Just to follow-up with Jim Puplava's article, the chart below shows the FED reserve assets YOY. Notice the decay in quality as treasury securities are replaced with toxic assets that banks could not wait to get rid of from their balance sheets. If the FED operated in the real world, such a detrimental change in assets would be catastrophic and result in immediate insolvency. Then again, their addition of toxic waste is probably not much different than what the Bank of America took on when they acquired Countrywide Financial, if the deal still proceeds.

What is shocking about the FED's assets in not so much the quality change but the severe drop in total Treasuries, most of which occurred after Bear Stearns collapsed. When, not if, the next systemic stress (heloc's, auto loans, credit cards, Alt-A and prime mortgages etc...) occurs, the FED may not have the ammo to solve the problem. Additionally, when the next systemic stress occurs, the FED will lose even more credibility because they have recently stated that the credit crisis is behind us. The next wave in the crisis will most likely result in precious metals going ballistic because it will become apparent that the FED may only be able to watch rather than react aggressively.

Regards - VHF

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