In response to:

Fed Now "Doing it Right"

Phil from NZ Wrote: Dec 14, 2012 3:37 PM
Read John Cochrane: "Inflation and Debt" http://www.nationalaffairs.com/publications/detail/inflation-and-debt The assumption behind QE via the purchase of Treasuries and other instruments, is that the brakes can be put on inflation, when it sets in, by selling off the Treasuries held by the Fed, to mop up the excess liquidity. I have an astute friend named Henry, and when I told him of the above assumption, his immediate response, without missing a beat, was "who to"? (That is, who does the Fed sell the Treasury Bonds to?) John Cochrane's paper asks the same question. If the market has (correctly in my opinion) realised that US government debt is NEVER going to be paid off, the Treasuries won't sell and there will be hyperinflation.

How do we know that the Fed pays attention to the things we write? Previously, commenting on the apparent lack of effect that the Fed's latest round of quantitative easing has had on stock prices, we observed:

1. The Fed is doing it wrong. In the two previous rounds of QE, the Fed purchased large quantities of U.S. Treasuries. So far in this round, the Fed is only purchasing Mortgage Backed Securities. The stock market just doesn't get the same bang for the buck as when the Fed...