Thursday, February 11, 2010

New kid on the block

Feb. 11 (Bloomberg) -- The Federal Reserve is in talks with money-market mutual funds on agreements to help drain as much as $1 trillion from the financial system as policy makers prepare for the first interest-rate increase since June 2006, according to a person familiar with the discussions.
The central bank is looking to the $3.2 trillion money- market mutual-fund industry because the 18 so-called primary dealers that trade directly with the Fed have a capacity limited to about $100 billion, estimates Joseph Abate, a money-market strategist at Barclays Capital in New York...--
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Comment: The Fed is desperate. Bernanke doesn't know yet how to neutralize the trillions of dollars he injected into the financial market. These dollar are like dynamite. It only takes spark and the reserves will explode into hyperinflation. If Bernanke slams the brakes to harsh, financial markets are in risk to collapse again and this would lead to deflation. Among these alternatives there is only a very slight chance that the Fed can manage the transition without extreme inflation or deflation. There is a chance, right, but it is small. As of now there is no way to tell what will happen. All we can do is watch closely, analyze sharply, and act courageously when the contours of the new phase will appear.

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