U.S. Federal Reserve has forgotten the most essential rule. They should first do no harm. In a rush to bailout the bankers from their self inflicted mortgage mess, Federal Reserve has seriously distorted the U.S. monetary system. In this week's graph are plotted the year-to-year dollar change for several Federal Reserve balance sheet items. First bar is for Reserve Bank Credit, which is essentially the change in Fed's total assets. It is monetary base from which money is created. Second bar is for Fed's holdings of government securities. Third is essentially the special lending facility created to bail out bankers. Federal Reserve has lent more than $200 billion to the creators of the mortgage mess. At the same time as indicated by second bar, Fed has extracted from rest of economy nearly a like amount.
In essence, Federal Reserve has reallocated money from Main Street to Wall Street. This massive shift of funds to Wall Street aways from producing sectors of U.S. economy has some strong implications. U.S. recession will be deeper and longer. Rather than allowing system to purge itself of weak financial institutions, Federal Reserve is providing them with special funding. Money has been shifted from goods and services producing sectors to non productive financial entities. Massive economic recession now rolling across U.S., and into Canada, was created by misguided policies at Federal Reserve. Now, another round of misguided policies has been initiated. This latest set of actions is not a cure, but a prolonger of the disease and rot. These actions will only exacerbate long-term Bear market for U.S. dollar. Over time, $Gold's price will benefit from these actions. Gold is insurance against act of the central bank. On a tactical basis, Gold has passed into a correction. Investors should use any serious price weakness which is likely to develop to add to Gold holdings in a measured manner. Also, be wary of oil trading lemmings, their next act may push Gold lower and deeper than many consider possible.
GOLD THOUGHTS come from Ned W. Schmidt,CFA,CEBS, publisher of The Value View Gold Report, monthly, and Trading Thoughts, weekly. To receive copies of recent reports, go to http://home.att.net/~nwschmidt/Order_Gold_EMonthlyTT.html.