RTFA: http://money.cnn.com/2008/10/13/news/economy/centr…

NEW YORK (CNNMoney.com) — The Federal Reserve announced Monday it will offer an unlimited amount of dollars to three other central banks in an unprecedented move to provide liquidity to the global banking system.

The U.S. central bank will lend dollars at a fixed interest rate to the central banks of England, Switzerland and the European Union, according to a joint statement from the banks.

The other central banks will be able to borrow “any amount they wish” in exchange for collateral. The goal is to flood the financial system with much-needed dollars.

After they borrow dollars from the Fed, the Bank of England, the European Central Bank and the Swiss National Bank will provide private financial institutions with one-week, 28-day and 84-day U.S. dollar loans in the latest attempt to unfreeze credit.

Am I the only one who is nervous about the phrase, “flood the financial system with much-needed dollars?” See, the trick to “paper” money is that the supply is potentially infinite, so it only retains value when that supply is kept at a finite level. The Fed, especially under Bernanke, has used a policy of inflation targeting – gradually increasing the money supply year-over-year within certain limits – to enable speculators to calculate the value of their money in the future.

To me, these words spell disaster for anyone who has locked their dollars into long-term bonds or bills. With an interest rate of around 4% on the 10-year T-Bond, that’s a slim inflation target to hit when you’ve just promised unlimited dollars.