Wednesday, February 15, 2006

Fed as Lender of Last Resort

I've just had an epiphany, thanks to Doug Noland over at the Prudent Bear. It's the U.S. Fed, stupid! The buck stops at their doorstep.

[Thanks to for the image.]

Over the last few months, I've been searching for the source of world confidence in the dollar that is causing foreign investors to continue to buy dollars in the face of the evidence that the U.S. in in the midst of an unprecedented credit boom (yes, in spite of the CPI figures.)

Noland's sentence is what gives it away:

"I believe the widespread perception that policymakers are prepared to bolster the boom - and will definitely not tolerate a bust - is an integral factor associated with major (throw caution to the wind) Credit System 'Blow-offs.' "

He's hit it on the head. The Fed has become the global Lender of Last Resort.

That explains why everyone wants to buy dollar instruments in spite of our (relatively) humongous consumer and governmental debt statistics and of all the overheated economy indicators. And everyone knows that the U.S. Fed will "not tolerate a bust." Not only that, the world is confident the Fed has the wherewithal to pull it off.

That's it! Doug, you ARE a genius. Read the full article here.

The only remaining question is, will it work for much longer.


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