You can’t pump up the money supply by a trillion and not expect inflation to rise…SO WEDNESDAY NIGHT we went to bed reading rumours of Vladimir Putin’s plan for a new world reserve currency to replace the US Dollar, writes Dan Denning in Melbourne for The Daily Reckoning Australia.

Thursday morning, we wake up to the news that the Federal Reserve will buy $300 billion in US Treasury bonds and another $750 billion in mortgage-backed securities.

Gold Bullion was up 6% on the news.

What we have now – with crystal clear clarity – is asset-price inflation. Bonds and shares will benefit first, if benefit is the right word. If the up-tick rule is reinstated, preventing short-sellers from selling on weakness rather than after a stock has just moved higher, and mark-to-market accounting is also suspended, you could see a pretty impressive rally in stocks over the coming weeks and months.

But you’ll also see that inflation spread beyond share markets to tangible assets. Or so we guess. Do you think this news comforted the Chinese? Will they be glad the Fed is buying long-term bonds? Or will they be selling?

The Fed is now “monetizing” American debt in an effort to bring mortgage rates down and put a floor under Treasury bond prices. By “monetizing” we mean it is trading freshly printed cash for Treasury bonds owned by other investors.

Why? The Fed hopes that cash will shoot out into the credit markets as new loans and un-freeze things. Maybe it will. Maybe it won’t. But it’s pretty obvious you can’t pump up the money supply by a few hundred billion dollars and not expect the general price level to rise.

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