Economy question

[Thue]

Having seen newspaper articles in areas where I am knowledgeable, I will go with a).

[KrazyHorse]

Now, the real reason the Fed wants to do this has to do with liquidity premiums, risk premiums and the yield curve.

In conducting regular open market ops the Fed has its hand on the yield for the safest, most liquid and shortest duration assets (short term US government debt). Normally this is enough to alter significantly the yields of assets which are riskier, less liquid and longer duration. However, these are not really normal times (though personally I think that the real financial crisis has already passed and we are seeing a transition back to normalcy; I think quantitative easing should have been engaged in by the Fed months ago). What has happened is that people got very scared. Some of this fear was justified and some was panic. Now, what happens in situations like this is that people flee to safer, liquid, short-term assets. The yields on these assets dropped like a rock as their prices rose. At the same time, the Fed was dropping its target for the yield on these assets and was busy buying them too. Pretty soon they were at 0 yield and the Fed's hands were pretty much tied if they stuck to normal open market ops. The interest rates the Fed REALLY wanted to alter (the rates people and businesses pay for real loans to buy and invest) couldn't be reached by pushing down on the short term government debt yield any further. Quantitative easing on longer term, less liquid and riskier assets is a way to push down on the yields on assets which are more directly related to the interest rates individuals and businesses see.

[Vanguard]

I am not sure that lowering bond yields is necessarily going to boost stock prices. It could just boost gold.

It could also make speculation against stocks more attractive.

[snoopy369]

Silly question, but I noticed yesterday that Gold and Platinum are only separated by about 10% right now (high $900s vs high $1000s). Not two years ago Platinum was twice the price of Gold. Why did people suddenly stop buying Platinum and only buy Gold??

[Vanguard]

Car sales are way down. Platinum is used in catalytic converters.

[DaShi]

And plutonium is used in flux capacitors.

[snoopy369]

Car sales are way down. Platinum is used in catalytic converters.

Ummmmmm, given the cost of said (not much), seems to be a small effect on the overall price of platinum to me ... but what do I know ...

Also, aren't there likely to be fewer people buying engagement rings in a bad economy? While either metal could contribute to a ring, gold is used far more often.

[Unimatrix11]

Thanks, KH, enlightening answer .

I wonder why the NYT did not include a few lines to that effect in their article.

Thue, the reason bond yields dropped is that the Fed basically printed a bunch of money, went into the marketplace and bought bonds ...

Because, there might be some people left, who think, that, if an institution can print money by itself (and actually owns all of it anyway), it should not be allowed to buy anything at all. It´s like i could buy icecream with my crap (while i usually only lend out my crap for more crap to people who cant crap).

[KrazyHorse]

I have no idea what you're saying.

In that post I expounded quite simply on what the Fed had done/was planning to do and what the direct effect on yields was, due simply to the shift in the bond demand curve this action created.

Opining on whether or not this was a good idea I left to a later post. I don't see what argument you could possibly have with the first post.

[Unimatrix11]

None at all, KH, none at all. It was meant as an addition to your reply to thue´s quesiton, no objection to it at all.

BUT at your sig - It´s: ´Stadtluft macht frei.´ nitpicking, okay, but thought you might wanna know: macht = to make, Macht (female - of course ) = Power/Force (yeah, its the term in Star Wars), frei = free, not a noun, thus not capitalised. As said: nitpicking

[KrazyHorse]

I also don't think you fully understand the usual open market operations of central banks. During open market ops they don't "lend money" to market actors. They go buy short term government bonds in the market. In this case they went and bought long-term government bonds as well as MBS. There is more risk associated with both of these products than there is with short-term government bonds, but they are not qualitatively different.

[The Mad Monk]

Ummmmmm, given the cost of said (not much), seems to be a small effect on the overall price of platinum to me ... but what do I know ...

Also, aren't there likely to be fewer people buying engagement rings in a bad economy? While either metal could contribute to a ring, gold is used far more often.

Platinum is used in far more than that.

It's catalytic abilities extends to economical manufacture of nitric acid (used for making fertilers and explosives), among other things. It has a high melting point and fantastic wearing properties, which means it can be used for processes that would lead to frequent maintenance and repairs if you used cheaper materials; for example, platinum bushings are used in making fiberglass. I have seen reports that platinum is used somewhere in the manufacture of 20% of consumer goods.

When I saw platinum matching gold months ago, it gave me a chill.

[Unimatrix11]

I also don't think you fully understand the usual open market operations of central banks. During open market ops they don't "lend money" to market actors. They go buy short term government bonds in the market. In this case they went and bought long-term government bonds as well as MBS. There is more risk associated with both of these products than there is with short-term government bonds, but they are not qualitatively different.

What are bonds? I mean i see now, that there is no real difference, thanks to your post, but isnt buying bonds very much like lending? Now if they ´buy´ those, fine, but as soon as they start to acquire real values, the thing starts stinking - and a recent newspaper headline here was: ´FED buys everything - except ketchup´. (needless to say, i have no idea what MBS stands for - beyond my limited financial knowleagde, there is also a language issue, i may remind the english-speaking participants of).

The point i was trying to make with my post though is, that the (ordinary- not talking about some expert mags or whatnot) news coverage about the whole crisis is pathetic, to give it a nice word. It is even often misleading, as to how money works in general. Often the wide-spread public belief is fostered by it, that money is made by the governments for the governments freely to spent. Or that the bailouts were interest-free and such... In germany, we have the proverbial ´hot stew´ that no-one wants to talk about - kinda like the ´inconvenient truth´. You see, even critics like Kid, see a difference in the FED printing money and it lending it - it is the same thing. But 99% of the people think money comes into being for free, which it almost never does. Thus almost nobody will question this process, even when faced with desaster, caused by it. Instead the media embarks on a renewed jew-hunt (very much like ´29 - only this time, it´s the ´bankers and managers´ and not just ´the jews´ perse) to find new culprits for the bad side of capitalism. The show must go on...

[snoopy369]

MBS is Mortgage Backed Securities, ie one of the things that got us into this mess in the first place.

[KrazyHorse]

but isnt buying bonds very much like lending?

Yes, just like buying long-term government bonds and MBS are like lending.

The difference between lending and buying assets is very blurry. That's why I don't understand your objection to the Fed having a balance sheet. They issue cash and receive assets of different types in return. Most of the time (open market ops) these assets are short-term government bonds. Sometimes (discount window loans) they are agreements to be repaid by banks. Very rarely (like now) these assets are long-term gov't bonds and MBS.