This from The Sovereign Society:

The Federal Reserve this week announced new plans to unclog credit markets as the economic recession continues to deepen across the country, stifling bank lending and resulting in widespread hoarding of cash.

The Fed announced two new efforts to unfreeze credit for homebuyers, consumers and small businesses, committing up to $800 billion dollars. The move is timely as LIBOR rates ratchet higher again after a period of tightening since mid-October. Corporate bond spreads are also widening while mortgage rates remain elevated.

The Fed will purchase up to $600 billion dollars of debt issued or backed by government chartered housing finance companies. The central bank will also establish a $200 billion dollar program to support consumer and small business loans, the Fed said in a statement prior to the market’s opening.

Thus far, unprecedented efforts by the Fed and other central banks since August 2007 have failed to calm investors. Credit spreads remain historically high and three-month interbank lending rates as defined by LIBOR at 2.19% are well above the Federal Funds target rate of 1%. Though that’s much lower than 4.85% earlier in October at the height of the crash, it’s still high and testifies to a lack of counter-party confidence among lenders.

The Fed is clearly throwing everything it’s got at deflation. Bernanke is rapidly becoming “Helicopter Ben,” referring to his speech a few years ago where he warned that if deflation surfaced under his tenure as FOMC boss, he would print money like crazy. That’s now happening.

The Fed’s balance sheet is expanding like a massive balloon since August with over $1 trillion dollars in assets swapped or arranged through all sorts of fancy bridge loans, collateralized loans, interbank SWAP facilities – even to the emerging markets – and goodness knows what else that isn’t reported in the financial press. In short, the Fed is out of control.

In Washington, the government is now guaranteeing about 30% of total U.S. GDP through backstops in financial services (Citigroup the latest bailout), insurance (AIG) and probably extending to the auto sector and, possibly, homebuilders. Pretty soon, half of the GDP might be guaranteed by the U.S. government.

Throw in the cost of financing protracted conflicts in Iraq, Afghanistan and another huge stimulus package by President-elect Obama in January are we’re already in the hole for trillions of dollars.

Credit markets are still badly fractured, stocks have collapsed and housing remains in a freefall. The government’s backtrack on TARP is also confusing as investors debate whether a slush fund will be created to harbor toxic mortgage-backed securities. Or, as evidenced by Citigroup’s effective bailout on Monday, the government is sitting on residual TARP funds to attack the next disaster instead of throwing everything it’s got all at once at the crisis.

It’s no wonder gold is starting to look attractive again, even amid deflation. Investors forget their history when alluding to gold as only an inflation hedge; true, gold is primarily an inflation hedge as prices rise, but it is also emerging as a surrogate currency as the dollar, still the reserve currency of the world, heads into the abyss drowned by bailout after bailout and a seemingly never ending expansion of credit and money supply.

Gold was not freely traded post-1934 when FDR confiscated the metal. It’s therefore impossible to predict how gold will perform now in the first credit deflation since the 1930s. But I’ve got a feeling its moment has yet to arrive ahead of the next dollar sell off.

I’ll bet on gold.

Source: Fed Out of Control…Go for the Gold

The article starts off, “Angry Hong Kong investors, some banging gongs and others waving banners, scuffled outside a bank on Friday as frustration mounted over losses tied to investments linked to failed U.S. bank Lehman Brothers,” and “Several hundred investors, many of them elderly retirees, marched to eight banks which had sold Lehman structured products, demanding compensation for their losses” because the banks were guilty of “misleading investors on the risks involved.”

And it wasn’t just them, either, as “Investors in Singapore and Indonesia have also hit the streets in protest, expressing outrage that the failed products they bought were actually complex derivatives.”

Now, normally you would think, “What a bunch of dummies! Demanding compensation for their losses just because some slick stock and bond hustlers talked them into sinking all their hard-earned money into some now-worthless crap? Hahaha! Welcome to the real world! And now they want their losses covered by the government? Hahaha! What do they think this is, communist Russia? Hahaha!”

Apart from the fact that the English philosopher Herbert Spencer said, “The ultimate result of shielding men from the effects of folly is to fill the world with fools”, the joke is actually on me, as these Asian investors actually think that they deserve compensation for their stupidity by using the stupidity of us Americans as a model, as our stupid government and central bank are creating untold zillions of dollars to do that very thing!

And part of it is first jacking up Total Fed Credit to get the new credit into the banks, and sure enough, it was up another stunning $62 billion last week, taking the total to a staggering $1,872.948 billion, which is up an also-staggering $1,010.325 billion in the last year! My God! Total Reserve credit was up more than 117% in a year! A freaking year! Twelve months! More than doubling!

And if you are one of those people who write to me and say that I am just a stupid guy with bad breath, poor posture, and minimal social skills, I can only say “Touche!” but one of the few things I do know is that an increase in the money supply means that there will be an increase in consumer prices as all those additional dollars end up bidding for things in one marketplace or another, thus driving up their prices, and pretty soon the prices of food and energy and housing and everything else are rising so much that it is causing distress among the poor, and they are rioting in the streets, while the middle class will be drained of every penny’s worth of buying power, gold will be shooting to the moon in response to a devalued dollar, and you Earthlings will realize the True Mogambo Significance (TMS) of having gold, guns and grub, because no matter what happens, with those you can buy your way out, shoot your way out, or wait out a siege, in which case you will want to stock your bunker with tasty grub, extra ammo, and enough booze to deaden the horror of watching the outside world disintegrate under the onslaught of so much inflation.

On the other hand, one can infer the same thing from the fact that the new Gross Domestic Product Deflator is 4.2%! In other words, inflation in prices is, across the entire aggregate economy, 4.2%! Yikes!

This is so horrifying that during Halloween a few weeks ago, I made a last-minute decision to change my choice of costume. Originally, I was going to dress up as the beautiful ballerina whose heart has been broken in a tragic misunderstanding and ultimate betrayal, and who is now packing an Uzi to track down that lying bastard and make him pay, big-time.

Instead, I went as inflation; I stuck the head of a doll into my mouth so that it looked like I was eating somebody alive. When I knocked on the door, a man answered and we all said, “Trick or Treat!” and then the guy looked at me and asked, “What are you supposed to be?” I told him, “I am inflation, and I eat people alive!”

Mostly, the joke fell flat, and the rest of the conversation quickly turned to why a raving lunatic my age would be trick-or-treating among children, and wearing such a disgusting and incomprehensible costume, too.

I told him, “Because the new GDP deflator was 4.2%, you moron! And if that is not enough of a ‘trick’ for you, then you are too stupid to have candy, and so I am going to take all yours! Hahahaha!” Then I made a grab for the bowl of candy he had, and we tussled back-and-forth over it, candy flying everywhere, him yelling to his wife to “Call the cops! Call 911!” and me yelling back that he is a moron who doesn’t deserve any damned candy because inflation in prices, as a result of this insane inflation in the money supply means he won’t have any candy because nobody will be able to afford to buy candy, and the inflation is going to kill everybody, including him and all these stupid little kids, whereupon all the kids ran away, screaming and crying, and I was yelling, “If you think that this 4.2% GDP deflator is bad, you little morons, wait until the rest of the inflation in prices gets here as a result of the trillions and trillions of new dollars in various stimulus packages being concocted Around The Freaking Globe (ATFG), with more and more to come!”

By this time, I suddenly lost my grip on the candy bowl and the door was rudely slammed into my face. I kept ringing his doorbell and yelling for him to open the door and get a taste of the misery of inflation that all these trillions of new dollars are going to cause, and how he is an idiot to be cowering in there and spending his money on stupid trick-or-treat candy instead of spending it on gold and silver.

I was getting louder and louder, until I saw a police car turning the corner. Then I figured I had imparted enough wisdom, and snagged enough free chocolate candy, for one night.

It was the least I could do to help a neighbor!

Source: Shielding the World from Financial Folly