Fed to Create $500 Billion

That is not exactly the headline from the media, but it's close enough.  The headline is "Fed Likely to Announce $500 Billion of Purchases, Survey Shows".  The bet is that the Fed will create inflation of half a trillion dollars.  This is huge, especially when it is added on top of the over 1 trillion dollars created 2 years ago.

The Fed and the economy are in trouble at this point, no matter what is done.  The best case scenario is for the Fed to stop creating money out of thin air and to start withdrawing its earlier money creation.  Of course, this would put some banks in jeopardy of failing, which then causes a problem for the FDIC which is bankrupt and would depend on a bailout from the Fed.  It is one big circular mess.  And the Fed won't do this anyway because it is politically incorrect and goes against the Keynsianism of the establishment.

Instead, the Fed will continue to accommodate Congress and the big banks.  In the process, it will continue to weaken the dollar and set the stage for massive price inflation in the United States.  Assuming the headlines are correct and the Fed injects another half trillion dollars, the question will be what happens with the money.  Most of the previous money created is now sitting as excess reserves with the banks.  The banks are not lending this out because of fear.  They need to make sure they stay solvent.

So what will happen with this new money?  Will it add to the excess reserves or will it find its way out into the economy?  Either way, trouble lies ahead.  If it stays as excess reserves, we will continue to see a weak economy that resembles something like Japan.  If the banks decide to lend out the money, then we will be looking at high price inflation in the near future, along with more bubbles.

The Fed is in trouble.  It is trying to do the politically correct thing.  It is putting the dollar at risk.  It is lowering our standard of living.  It is misallocating capital on a grand scale.  Eventually, it will have to choose between a depression or a complete collapse of the currency.  Hopefully it will choose depression.