The day the Fed blinked

Some day we will look back at Wednesday, March 18 as the day the US Dollar started down the path to rampant inflation. Early in the day, the new CPI figure came in higher, and the price of oil was higher. You'd think the price of precious metals would be higher too, but the Gold Cartel was at work, and the gold price had been driven down to almost $880, and silver was below $12.

Then the Fed made an announcement that it would purchase $300 billion of treasury bonds, $100 billion of agency bonds, and $750 billion of agency-guaranteed mortgages over the next six months. That's $1.15 trillion, and that's in addition to all of the other purchases the Fed has made. Where is the Fed going to get all that money? That's easy: it will create the money out of thin air.

Within 15 minutes, the price of gold had rallied $38, and silver was even stronger. The rally continued on Thursday, and now gold trades at $952 and silver at $13.73. I think the market is finally getting it. We aren't going to see deflation. The CPI, as doctored as it is, was up even though we are in the deepest recession since the 1930's. The most basic industrial materials, copper and oil, have climbed off their lows, and the Baltic Dry Index (an important indicator of international trade) has also rallied.

Finally, this $1.15 trillion is only the beginning. A down payment, if you will, on much larger bailouts to come. No one thinks this $300 billion is the end. You can't run the US government for very long on a piddling $300 billion. It is possible that the Chinese demanded it; that the Fed will be buying treasuries that China wants to sell to fund its own stimulus program. But one thing is certain: the Treasury will continue to scramble to raise money. Tomorrow, Geithner will announce another scheme to try to foist some more toxic assets on unsuspecting investors, if they can find any.

The Public Investment Corporation will spend another $1 trillion on toxic assets, which they will try to sell to hedge funds or other private investors (read suckers.) The government will offer low-cost loans and will even share some of the risk if (when) the value of those assets falls even further. It may have a different name, or a new acronym, but it's still the same old scam. It all adds up to more inflation, and much higher prices for commodities and tangible assets.