Fed Euthanises The Dollar

[Surlethe]

Okay, so let me get this straight. The Fed just dropped interest rates, which means that more borrowing will occur, which means that not only will the dollar inflate more but the US debt as a whole will grow, right? Alan Greenspan would be spinning in his grave if he were dead.

[Spin Echo]

Okay, so let me get this straight. The Fed just dropped interest rates, which means that more borrowing will occur, which means that not only will the dollar inflate more but the US debt as a whole will grow, right? Alan Greenspan would be spinning in his grave if he were dead.

I think the point is to prevent people dumping their houses on the market in a bid to avoid forclosure, further depressing the housing market and economy. But I'm not an economist.

[Admiral Valdemar]

The funny thing about the American debt situation is that if it was just the federal government debt, the country could manage that. As a percentage of GDP, it's actually not that bad (yet). But the country's economy has become a house of cards, built upon a mountain of individual debt, underwritten with empty promises and sunny optimism.

Apparently conservatives skipped the "fiscally conservative" class.

Okay, so let me get this straight. The Fed just dropped interest rates, which means that more borrowing will occur, which means that not only will the dollar inflate more but the US debt as a whole will grow, right? Alan Greenspan would be spinning in his grave if he were dead.

The Fed could keep the presses off turbo for now, so that instead deflation occurs. The rates are lowered, but the Fed doesn't print much more and so the Americans simply have to make do with less disposable income.

This would be fine, if only we weren't running into an energy crisis along with other resources hitting a peak such as wheat and we didn't know governments love to spend their way out of any sticky financial situation. Something Bush seems to have perfected to an art.

Given everyone was hoping for an increase in rates, this is about the worst thing they could have done.

[CmdrWilkens]

The funny thing is that the weakening US dollar is almost what the US needs right now in its own way. The total value of US manufactured good still exceeds that of any country on Earth but we are tooled heavily towards higher end items rather than low-grade and low-end consumer products. A weak US dollar will not neccessarily effect those industries which are currently in existence except that procurring raw materials outside the US will become more expensive but their margins are already sufficient for that. Comparatively if the dollar does drop drastically or really noticeably then it becomes increasingly effecient to produce cheaper goods in the us rather than pay the differntial to aquire them overseas. This means an increase in domestic jobs which would help stabalize the economy (and society as a whole).

The other flip side is that the housing market affects the low middle-income families trying to live it up and the upper-middle class trying to live like kings. Defaults may be rising and debt continues to pile up and personal bankruptcy may rise...but so what? The losers there are creditors who must accept defaults or late payments on tons of loans and filing for perosnal bankruptcy doesn't stop you from going to work. At the same time companies need the money from easy credit to be able to invest in massive capital outlays such as new manufacturing plants and commercial ventures. This rate cut seems principally aimed at reviving the cororate bond maket which is a far more critical factor in the long term health of the US economy than the sub-prime market. Right now the corporate bond market is all but stagnate and THAT means lower job growth and capital outlays for quite some time. If this cut opens up that market then it does the job it needs to.

All of this is not to say that runaway inflation may not catch folks since it encourages accumulation of greater personal debt which will inevitably curtail consumer spending (though it hasn't yet so maybe it won't even do that) and that can't keep things going forever. The question really remains whether a weaker US dollar combined with an expanding coporate bond market can afford to increase the jobs available and maybe make a dent in real wages.

[J]

Okay, so let me get this straight. The Fed just dropped interest rates, which means that more borrowing will occur, which means that not only will the dollar inflate more but the US debt as a whole will grow, right?

I'd say they're just trying to postpone the inevitable crash for another year to a year & half, you know, so the damn dirty Democrats are in power when it happens and it can all be blamed on them.

[Pick]

Dude, the federal funds rate indirectly does control the money supply. The Fed forces open-market operations of treasury bills, which, by virtue of buying or selling, puts more loanable funds into the hands of banks. That is, when it sells off its treasury securities, the banks' money gets tied up in them and can't be loaned out, so supply and demand relationships yield a higher interest rate (less money to be loaned out, the higher penalty for doing so.) When it buys up securities, the banks get the cash and then can loan it out, decreasing loan interest rates, since now there is more liquid cash that can be lent. That now-eagerly lent money then is part of the money supply, since it's out there, doing things.

Because I'm nice, here's a .pdf that goes into more detail here

Money that is sufficiently non-liquid (for instance, long-term CODs) aren't included in the M1 or M2 definitions of money supply, by the way, because of their lack of influence in economic operations. If you have a problem with that, look it up and think about it. If you still have a problem with that, I'll scan pages from my textbook and explain it.

Direct control of the money supply was something the Fed did for a time, a good 25+ years ago. It did not work. Money Supply x Monetary Velocity = Nominal GDP (or RealGDP x Price Index, if you prefer.) However, with velocity changing (which you really can't do shit about, since it's not really a foreseeable nor directly changeable rate) money supply:GDP didn't track correctly. The Fed had to give it up in the early 80s, though let me tell you, they gave it their all. They gave it their all much longer than they should have. For more information, read "Secrets of the Temple: How the Federal Reserve Runs the Country", which, despite its hokey name, gives information on those attempts during that era.

I blame Friedman.

[Pick]

BTW- I'm not taking a stance on what they did this time, however, since I haven't made any preliminary analysis on this FOMC meeting (being a tad busy.)

[Drooling Iguana]

Apparently conservatives skipped the "fiscally conservative" class.

They don't have to actually be fiscally conservative if everyone thinks they're fiscally conservative. A tanking economy is great for the Republicans since, despite all evidence to the contrary, the prevailing wisdom is still that the GOP is better at managing the economy than the "tax and spend" Dems. They can just blame all this on Clinton and keep scaremongering about it until Giuliani's in the Oval Office.

[aerius]

Fortunately, no one is going to think anything suspicious of someone bringing back a suitcase full of clothing from vacation.

As long as you remove all the price tags first and run them through a wash cycle to get rid of that plastic-like store fresh smell. You'd be surprised at how many people we nail at Customs because they forgot to remove the price tags and store labels.

[Adrian Laguna]

I just had a talk with my mother. She is a real estate investor, well was, the market kinda died, now she's a landlord. Anyway, the point is my mother knows a bit about these things. I just had a chat with her about the subject.

I informed her that the Fed had just decreased the interest rate and she replied that this was not news, it had been announced beforehand that they were going to do it. She then asked if they lowered it .25% or .5%. After I called the Fed a bunch of imbeciles, she went and made a good case for this being a good decision.

The current problem with the subprime market is that there are a lot of people with high interest loans (due to shitty credit histories) they can't pay, and the reason they can't pay them is because the housing market finally reached its peak. What happens when mortgages cant' be paid? Foreclosures. It just so happens that foreclosures are bad, not just for the home owner, for everybody. This is especially true in a dead housing market because after the foreclosure the bank still doesn't have its money back because nobody wants to buy the house. The Fed hopes that by lowering its interest rates the banks will lower their interest rates, which will increase the amount of people who can pay their loans and thus decrease the amount of foreclosures.

[Broomstick]

Let me just say that I'm NOT getting a warm and fuzzy feeling from ya'll gloating over the anticipated economic implosion in my country.

Dammit - I was responsible! I have no debt, I have savings, and yet I'm lumped in with the idiots and assholes.

>sigh<

Can I move to Canada?

[Chardok]

Let me just say that I'm NOT getting a warm and fuzzy feeling from ya'll gloating over the anticipated economic implosion in my country.

Dammit - I was responsible! I have no debt, I have savings, and yet I'm lumped in with the idiots and assholes.

>sigh<

Can I move to Canada?

Ditto...I WAS going to buy a house. But I've now postponed that...I'm waiting for the Crash-and-burn of housing prices and then I'll pounce once mortgage companies are desperate for ANY takers (And It'll happen...it's all cyclical...) As for my debt...well, I keep 500 bucks in revolving credit and an 8k car loan steadily paying down, down, down...

The rest goes to food and childcare, lawl.

[Einhander Sn0m4n]

Let me just say that I'm NOT getting a warm and fuzzy feeling from ya'll gloating over the anticipated economic implosion in my country.

Dammit - I was responsible! I have no debt, I have savings, and yet I'm lumped in with the idiots and assholes.

>sigh<

Can I move to Canada?

Just think. all the 'filthy furriners' crowing about flying into America and flying back out with huge amounts of Ph4t L3w7z? Guess what they'll be leaving behind? Money!

Still, this is gonna suck for all of us. Dave and I are essentially breakeven (no real savings, but no debts bigger than a few hundred bucks) and he has no concept that his dollars are worth less and less due to Foxnewsitis. It's getting scary.

[Einhander Sn0m4n]

The rest goes to food and childcare, lawl.

I hear food prices may end up rising due to ethanol and the Farm Bill and a bunch of other things. I already see it happening through smaller burgers for the dollar I pay...

[Yogi]

Semi random question from someone with little understanding of economics:

If the value of the dollar is going to plunge soon, would it be a good idea to invest in Gold, or some sort of foreign currency right around now?

[aerius]

Ditto...I WAS going to buy a house. But I've now postponed that...I'm waiting for the Crash-and-burn of housing prices and then I'll pounce once mortgage companies are desperate for ANY takers (And It'll happen...it's all cyclical...)

One thing I've always wondered. What happens to your mortgage if, hypothetically speaking, all the mortgage companies go tits up?

[Covenant]

Let me just say that I'm NOT getting a warm and fuzzy feeling from ya'll gloating over the anticipated economic implosion in my country.

Dammit - I was responsible! I have no debt, I have savings, and yet I'm lumped in with the idiots and assholes.

>sigh<

Can I move to Canada?

As another Chicago-area local, I'm feeling the same way, and I bet it's gonna be another coooold winter. You'd think that my lack of debt and my miserly built-up savings would somehow have benefitted me in life, but sadly, no, I'm absolutely boned if this keeps going. Plus, I've got no healthcare because of OTHER issues, and I'm on contract rather than fulltime employment so that they don't need to worry about pensions and defaulting and such.

Honestly, I don't get where this whole rosey picture comes from, I'm fucking terrified of my economic situation, despite the fact that I should be absolutely bulletproof due to fiscal responsibility.

Not that this is something that'll have me thrown out into the streets (I don't think) but I really wanted to get a house or something when I had the cash, but companies keep slashing benefits to make me pay for them, and I'm not getting a raise.

[Beowulf]

Ditto...I WAS going to buy a house. But I've now postponed that...I'm waiting for the Crash-and-burn of housing prices and then I'll pounce once mortgage companies are desperate for ANY takers (And It'll happen...it's all cyclical...)

One thing I've always wondered. What happens to your mortgage if, hypothetically speaking, all the mortgage companies go tits up?

I go stand in a soup line? If all the mortgage companies go tits up, then the global economy has just crashed and burned.

[Adrian Laguna]

If the value of the dollar is going to plunge soon, would it be a good idea to invest in Gold, or some sort of foreign currency right around now?

Gold might be a good idea, but I would strongly suggest you find someone who knows what he's talking about and not some random dude from the internet. Certainly the gold corporations make compelling argumens, but they paid marketers a lot of money to make compelling arguments. So again, find someone who you trust to know what he's talking about. Otherwise, don't go gambling with your money.

[Adrian Laguna]

GHETTO EDIT - Actually the argument was compelling 9 months ago...

[Pick]

I sincerely doubt anyone here has enough versing in financial markets to be able to aid you, Yogi. And if there was someone able to do so, even they would probably refer you on to someone else.

[septesix]

Ditto...I WAS going to buy a house. But I've now postponed that...I'm waiting for the Crash-and-burn of housing prices and then I'll pounce once mortgage companies are desperate for ANY takers (And It'll happen...it's all cyclical...)

One thing I've always wondered. What happens to your mortgage if, hypothetically speaking, all the mortgage companies go tits up?

Nothing changes.

Mortgage company in america no longer acts as the principal holder of the mortgage. All they did is get the necessary finanicing by borrowring from the money market, make loans to you, then sell the result mortgage to someone else who want it and pay bad their borrowing and hopefully they makes some profit out of it. ( This is disregarding all the BS surcharge they might piled on you)

So even if the mortgage company all go belly up, the worst that would happen is that the availabe mortgage to home-buyer suddenly dries up a lot. For those who already have the mortgage, nothings changes at all.

[Chardok]

Well, if the mortgage servicing companies are gone, then the investor would have to service their own mortgage...so...let's say your investor (the "owner" of your mortgage) is...Bank of America. Yeah, that's right, you may be with Countrywide, but B of A actually OWNS your mortgage, neat, huh?

So, if, magically all mortgage company go tit's up shut-down game over....then, there'd be alot of mortgage debt out there that's just...well, it COULD potentially just "go away" if the servicing of the mortgage is never transferred. The county cannot hold a lien against a property in the name of X if X no longer exists and did not transfer that lien to entity Y...this is....unlikely, as there's always someone out there ready to snap up a mortgage...but...THEORETICALLY, yeah, your mortgage could be "forgiven" if there was no entity left to service it.

[Uraniun235]

Semi random question from someone with little understanding of economics:

If the value of the dollar is going to plunge soon, would it be a good idea to invest in Gold, or some sort of foreign currency right around now?

On that note, I see a lot of commercials on cable TV these days pushing gold. Is that basically the work of people who have heavily invested in gold who want to see an influx of newcomer investors in hopes of raising the price of gold?

[White Cat]

Oh wow, the US is so fucked now. Every chart I see is a near vertical fucking line.

I bet T-bills are selling well. Hey, what's less useful than a greenback today? A greenback ten years from now.

Am I missing something, or did you link to the wrong page? It shows the Dow Jones steadily rising for the last two years...