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Fed's Easy Money Policies Will End Badly: Opinion

NEW YORK ( TheStreet) -- Bar the door Nelly. The Federal Reserve has abandoned all restraint and will now print money to finance the federal deficit.

To support the weak recovery, the Fed continues to keep short interest rates near zero, purchase mortgage-backed securities and push down long interest rates. To accomplish the latter, since September 2011, the Fed has sold Treasurys with terms of less than three years to purchase bonds with longer maturities.

Now, with its supply of supply of short-term securities running out, the Fed will simply print new money to buy U.S. government debt at a pace of $45 billion a month. Add in its $40 billion in purchases of mortgage backed securities, it is supplying U.S. capital markets with more than $1.1 trillion annually. That's just about the size of the likely 2013 federal government deficit and 7% of GDP.

With the U.S. economy growing at only 5% in nominal terms, and 2% subtracting for inflation, growing the money supply at that pace sooner or later has to cause a great deal of inflation.

In the meantime, commercial banks enjoy a rock bottom cost of funds and the elderly who often rely on CDs to supplement their Social Security checks must settle for about 1%. Only economists running central banks could find virtue in taxing grandma to subsidize Goldman Sachs.

Until now, easy money policies have done little to accelerate inflation. The reasons are simple: banks are not lending enough of the additional liquidity on their balance sheets to cause a lot of new consumer and business activity. With so much idle industrial capacity and unemployed labor, what new spending Fed policies instigate appears to be supporting additional production rather than higher prices for what is produced. But that can't last forever!

So far, the big exception is the housing market, where prices are picking up, despite wages of many young buyers stagnating or falling. With prices outstripping wage growth nationally and rising quickly again in some choice urban locations, local bubbles and bursts pose new dangers to the fragile recovery.
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