Goldman Sachs says the Fed is ready to to bring out the Daisy Cutter of monetary tools:
In our view, it is highly likely that the Federal Reserve will eventually decide to purchase longer-term Treasuries. First, even a 0% nominal federal funds rate is likely to look much too high by 2010 if our forecasts for inflation and the unemployment rate are roughly on the mark ... Fed officials will therefore have to pedal harder and harder to “mimic” the effects of cuts in short-term interest rates via unconventional monetary policy options, and buying longer-term government securities is one of the most conventional of these unconventional options.
Might this have some negative impact down the road? As the saying goes, "We'll jump off that bridge when we get to it." But take note of this recent analysis by currency guru Alex Merk:
After all, the massive stimuli under way should be highly inflationary; but if the Fed helps to engineer that markets cannot price inflation into bond prices, there has to be a valve. This valve, in our view, will be the U.S. dollar; we cannot see the dollar hold up in face of the types of intervention that are under way and that we see play out. Incidentally, a substantially weaker dollar may be exactly what Fed Chairman Bernanke wants. He has repeatedly praised Roosevelt for going off the gold standard during the Great Depression to allow the price level to adjust to the pre-1929 level; this is Fed talk for praising the pursuit of inflationary policies. His only criticism has been that he didn't act fast enough. ... In the U.S., these days, most of the deficit is financed abroad; the U.S. is lucky that at least the debt is U.S. dollar denominated so that it can, at any time, repay its debt by simply printing more money. However, the value that foreigners may place on the U.S. dollar may be substantially less the more inflationary the policies are the U.S. is pursuing.
Does this all have anything to do with the Obama administration's decision to send the national debt soaring with both a giant stimulus package and another bank bailout? Here is what the St. Louis Fed says about debt monetization:
Today, as in the immediate post-World War II period, the phrase “monetizing the debt” means money growth induced by attempts to moderate the effects of rapidly growing gover-nment debt on interest rates.