full year report fy11, page-37

Country,

What you say is true and scary because in the past deleveraging has never been easy and now we have the private and public sectors doing the same thing at the same time.

However I am not with you when you state that the money enabled the Govt to go deeper into debt as Banks bought up this paper because in mio that was a necessity imposed by the private sector on the public.

I am saying this because for the private sector to be able to deleverage without causing the GDP to fall considerably we need the public sector to go into the red. That is, while one is saving the other has to be using those savings. If you look at Europe minus Greece you will see what I mean immediately. Spain when the crises arrived was having a budgetary surplus and not a deficit.

The problem that the Fed is trying to address imo is this: long term interest rates tend to move in one direction or another according to expectations about the direction of the short term interest rates which are determined by the Fed. So if the expectation about short terms interest rates is that they are going down (recession at the door) then the interest rates on long dated paper would in anticipation start coming down. However, when the short term rates are already at zero rhey cannot fall further down and therefore the expectations are that they will eventually be going not down but for sure up. And this causes problems. If you expected rates in the future to go up because they cannot fall any more then you don't want to by now long dated paper and therefore you either stay liquid or buy short term paper which is almost the same thing. But the rates charged to home owners are set by the long term treasuries and the building industry is a very important sector and therefore in order to bring the mortgage rates down the Fed needs to buy long dated treasuries.

I hope that this action by the FED also will help FML by having a positive effect on the price of gold.

Cheers