Grand Rapids, MI (PressExposure) April 07, 2009 -- The Federal Reserve recently announced they'll be creating billions of dollars by buying back US Treasuries. Financial Advisor Dennis Tubbergen believes those with accumulated wealth may need to begin to look at dollar alternative investments.
Last week, the Federal Government has announced they will pour up to $1.25 trillion into buying mortgage backed bonds issued by government backed entities like Fannie Mae and Freddie Mac.
But where did the Federal Reserve find all of this money?
They didnât, Tubbergen explains. Theyâre just printing it. The Fedâs goal is to keep bond prices high and interest rates low in an effort to revive lending, so it has now committed to becoming the buyer for these securities.
Why would they do this?
Well, the feds want to get more money flowing into the economy. However, since the fed funds target interest rate is at 0% - .25%, they couldnât reduce interest rates further. So instead, in an unprecedented move, the fed elected to simply print more money to buy back government debt.
If youâre a poker player, this move by the fed could be described as going âall inâ, according to Tubbergen. When the fed buys government debt and replaces it with even more debt, the end result is something known as monetizing the money supply.
Although the fedâs move to monetize debt may temporarily help sustain depressed interest rates, it is likely to result in inflation and higher interest rates in the long run.
Simply put, the fed is creating US Dollars almost from thin air, Tubbergen says.
The result of the fedâs announcement?
The US Dollar fell and gold prices rose.
Shortly after that, China called for the creation of a new currency to replace the U.S. Dollar as the world reserve currency.
Russia has also gone on record recommending that the International Monetary Fund issue the new world reserve currency.
This could be seen as a reflection of how unhappy many nations currently are with the United Statesâ role in the current global economy.
And how could this effect U.S. citizens? It is Tubbergenâs view that inflation, possibly even hyper inflation could follow within 12 â 24 months as a result of the fedâs move.
For those who have accumulated wealth, Tubbergen believes they may need to look at dollar alternative investments and "absolute returns" investment strategies.
The fed funds target interest rate is the key rate used for regulating the U.S. economy, our government typically lowers it when it needs a boost and raises it when the rate of inflation is too high.