The Fed goes All IN

The latest move by the Federal Reserve is the equivalent of going all in at the poker table. The Fed is betting the entire economy on this latest move. If it is right, the Fed will help restore growth, but if it has miscalculated then we may well be headed for a cliff.

The biggest problem of the Fed's purchase of bonds is seen in this sentence from the explanation issued by Ben Bernanke: “And higher stock prices will boost consumer wealth and help increase confidence, which can also spur spending. Increased spending will lead to higher incomes and profits that, in a virtuous circle, will further support economic expansion.”.

In essence, the Fed is betting that rising stock prices will lead to higher consumption which will lead to higher stock prices which will lead to higher consumption, etc. One thing I learned long ago, though, is that only a real fool would try to predict what the stock market will do. After all, the Fed will not be buying stock, they will just be pumping money into the country while reducing the yields available on fixed income instruments. Money will have to go into the market -- or so the reasoning goes. But what about the money that leaves the country? QE2 will lower the dollar. I have already purchased investments denominated in non-US currencies in anticipation of the decline of the dollar. Right now, I favor currencies that are tied heavily to commodities since these may benefit as well from inflation that leads to higher commodity prices. Gold is another place to put funds that are seeking safety from the trials of the dollar. Of course, moves like mine do not affect the economy, but if there are countless numbers of people who follow suit, the funds pumped by the Fed into the economy will only leave the US. That may inflate the currencies abroad and cause problems in other countries as well.

The only responsible course for the Fed would have been to allow for the recovery of the economy to be completed at its current pace. Sure, we may have suffered high unemployment for a longer period of time, but betting the farm on an untried policy is just plain crazy.