TARP?

No, TALF.

The Federal Reserve Board on Tuesday announced the creation of the Term Asset-Backed Securities Loan Facility (TALF) and in doing so, conjured up another $800 billion out of thin air. The central bank plans to (I say "plans to" because judging by the TARP that could change by tomorrow morning) buy $600 billion in GSE assets. Under the TALF plan, $200 billion in credit card debt, student loan debt and auto loan debt will also be purchased. The purchases are expected to occur over the next three to six months.

Some of the trillions of dollars that have been pumped/injected/firehosed into the system in the last 18 months has not been inflationary, because it has been offset or removed from other parts of the system. Todays $800 billion, however, is admittedly and unabashedly straight off the printing press. God help you if you don't have some inflation protection because once we get through this deflationary mess you're going to need it.

At this point it is the Federal Reserve and U.S. Treasury that are assuming the credit risk. This is like walking a tightrope. How can the U.S. dollar stand up against this wild money creation?

Based on bid-to-cover ratios, the Treasury is already starting to have minor problems selling its T-bills, notes and bonds. If buyers (most of them foreign central banks) start to walk away from the dollar, the situation could and would go from bad to much, much worse - and in a hurry.

Full blown quantitative easing would be the last bullet in the chamber. Fed funds rate 0% dead ahead.