We’re on our way for a brief visit to South America. So, not much from us today.

We simply pause and draw breath before the most important news of the week…


The Federal Reserve added a third dose of liquidity to a vital corner of the funding markets Thursday, helping rates retreat further as investors warn that fresh bouts of stress remain possible in the weeks ahead.

The New York Fed injected another $75 billion through an overnight repo operation. That followed a dose of the same size on Wednesday and $53.2 billion on Tuesday. The operations, commonplace in pre-financial crisis times, temporarily add cash, with the Fed taking government securities as collateral. Wall Street bond dealers submitted about $84 billion of securities for Thursday’s Fed action, the most in the three days.

That’s around $200 billion of injections. What’s going on?

Dry night

As you know, the Fed doesn’t have a pile of cash sitting in the vault. When it is called upon to provide funds, it doesn’t draw on the savings of honest citizens.

Nope. It just creates the money out of thin air. This fake money then becomes a part of the money supply (aka inflation).

Nor is the money earmarked for struggling hardware stores or families that are just scraping by. For example, we’ll bet that you, Dear Reader, have never borrowed overnight money in your entire life…except perhaps to buy a six-pack on a dry night.

Businesses need longer-term loans to fund their expansion plans. Consumers, too, need financing for cars, refrigerators, education, and houses — all on a long-term basis.

So who gets the Fed’s money?

Speculators. Players. And Wall Street hustlers. It’s their gambling money. And if it’s cheap enough, they can use it to make bets that they would never dare to make in honest markets.

Our guess is that they are betting on more stimulus — lower rates, quantitative easing, and bigger government deficits. They know the fix is in, and that both the Fed and the federal government itself are going to inflate — big time. They’re betting heavily, for example, that bonds are going up. And they do it with overnight money so they can unwind the trade on any day.

Plot twist

The risk is always the same — the cost of carry shoots up, forcing you to abandon a good trade at a bad moment. That’s the market’s way of limiting speculation and separating fools from their money.

But what a delightful twist! If the price of overnight money goes up, raising the cost of carry and putting the gamblers at risk, well, those nice folks at the Fed come to the rescue with a few hundred billion dollars of ‘liquidity,’ pretending that the economy is in jeopardy…And the fools are geniuses, after all.

Which is why we ended yesterday’s Diary with ‘you ain’t seen nuthin’ yet.’ This ‘Inflate-or-Die’ show has a long season ahead. Bailing out the speculators is just a warm-up act. And $200 billion is hardly enough to buy a box of popcorn.

The next crisis could come at any time. Then what?

What we’re seeing now is what the feds do even with an economy that is still expanding, with unemployment at 3.7%, and with stocks near an all-time high. What will they do when the stock market has erased $15 trillion in wealth, joblessness heads for 10%, and the economy falls into recession?

Our guess is that they will panic into the boldest, most reckless and irresponsible programme of inflation that the US has ever seen.

So get a good seat. Buy gold. And enjoy the show.


Bill Bonner