The U.S. Federal Reserve bought junk debts from banks to bail them out and then to print money.
Bernanke says we shouldn’t worry about inflation because he can turn around the money printing in 15 minutes by selling all of the bonds he has to stop any increasing inflation.
Interesting fantasy – who is going to buy trillions of junk bonds?
The true price discovery of these impaired bonds may be near zero and so no money would be going back to the Federal Reserve so there would be no brakes on increasing inflation.
But the bonds that were bought are NOT the same bonds that would be sold – interest rates change and the expiration date is closer. Plus, the bonds that have ALREADY expired must be re-created to keep the debt level of the Federal Reserve at the same place.
As Max Kaiser says so eloquently about the Fed’s fantasy about of exiting all the debt in 15 minutes, “Just because you can eat a porcupine whole does not mean you can pull it out – the quills are now facing the wrong way.”