The Fed: Money For Nothing

[Vanguard]

This whole problem stems from the fact that we have spent the past thirty years inflating the financial economy while simultaneously deflating wages and (as a consequence) the productive economy.

This is what "supply side economics" means. You inflate capital relative to everything else. Unsurprisingly, it eventually results in economic disaster.

The spending undertaken by the Fed is stupid not because it will result in general inflation but because it won't result in general inflation. You can't have inflation in the price of goods unless wages increase. And nothing the Fed is doing will increase wages.

Consequently nothing will change. One set of overpriced assets (mortgages) will be exchanged for another set of overpriced assets(government bonds or money).

If you want to inflate out of debt, you have to inflate. Otherwise you are just moving the debts around.

[The Mad Monk]

The Feds feel the danger of deflation is worse than the danger of inflation.

In reality, the governments of the world can do little to stabilize markets and restore growth. What they can do is attempt to ameliorate the effects of the crisis on people, so that, in the imperialist world at least, we don't see mass homelessness and starvation as a result of following the conservative mantra.

In reality, the only solution is to abolish the government subsidized market and government dependent enterprise and move to a true privately owned and managed society, i.e., the democratic free market.

Fixed.

[Unimatrix11]

It doesn't really matter if they lend it or just print it....

Same thing.

[Unimatrix11]

Thats WrG! Oh and while I'm at it, welcome back KH.

I've always said it was something to look at and explore not as something I was sold on. And it would have to be a very very broad basket of commodities with large reserves to back up the currency thus greatly reducing volatility.

I've most recently become enamored with another novel monetary concept, Demurrage which is a steady decrease in the FACE value of money over time. The effect is to encourage spending and discourages savings which increases the 'velocity' of money. Because the money supply is always decreasing the government can create (from thin air) and spend an amount equal to the loss in supply without causing any inflation. Read more on the wiki page. Again this is something to explore not an idea I'm committed too, I want to keep an open mind as to WHAT money could or should be in our society, its already been changed several times and without much seemingly any foresight in how the nature of the money shapes society and the economy for good or ill.

http://en.wikipedia.org/wiki/Demurrage_(currency)

As for the Fed I'm not optimistic about these moves, the money is going from the Fed into companies like AIG and their their it goes out to pay CDS's to Banks which would otherwise be completely Insolvent. Essentially everyone is going to be being covertly taxed through inflation (or reduced deflation which would otherwise enrich them) and the money is going to make whole bunch of Banks which basically made huge unregulated side-bets whole. Society is under no obligation what so ever to protect those banks or guarantee contracts which come from insolvent institutions. The banks should be Nationalized and the CDS's voided to remove the un-payable debts from the system. I'm remaining very skeptical of the Fed.

First sane, open minded post in this thread, IMHO.

[Unimatrix11]

Fixed.

Outragous ! ´Fix´ a single word (or such) and mark what you fixed, but i´d be pretty p*****, if you r***d any of my posts this way.

[Vanguard]

Hear hear! Outrageous behaviour! Resign! Resign!

[The Mad Monk]

I will be sure to keep that in mind.

[The Mad Monk]

In the meantime, you may want to run a post-specific search on "Fixed" in the Off-Topic forum; I think you may find it instructive.

[Victor Galis]

The mathematical modeling of economic behaviour, as taught in almost every economics department around the world, will one day be exposed as a delusion.

Why use the future tense to refer to past events?

Essentially everyone is going to be being covertly taxed through inflation (or reduced deflation which would otherwise enrich them) and the money is going to make whole bunch of Banks which basically made huge unregulated side-bets whole.

Except for the millions who are deep in debt, who will also benefit from inflation. I'm not sure they're any more deserving than the bankers. (Though some might be.)

[chequita guevara]

Fixed.

Yeah, let's go back to the 19th Century!

[The Mad Monk]

Dollar Declines Most Since 1985 Plaza Accord on Fed Bond Buying

March 21 (Bloomberg) -- The dollar dropped the most against the currencies of six major U.S. trading partners since the Plaza Accord almost a quarter-century ago as the Federal Reserve’s plan to purchase Treasuries spurred speculation that it’s debasing the greenback.

“What it introduces is the problem of the currency to the extent that the Fed is buying what isn’t desired by foreign holders,” said Bill Gross, co-chief investment officer of Pacific Investment Management Co., in an interview on Bloomberg Television on March 19. “The Fed can keep interest rates where they want to keep them, at least for a 6- to 12- to 18-month period of time, but it will have consequences down the road.”

The U.S. currency weakened beyond $1.37 per euro this week for the first time since January as the central bank’s decision to increase its balance sheet by $1.15 trillion lowered yields, making American assets less attractive. The Norwegian krone and the New Zealand dollar rallied as the Fed’s move spurred advances in commodities.

The dollar depreciated 4.8 percent to $1.3582 per euro yesterday, from $1.2928 on March 13. The U.S. currency touched $1.3738 on March 19, the weakest level since Jan. 9. The dollar also fell 2.1 percent to 95.94 yen from 97.95. The euro increased for a fifth week versus the yen, gaining 2.9 percent to 130.29 after touching 130.49 yesterday, the highest level since Dec. 18.

The ICE’s trade-weighted Dollar Index dropped 4.1 percent this week to 83.84, the biggest decrease since the week in September 1985 when the U.S., U.K., France, Japan and West Germany agreed at New York’s Plaza Hotel to coordinate the devaluation of the dollar against the yen and deutsche mark.

Fed’s Announcement

The U.S. currency tumbled 3.4 percent versus the euro on March 18, the biggest drop since the 16-nation currency’s 1999 debut, when the Fed unexpectedly announced at the end of its two-day policy meeting that it will buy up to $300 billion of Treasuries and increase its purchase of agency mortgage-backed securities, a policy known as quantitative easing.

“The dollar’s decline this week has more or less priced in the policy response,” said David Woo, global head of foreign- exchange strategy at Barclays Capital in London, in an interview on Bloomberg Television. “Over the next three months, I don’t see much downside for the dollar to the extent other central banks will be under pressure to follow the Fed’s lead and essentially go down the route of quantitative easing.”

Stocks advanced this week, while crude oil had a fifth week of gains, the longest winning streak in 11 months. The Standard & Poor’s 500 Index increased 1.6 percent. Crude oil rose above $50 a barrel.

Norway’s Krone

Norway’s krone was the best performer versus the dollar among the major currencies, increasing 7 percent this week to 6.377, the biggest advance since 1973. The Australian dollar gained 4.4 percent to 68.69 U.S. cents, extending its advance in March to 7.5 percent. Crude oil is Norway’s largest export, while raw materials account for 60 percent of Australia’s overseas sales.

Colombia’s peso increased 3.6 percent to 2,359 per dollar, while the South Korean won appreciated 5 percent to 1,412.25 on demand for emerging-market assets.

“The rise in risk appetite may be sustained in the near term, which would make the dollar weaker still,” a team led by Vincent Chaigneau, head of fixed-income and currency strategy at Societe Generale SA in London, wrote in a research note yesterday. “We remain skeptical about the durability of that run, but still believe that the newly found dollar weakness could last.”

Treasury Yield

The yield on the benchmark 10-year Treasury note dropped the most since January 1962 on the day of the Fed’s announcement and fell 0.26 percentage point this week in its biggest decrease since December. At 2.63 percent, the yield was 0.34 percentage point lower than that of the comparable-maturity German bund. The gap widened 0.16 percentage point from a week earlier, making U.S. assets less attractive.

“We would by no means assume that the reaction to the Fed’s quantitative-easing announcement has run its course,” Credit Suisse Group AG currency strategists led by London-based Ray Farris wrote in a research note yesterday. “Fed purchases of Treasuries are likely to be quite problematic for the U.S. dollar, particularly given large foreign holdings of Treasuries and the loss of yield support for the dollar that Fed purchases have caused.”

Foreigners hold about half of the marketable Treasury debts that are outstanding. China, the biggest foreign holder, with $740 billion, is “worried” about its holdings of Treasuries and wants assurances that the investment is safe, Premier Wen Jiabao said at a press briefing in Beijing two weeks ago.

Goldman Sachs Group Inc. raised on March 19 the target on its bet against the dollar to $1.40 per euro, and Citigroup Inc. recommended on the same day that its clients buy the euro versus the dollar.

The yen fell to a three-month low against the euro as the Bank of Japan bought government notes and made subordinated loans to banks to spur the economy. The stretch of weekly declines was the longest since July.

To contact the reporter on this story: Ye Xie in New York at yxie6@bloomberg.net

Last Updated: March 21, 2009 08:00 EDT

http://www.bloomberg.com/apps/news?pid=20601087&sid=aNdu22y30zwc&refer=worldwide

[Victor Galis]

Yeah, let's go back to the 19th Century!

It's not quite the same thing. The rich could still continue to enjoy 21st Century lifestyles, while the rest of us...

[The Mad Monk]

Whatever system we have, those who desire power will find it; I would they they had to compete with each other in looting the country, than cooperate with each other in looting the country.

At least it takes longer the first way.

[The Mad Monk]

In other news, some states are attempting to acheive sane fiscal policy...

Why South Carolina Doesn't Want 'Stimulus'

By MARK SANFORD
Columbia, S.C.

America's states are laboratories of democracy. They are both affected by, and relevant to, the larger national debate. What we've found in our own corner of the country is that carrying a substantial debt load limits our options when it comes to running government.

A recent report by the American Legislative Exchange Council ranked us 47th worst in the nation for annual debt service as a percentage of tax revenue. Our state dedicates nearly 11% of its annual tax revenue to paying debt. On top of that, South Carolina has another $20 billion in unfunded, long-term political promises for pensions and other liabilities. The state budget has already been cut four times in recent months as the national economic downturn has impacted South Carolina and driven down tax revenue.

President Barack Obama recently signed a "stimulus" bill that will spend about $2 billion through "programmatic means" in South Carolina. In other words, the federal government will put this money directly into existing funding formulas and programs such as Medicaid. But there is an additional $700 million that I as governor have influence over, and it is the disposition of this money that has drawn the national spotlight to South Carolina.

Here's the background: Before the stimulus bill passed, I asked for states not to be bailed out. After it was signed into law, I said that a state bailout would create more problems than it solved, and that we shouldn't spend money we don't have. That debate was lost, so I looked for a reasonable middle ground. I asked the president for his support in using the $700 million to pay down state debt.

If we're going to spend money we don't have at the federal level, it becomes all the more important that our state balance sheet is in good order -- particularly if this is a protracted downturn. But many people do not realize that the stimulus money runs out in 24 months -- at which point South Carolina will be forced to find a new source of funding to sustain the new level of spending, or to make sharp cuts. Sure, I could kick the can down the road; in two years, I'll be safely out of office. But it would be irresponsible.

If South Carolina could use stimulus money to pay down debt, in two years we will be able to spend, cut taxes or invest even if the federal government can no longer provide more money -- not a remote possibility. In fact, paying debt related to education would free up over $162 million in debt service in the first two years and save roughly $125 million in interest payments over the next 13 years -- just as paying off a family's mortgage early frees up money for other uses.

When you're in a hole, the first order of business is stop digging. South Carolina is in a hole, and it's not a shallow one. Spending stimulus money on ongoing programs would mean 10% of our entire state budget would be paid for with one-time federal funds -- the largest recorded level in state history.

Also, spending stimulus money will delay needed state restructuring. General Motors recently found itself in a similar spot. It needs to be restructured if it is to prosper, but a federal bailout enabled it to put off hard decisions. Likewise, taking federal stimulus money will only postpone changes essential to South Carolina's prosperity. Though well-intended, it forestalls hard choices we must make.

One of Mr. Obama's central campaign themes was his pledge to do away with politics of the past. In his inaugural address, he proclaimed "an end to the petty grievances and false promises, the recriminations and worn-out dogmas, that for far too long have strangled our politics."

This idea connected with millions of voters, myself included. I've always believed ideas should rise and fall on their merits. In fact, I saw such historical significance in his candidacy and the change he spoke of that I published an op-ed on it before South Carolina's presidential primary last year. It was not an endorsement, but it did note the historic nature of his candidacy and the potential positive change in tone it represented. That potential may now be disappearing.

Last week I reached out to the president, asking for a federal waiver from restrictions on stimulus money. I got a most unusual response. Before I even received an acknowledgment of the request from the White House, I got word that the Democratic National Committee was launching campaign-style TV attack-ads against me for making it.

Is this the new brand of politics we were promised? Instead of engaging with me and other governors on the merits of our dissent, I am to be attacked in television ads? In the end, I just don't believe a problem created by too much debt will be solved by piling on more debt. This doesn't strike me as an unreasonable or extremist position.

Nevertheless, the White House declined my request for a waiver yesterday afternoon. That's unfortunate. But in coming months we'll continue advancing the debate at the state level about the merits of debt repayment. The fact remains that while we'd all like to spend unlimited dollars on the very real needs that exist in our state, we must spend in the context of what is sustainable.

Mr. Sanford, a Republican, is the governor of South Carolina.

http://online.wsj.com/article/SB123759827524401409.html

[Vanguard]

The whole point of the stimulus bill is to stimulate the economy. Paying down South Carolina's debt won't do that, so why should Congress agree to it?