Thanks Ben, now its your turn Congress

(1) Monetizing the Deficit and Fed History in the Making

The Fed's initiative to buy long-term treasuries and yet maintain its level of mortgage backed assets on its balance sheet is effectively a monetization of the US debt. It's a detriment to the dollar but the only way to stay relatively neutral on the monetary stimulus approach. Keeping interest rates at 0% is the traditional tool and was a given. Now the Fed has had to go into uncharted waters, effectively creating a NEW benchmark tool whereby investors can examine how the Fed will atttempt to stimulate the economy --- the overall size of its balance sheet. For the first time, the fed has articulated a clear policy to keep its balance sheet around $2 trillion dollars. Future Fed statement can signal policy to markets by stating an intent to shrink that balance (or increase it) accordingly.

The scary part here is, everyone knows these aren't long term solutions. But you can't get to long term until you stabilize and ensure the short term (including thoroughly warding off deflation). So this is a necessary evil, which is likely why markets bounced in reaction at first and are now selling off heavily this morning.

(2) Structural Problems

Speaking of long-term solutions, the US is going to have to address some if its truly going to ward off deflation and solve its deficit issues. Structural solutions include raising the retirement age, cutting retirement/federal benefits, raising taxes, cutting pay, and/or reducing healthcare. Starting to sound like Greece? But these are facts. Our economy is built on a structure of unsustainable debt. All of these initiatives just can't be afforded and, the only way to solve our debt issues is to address each of these structural problems seriously. The appetite certainly won't be there to do so, so its scary to think the political will wont either. The Fed can only do so much (and is largely out of strong policy bullets). The final stage of recovery must come from Congressional reform. I know. I did just say that.