Don Miller, Associate Editor of Money Morning, reviews the process and implications of the Fed’s possible plan for raising intereste rates without actually raising the rate itself.

Don Miller (Money Morning): The U.S. Federal Reserve may take an unorthodox approach to raising interest rates by paying interest on bank reserves rather than relying on traditional open market remedies, as it exits from its long-term fiscal stimulus programs, Reuters reported today (Tuesday).

Paying interest on reserves is mostly untested and would represent an unexpected twist in the Fed’s response to the financial meltdown.

“In the old days … the Fed controlled the federal funds rate with open market operations,” Antulio Bomfim, a former Fed economist now with Macroeconomic Advisors LLC in Washington told Reuters. “Now, at least in this period when reserves are over-abundant, the way the Fed hopes to raise the federal funds rate will be primarily by raising

The paragraphs below are excerpts from Richard Russell’s latest Dow Theory Letters, arguing the case for gold bullion.

“Today I ask myself, where would I rather have my subscribers be - loaded up in the Dow Jones Industrial Average or loaded up with gold?. And in all honesty, I believe they are better off in gold than in the stock market with DIA.

“There are a number of items favoring higher gold now.

(1) Interest rates are at zero, which means the ‘opportunity cost’ of owning gold now is highly favorable. You sacrifice no yield in owning gold vs. Treasury bills. T-bills pay you nothing, so you might as well have your money in gold.

(2) The Bernanke Fed will evidently stop at nothing in its all-out attempt to ‘jump start’ the wobbly US economy. This means spending and building debt at a never-seen-before rate. This will

This post provides links to a number of interesting articles I have read over the past few days that you may also enjoy.

• Gerard Lyons (Times Online): Discovering if we learnt the lessons of Black Monday, October 19, 2009. Today (Monday) is the twenty-second anniversary of Black Monday. On this day in 1987 stock markets around the world crashed. The Dow Jones fell 22.6 per cent in one day, London shed one fifth of its value over two days. The newspapers and television were full of pictures of traders in panic. Sound familiar? Reflecting on 1987 is interesting in its own right and has lessons for today.

• Allan Dodds Frank (The Daily Beast): Hedge fund dominoes, October 18, 2009. Friday’s insider-trading charges against the founder of Galleon could be the tip of the iceberg. Other hedge funds and the McKinsey consulting

Here I offer some thoughts on Bloomberg's account that the Fed has made inquiries with its dealers about the feasibility of a significant increase in the Fed's reverse repo operations.

First, a little background. The traditional tool of monetary policy is an open market purchase, in which the Fed purchased U.S. Treasury securities that had previously been held by someone in the private sector. The Fed would pay for those securities by crediting deposits in an account that the selling bank had with the Federal Reserve. These reserve deposits of banks represent claims that the bank could use, if it wished, to withdraw green currency from the Federal Reserve. The volume of reserve deposits historically was extremely important in determining the interest rate at which banks would lend the deposits to one another overnight. The traditional understanding of monetary policy was that the Fed would

As the U.S. and global economies stabilize, economists wonder how U.S. Federal Reserve Chairman Ben S. Bernanke will manage to reverse all the monetary stimulus that has been infused into the economy over the past year and prevent inflation.

My guess is that he won’t be able to do so, meaning investors need to position themselves now for the “stagflation” that’s almost certain to come.

Let me explain how I believe this will all play out.

In Federal Reserve’s Monetary Policy Report to Congress – as well as in an op-ed piece in The Wall Street Journal – Bernanke acknowledged the potential danger inflation poses and outlined an “exit strategy” that described a “smooth and timely” withdrawal of monetary stimulus.

However, the Fed chairman was vague about exactly how he will know when to implement that strategy, and the reality is that the exit …

I had just finished Final Lockdown Mode (FLM) here at Rancho Mogambo Bunker (RMB) and was starting to relax, or as much as a guy can relax when a guy is naturally skittish, paranoid and fearful and whose symptoms include rabidly obsessive total denunciation of the disastrous Federal Reserve for creating so much money, the traitorous Congress that allowed it so that it could deficit-spend the money, and the moron American voters that elected and re-elected and re-elected such loathsome, incompetent people to Congress.

I could see by the way I was getting worked up into another hissy-fit that I had not taken my medications as prescribed, a realization probably prompted by the way my wife was insistently banging on the door of the bunker and shouting, “Did you remember to take your pills like you promised?”

I was shouting back, “Yes!”, which was, of course, a lie, but for which

[Editor's Note: If it's inflation you're worried about - and commodities you want to invest in - there's no better place to look than the Global Resource Alert trading service, which ferrets out companies poised to profit from the so-called “Secular Bull Market” in commodities. If you’re new to the commodities-investing arena, and are uncertain about the landscape – or even if you’re an “old hand” at natural-resource stocks, but want some insights into the new profit plays and new players – consider hiring a guide: Money Morning Contributing EditorPeter Krauth, a recognized expert in metals, mining and energy stocks, who is also the editor of the Global Resource Alert. A former portfolio advisor, Krauth continues to work out of resource-rich Canada, which keeps him close to most of the companies he researches. Against the growing global financial malaise, Krauth says that commodities are among …

Total Fed Credit went down by $9.6 billion last week, which is, in comparison to their wild excesses of late, not that much, and certainly nothing to get excited about. Sort of like how my boss is unimpressed that she only got one letter last week, instead of the usual five, from disgruntled customers complaining about how I called them “morons” because they were not buying gold and silver in response to the government acting like monetary and fiscal idiots.

And if you are wondering, “Like what kind of monetary idiocy, Magnificent Manly Mogambo (MMM)?” then all I have to do is smile enigmatically and silently point to where it shows that the Fed used some of the money that they created to buy up another whopping $9.3 billion in Treasury debt, agency debt and miscellaneous other worthless debt from banks last week. Last week!

The surprising thing to me about last

We decided that it was worth sharing our views of the inflation/deflation debate with all of our readers.  In our weekly newsletter we are already positioned to take advantage of some of the current as well as potential trends that will benefit from our scenario.

The following are our views on different parts of the puzzle that show that we are currently in, and will likely be experiencing deflation for longer then most people seem to think.

Savings-

Here are some interesting, and unfortunately not surprising, savings rate numbers.  The current savings rate is 5.7%, the all time high in 5/1/75 was 14.6%, the all time low was in 8/1/05 with a savings rate of -2.7%, the historical average is 6.8%, and the 10-Year average is 1.7%.  As you can see in the chart the past year has seen a huge uptick in the savings rate as consumers are …

We decided that it was worth sharing our views of the inflation/deflation debate with all of our readers.  In our weekly newsletter we are already positioned to take advantage of some of the current as well as potential trends that will benefit from our scenario.

The following are our views on different parts of the puzzle that show that we are currently in, and will likely be experiencing deflation for longer then most people seem to think.

Savings-

Here are some interesting, and unfortunately not surprising, savings rate numbers.  The current savings rate is 5.7%, the all time high in 5/1/75 was 14.6%, the all time low was in 8/1/05 with a savings rate of -2.7%, the historical average is 6.8%, and the 10-Year average is 1.7%.  As you can see in the chart the past year has seen a huge uptick in the savings rate as consumers are