U.S. Secretary of the Treasury & Free Lunches has done Gold investors an incredible favor. While not benefiting immediately as did those owning bank stocks, we will over time. With U.S. government now assuming responsibility for financial assets of dubious value, U.S. government has committed itself to nearly unlimited funding of U.S. housing market, and every other industry with political clout. One consequence may be that Federal Reserve loses control of monetary policy. Will the Federal Reserve now need to monetize U.S. government debt in unlimited fashion?
This week's chart is of year-to-year change in Federal Reserve credit, essentially the asset side of Fed's balance sheet. When it buys securities or makes loans to banks, those claims become assets of Federal Reserve. In recent years, Federal Reserve has had luxury of relying on foreign central banks to finance U.S. economy. Federal Reserve Credit grew slowly, as did core inflation. With foreign investors now balking at financing doubtful U.S. financial assets, that financing burden will now belong to Federal Reserve. Recent spike in that chart is the first round of uncontrolled financing of bank stock holder bailout plan. Federal Reserve credit growth rate had already been on a rising trend as the Federal Reserve began financing the questionable assets of the U.S. financial system.
With Federal Reserve now forced to monetize vast quantities of U.S. government debt, Federal Reserve credit will grow rapidly. As that is base from which money is created, quantity of dollars will grow. As quantity of dollars rises, the value, or price, of those dollars will decline. As that happens, the dollar value of Gold will rise. The U.S. financial bailout plan in essence puts a rising floor under the dollar price of Gold. Gold may indeed benefit more from the financial bailout plan!
GOLD THOUGHTS come from Ned W. Schmidt,CFA,CEBS, publisher of The Value View Gold Report, monthly, and Trading Thoughts, weekly. To receive these reports, go to http://home.att.net/~nwschmidt/Order_Gold_EMonthlyTT.html.
