The charts above shows that the US Government is going for a hyper-inflationary monatery policy as the way to get out of its current financial crisis. US cannot afford to have its economy going into deflation which can lead to only one outcome, 1929 scale of depression.
Recall what the Federal Open Market Committee (FOMC) has proposed on 18 March. FOMC has decided to increase the size of the Federal Reserve's Balance Sheet further by:
(a) Provide $750 billion to purchase agency mortgage backed securities.
(b) Provide $100 billion to purchase agency debt.
(c) Provide $300 billion to purchase long-term Treasury securities.
The purchase of Treasury securities by Federal Reserve reflects the low confidence levels the rest of the world have in US currency and US Treasury Bonds. China and Japan are holding a big quatity of US Treasury securities. One week before the FOMC meeting, Chinese Premier Wen Jiabao mentioned " We have lent a huge amount of money to the United States, I request the US to maintain its good credit, honor its promises and to guarantee the safety of China's assets. Of course we are concerned about the safety of our assets. To be honest, I am a little worried." China has to worried, China is holding $740 billion worth of US securities which is 24% of total US issued securities and it has $2 trillion of US dollars in its currency reserve. When so much money is being printed and pumped into the US economy as shown by the vertical line in the above chart, the dollar will go down, inflation will go up very very fast, interest rate will have to go up equally fast to control inflation. Due to the weak US dollar and inflation, commodities will go up, property price will go up (that will automatically solve part of the toxic assets problems) and watch out, this is the next big bubble that is likely to help to start the Major Wave C that can send Dow to below 5,000 two to three years from now. Meanwhile let's enjoy the ride of major wave B (yet to be confirmed).
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