Gold Soars As The Fed Explicitly Promises To Debase The U.S. Dollar

Federal Reserve Chairman Bernanke hit the panic button today by announcing a specific inflation target, vowing to keep rates at zero until at least 2014 and pledging to offer additional monetary stimulus. The Fed also noted, as it has in the past, that the economy still faces "significant downside risks".

These actions by the Fed come nearly four years after the financial crisis began in 2008. During that time, the Fed has ballooned its balance sheet to almost $3 trillion, driven real interest rates to negative 1.2% and encouraged lending by flooding the banking system with reserves. The Fed's monetary easing was supplemented by trillions of dollars in U.S. deficit financed spending aimed at restoring economic growth and gluing back together the shattered real estate bubble.

Despite these unprecedented and controversial actions, the economy refuses to rebound. Collapsing home prices, declining real incomes and an "official" unemployment rate of 8.5% are deflationary and this is what has panicked Bernanke more than anything else. Deflation is the mortal enemy of a credit fueled, debt burdened economy. Today's actions by the Fed show that Bernanke will do whatever is necessary to prevent a deflationary collapse. Of course, the markets already knew this...more