at once. Now once upon a time, back when we thought we had a recovery, the theory was that as the economy rebounded there would be plenty of demand for our government debt so the Fed would be in a position that they would not need to be buying securities so as inflation started to rear its ugly head they could sell back what they had bought. Oops.

They are in a catch 22. They have to keep buying to keep interest rates low. If bond auctions are poorly bid interest rates go up. If interest rates rise all kind of mean, nasty things start to happen. Like our government deficit gets worse as we can't make the interest payments. Like more homeowners and businesses defaulting on their loans and causing a downward spiral in bank balance sheets that are already insolvent if marked to market. Interest rates can't be let rise....... or the downward spiral begins. The economy is not helping out at all as it struggles. The Euro debacle has been a godsend for the US Dollar. If all that demand for US dollars was not coming out of Europe, how much of the USD bond market would the Fed need to be buying now? They are already at two thirds of it. Without the Euro crisis it might be they would be buying all of the debt. That would basically be outright printing of money to fund our government. Can anyone spell "Weimar"? And if price inflation starts, their plan is to SELL back into the market to keep it under control???????? Yep, sure thing, checks in the mail.

So bottom line is, they can debase the currency all they need to prop up the banks and it is still debasement. With no credible way of unwinding it (with "credible" being the key word), it is not if, but when the debasement starts showing up in prices. It will eventually, because there is no unwinding of the winding in sight, other than something like "then aliens land and a miracle happens". Outside of that, there is no credible exit plan. There is no reasonable amount of "growth" in the economy (without the aliens and the miracle) that can solve the problem. Someday, either before or after Japan, the UK and the Euro blow up, the markets will figure this out and we will not have the luxury of being the "best of the worst". Then people will realize that the money they are holding is getting worth less every day and being paid no interest or negative interest is a really bad thing. Once the bond market decides hard assets would be a better thing to own than paper that is getting worth less and less, the price of "things" will go up.

Watch the bond market. When it breaks, Katy bar the door.

John