The US Federal Reserve buying up more bonds...

[ShadowOfMadness]

(I didn't see a thread on this...hope I didn't miss it since it is a couple days old...)

The Federal Reserve, in a dramatic effort to rev up a "disappointingly slow" economic recovery, said it will buy $600 billion of U.S. government bonds over the next eight months to drive down interest rates and encourage more borrowing and growth.

Many outside the Fed, and some inside, see the move as a 'Hail Mary' pass by Fed Chairman Ben Bernanke. He embraced highly unconventional policies during the financial crisis to ward off a financial-system collapse. But a year and a half later, he confronts an economy hobbled by high unemployment, a gridlocked political system and the threat of a Japan-like period of deflation, or a debilitating fall in consumer prices.

...
The Fed normally would push down short-term interest rates when the economy is weak. But it has already pushed those rates to near zero, leaving it to resort to unconventional measures.

http://online.wsj.com/article/SB1000142 ... 74194.html

Time to start investing in foreign currencies :/

[Starglider]

Time to start investing in foreign currencies :/

Make sure you avoid countries with significant exports to the US, all of those are either pegged to the dollar (China), doing massive interventions to avoid appreciation (Japan), or seriously considering it. Right now the world is sliding towards outright trade war and no one seems inclined to stop it.

[J]

The $1.4 trillion print job from last year didn't work...so let's print another $600 billion, surely it will work this time!
It worked, for all of one day. QE2 was announced on Wednesday, the interest rates were back up to normal by Friday.

---

This is just brain dead stupid on the part of the Fed, the problem here is that all commodities prices are moving upwards at a good clip and these higher prices will eventually feed through to the manufacturers, companies, and the people. Some of it is almost immediate as is the case with oil where gasoline, diesel, and heating oil prices will go up nearly as soon as the trades clear on the exchange. Others take a while to hit the system, for instance it can take a few months for higher agricultural commodities prices to make their way to grocery store shelves.

The really bad part is that we're in a depression period of below average economic activity with high unemployment and frozen or falling wages, this limits the price increases which can be passed through to the final consumers. If the prices go up in proportion to the material input costs then people simply will not be able to buy stuff, they'd like to but they just can't since they're already stretched thin. Which means the companies making cereal, toilet paper, beer, and twinkies will have to eat a portion of the cost increases, their profits drop or they may even start losing money (the joys of margin compression), meaning they're not going to be doing any hiring, in fact they'll be looking to lay off more workers. Which further erodes the purchasing ability of the people which leads to further margin compression and it's all downhill from there, eventually it leads to companies shuttering their doors en masse.

[K. A. Pital]

J accurately summed up my thoughts on this. It's especially funny since the dollar is the world's reserve currency and lots of folks use it for savings. Like Russia. And now all these Second and Third World nations get basically shat upon. Oh, and the last G20 talks, where high words about "let's not artificially depress anyone's currency" were spoken? It's America, so we can shit on anyone. We can also say that China is bad for artificially depressing the yuan, and oh - you say we're doing the same? - silly you.

[aerius]

Oh, and the last G20 talks, where high words about "let's not artificially depress anyone's currency" were spoken? It's America, so we can shit on anyone. We can also say that China is bad for artificially depressing the yuan, and oh - you say we're doing the same? - silly you.

It's like the US is playing a game of chicken with China, the US keeps devaluing its own currency and dares China to break its currency peg or stop buying US Treasuries. This is how trade wars get started, one of these days someone is going to push too far and then everyone starts putting tariffs on everything.

[CJvR]

Is this "drive down interest rates" directly related to why my savings account gives a pathetic 0.6%? Or is it more about the interest the banks charge if you want a loan?

I suspect that is more caused by the realestate implosion and the low inflation. The traditional way to improve profits in a bank is to increase the intrest gap, and since all banks are more or less in the same fix the normal competitive blocks on the intrest gap is not an issue.

[Starglider]

Oh, and the last G20 talks, where high words about "let's not artificially depress anyone's currency" were spoken? It's America, so we can shit on anyone.

The US has a massive negative trade balance. This is not sustainable and the normal mechanism that would correct it is dollar devaluation. The dollar is effectively being proped up by its reserve currency status. Frankly anyone who continues to act like their massive exports to America are in any way sane or sustainable (Japan, China, Brazil) deserve what they get. The value of the GBP is also being propped up (and the BoE is also trying to devalue), but by the status of the City of London in global finance rather than reserve status for the Sterling, which is perhaps marginally less unhealthy. Meanwhile Germany is more or less single-handedly keeping up the value of the Euro... not that they particularly want to, given their export reliance, thus leading to predictions of letting one or more of the PIIGs default to suppress the Euro as much as to save the costs of a bailout.

[Starglider]

Is this "drive down interest rates" directly related to why my savings account gives a pathetic 0.6%?

The Federal Reserve does not want you keeping money in a savings account, it wants you to put that money into shares and further pump up the stock market. Why are you so unwilling to be a good American and invest in a mindless, fragile, flash-crash-prone stock boom? Alternatively you could by commodities or precious metals, which have outpaced US stocks in growth over the last year...

[ShadowOfMadness]

Is this "drive down interest rates" directly related to why my savings account gives a pathetic 0.6%?

The Federal Reserve does not want you keeping money in a savings account, it wants you to put that money into shares and further pump up the stock market. Why are you so unwilling to be a good American and invest in a mindless, fragile, flash-crash-prone stock boom? Alternatively you could by commodities or precious metals, which have outpaced US stocks in growth over the last year...

Yep :/ Hence my snarky buy foreign currency comment. Commodities would be another good choice. Although I'm tempted to play a game of stock hot foot.

I'm just a bit frightened at this point that they think this is a good idea. If they continue to devalue the reserve currency of many countries (e.g. China) it is likely to cause alot of problems diplomatically and economically. :/

Admittedly, the Federal Reserve is pretty much out of tools in its tool chest. In the long run, devaluing the Dollar probably makes the most sense from the Federal Reserve's point of view with our massive trade imbalance. However, the pain it is likely to inflict is likely to cause a second recession at a minimum...

[J]

Is this "drive down interest rates" directly related to why my savings account gives a pathetic 0.6%? Or is it more about the interest the banks charge if you want a loan?

Yes. A bank will never pay more interest on deposits than it charges for loans, if it's handing out loans with low interest rates it will give you next to zero interest on your savings account. In the days when a mortgage had 15% interest rates it was possible for the banks to give you 5% interest on savings accounts and up to 10% on term deposits, and they did. Nowadays a mortgage can be had for under 5% so your deposits get next to nothing.

The Federal Reserve does not want you keeping money in a savings account, it wants you to put that money into shares and further pump up the stock market. Why are you so unwilling to be a good American and invest in a mindless, fragile, flash-crash-prone stock boom?

This here is also bad news for pension funds both public & private and anyone trying to save for retirement. In the past it was possible to simply let the money collect interest and let compounding work its magic over a few decades to grow the funds to what's required. It wasn't necessary to risk the money buying shares & other high risk high return instruments, it simply sat in bonds and collected a nice coupon every year. This isn't and hasn't been possible for over a decade now and as a result many pension funds & individuals are now experiencing shortfalls and being forced to gamble & make up their deficits by playing in the stock market casino. Unfortunately this just results in Goldman-Sachs & friends taking all their money since the TBTF banks own the casinos, so you have yet another wealth transfer from the people to the banks.

Yep :/ Hence my snarky buy foreign currency comment. Commodities would be another good choice. Although I'm tempted to play a game of stock hot foot.

There's nothing safe for investing anymore, speculating and daytrading? Sure. Investing, forget about it.

Admittedly, the Federal Reserve is pretty much out of tools in its tool chest. In the long run, devaluing the Dollar probably makes the most sense from the Federal Reserve's point of view with our massive trade imbalance. However, the pain it is likely to inflict is likely to cause a second recession at a minimum...

Consider the costs of everything that America needs to import simply to function as a nation, the most important import being of course, oil. Let's say the US devalues the dollar by half which would roughly double the price of oil and all its products. Congratulations, you've now sent an additional $250 billion overseas to buy the oil, the people will spend an additional $500 billion buying gasoline so they can get to work, and there's another $250 billion extra for diesel fuel to power trucks and heat homes. So $1 trillion gone just like that on oil alone, not counting transport costs, higher food costs (bread doesn't bake nor move itself to your grocery shelf) and a million other things. That just erased the total value of all US exports, and there's a million other things the US needs to import where the prices will also go sky high and feed through the system if the USD is devalued.

The US is not Germany, it does not export nearly enough stuff for a dollar devaluation policy to make sense, devaluing the USD will actually tip the balance against the US rather than for it. The correct policy would be to end all the intervention programs, let the FDIC close & resolve all the TBTF banks, and allow interest rates & the value of the USD to return to a healthier much higher range.

But you are correct that devaluation is the best thing from the Fed's point of view; the Fed afterall is a private bank run by the bankers for the bankers. Devaluation is good for the bankers since it allows them to strip more assets from everyone else.

[ShadowOfMadness]

...

Yep :/ Hence my snarky buy foreign currency comment. Commodities would be another good choice. Although I'm tempted to play a game of stock hot foot.

There's nothing safe for investing anymore, speculating and daytrading? Sure. Investing, forget about it.

That is what I meant

Admittedly, the Federal Reserve is pretty much out of tools in its tool chest. In the long run, devaluing the Dollar probably makes the most sense from the Federal Reserve's point of view with our massive trade imbalance. However, the pain it is likely to inflict is likely to cause a second recession at a minimum...

...

But you are correct that devaluation is the best thing from the Fed's point of view; the Fed afterall is a private bank run by the bankers for the bankers. Devaluation is good for the bankers since it allows them to strip more assets from everyone else.

I apologise for the confusion. I was more-or-less agreeing with you. For the Fed it makes sense.

I'm just a bit frightened at this point that they think this is a good idea. If they continue to devalue the reserve currency of many countries (e.g. China) it is likely to cause alot of problems diplomatically and economically. :/

Was more or less meant to gloss over all the possible problems (mainly because I know it *will* cause problems but am not well versed enough to explain them effectively).

[Mr Bean]

I agree with Sarah Palin


And you will to...
http://www.huffingtonpost.com/2010/11/0 ... 80419.html

NEW YORK -- In an unusual detour, Sarah Palin waded into monetary policy Monday, lashing out at Federal Reserve Chairman Ben Bernanke and urging him to "cease and desist" his attempt to jumpstart the economic recovery by committing to buy up to $900 billion in U.S. government debt.

In prepared remarks to be delivered to a trade association in Phoenix, the former Alaska governor and vice presidential candidate said she is "deeply concerned" with the Fed's plan, announced last week, arguing that the nation's central bank would be "printing [money] out of thin air" and that it is "far from certain" to "even work." The argument was unusual in that monetary policy is supposed to be immune to political pressure.

The economy, though growing, remains sluggish as unemployment hovers near 10 percent and prices stagnate. Hoping to reignite the recovery, the Fed committed last week to purchasing hundreds of billions of dollars in Treasuries in hopes that the extra cash it pumps into the
economy will stimulate inflation, the broad increase of prices, which would then lead consumers and businesses to resume their pre-recession spending.

The controversial move has divided the Fed, with one side arguing that it could lead to unintended consequences, like asset bubbles or runaway inflation, and the other saying that the risk of not acting, a Japan-like era of no growth, is too large. With policy makers in Washington unable to develop coherent fiscal policy, it's largely up to the Fed to rescue the nation from its worse economic malaise since the Great Depression, economists and commentators say.

Palin, whose monetary policy credentials could not be deduced Monday, addressed one side of the issue in what is likely to be an appeal to the Tea Party movement, which is deeply suspicious of the central bank.

"The Fed hopes doing this may buy us a little temporary economic growth by supplying banks with extra cash which they could then lend out to businesses," she will say, according to remarks leaked to The National Review, a conservative publication. "But it's far from certain this will even work."

Noting that banks have abundant liquidity -- depositories have about $981 billion in excess reserves stashed at the 12 regional Fed banks around the country, Fed data through September show -- Palin will say that they don't want to lend it out "because they don't trust the current
economic climate."

Palin adds that, if it doesn't work, the Fed runs the risk of printing so much money that "no one will want to buy our debt anymore."

The risk of inflation is too large, Palin will argue. She notes that prices have already "risen significantly" as "everyone who ever goes out shopping for groceries knows." She adds that the price of oil is also rising, according to her prepared remarks, which she links to the Fed's asset purchases and "decision to dump more dollars onto the market."

Palin then will argue that "the worse part" of this is that the White House "refuses to open up our offshore and onshore oil reserves for exploration." It's unclear how drilling for oil relates to monetary policy.

Referencing calls from foreign leaders who oppose the Fed's plan, Palin will call on Bernanke to "cease and desist." The former mayor of Wasilla, Alaska, doesn't appear to mention the fact that foreign leaders are concerned because the Fed's plan is likely to lead to a devaluing of the dollar relative to other currencies, which should stimulate exports and cut into imports.

It's funny to see people with such strong anti-Palin bias on huffpost blast her when she opens her mouth and says something conceptual correct for once. I can now refer to those among my Liberal friends as "An economic idea so bad, even Sarah Palin knows it's a terrible idea" Her logical arguments are nothing to write home about, but she does grasp at least in this case that the definition of insanity is doing the same thing over and over again and expecting a different result.

[Phantasee]

Her speechwriter knows what he's talking about, at least.

[Chardok]

Forgive me for my ignorance, but I thought there was some sort of check in place that specifically prevents the federal reserve from manipulating rates by doing this? Or am I misunderstanding. I thought the FRB just said "RATE IS NOW X" and boom - it's done.

[Marcus Aurelius]

Forgive me for my ignorance, but I thought there was some sort of check in place that specifically prevents the federal reserve from manipulating rates by doing this? Or am I misunderstanding. I thought the FRB just said "RATE IS NOW X" and boom - it's done.

The Federal Interest Rate is already 0%. Look up what Zero Interest Rate Policy (ZIRP) means. Quantitative Easing is a essentially a last ditch effort to increase the money supply and stimulate spending when ZIRP is not working like it's supposed to. It's the only monetary policy tool available to the Fed right now. The alternative is what J suggested, although that option would also be potentially quite painful in many ways, if I understand its implications, although I am hardly an expert here.

[Rogue 9]

Is this "drive down interest rates" directly related to why my savings account gives a pathetic 0.6%? Or is it more about the interest the banks charge if you want a loan?

That high? Lucky. I'm getting 0.01%. No, that is not a typo.

[J]

Forgive me for my ignorance, but I thought there was some sort of check in place that specifically prevents the federal reserve from manipulating rates by doing this? Or am I misunderstanding.

Sure! In theory at least. It's in the Federal Reserve Act, specifically Section 2A and Section 13. But no one cares about black letter law anymore so the Federal Reserve Act isn't worth the paper it's written on and in practice there's nothing stopping the Fed from doing whatever it wants. Well, nothing short of lynch mobs.

I thought the FRB just said "RATE IS NOW X" and boom - it's done.

Most of the time it works that way. The Fed announces an official rate and it in concert with the Primary Dealer banks and other participants in the market will buy or sell government bonds to move the rate to the Fed's target. This happens very quickly so it's almost as you said, "Bam! It's done!" But not always. Sometimes the market throws a fit and refuses to co-operate with the Fed, the Fed says 3% but the market decides that it likes 5% better, or maybe 1%. Then the Fed has to threaten or bribe everyone to make them co-operate or it has to do some buying & selling of its own.

[J]

The Chinese aren't happy. I wonder why?
There are limits to what other nations will allow the US to get away with, let's hope the US doesn't try to push things too much.


Business Insider link

China's Rogue Ratings Agency Just Downgraded The US From AA To A+
Joe Weisenthal | Nov. 9, 2010, 10:26 AM


Dagong, the Chinese credit ratings agency that's not respected as an official statistical ratings agency in the US, has just downgraded (.pdf) America's credit rating from AA to A+. (via ForexLive).

Remember that back this summer, Dagong trashed US regulators after being denied the same status as Moody's and S&P.

The firm cites reduced ability to pay:

Dagong has downgraded the local and foreign currency long term sovereign credit rating of the United States of America (hereinafter referred to as “United States” ) from “AA” to “A+“, which reflects its deteriorating debt repayment capability and drastic decline of the government’s intention of debt repayment.

The serious defects in the United States economic development and management model will lead to the long-term recession of its national economy, fundamentally lowering the national solvency. The new round of quantitative easing monetary policy adopted by the Federal Reserve has brought about an obvious trend of depreciation of the U.S. dollar, and the continuation and deepening of credit crisis in the U.S. Such a move entirely encroaches on the interests of the creditors, indicating the decline of the U.S. government’s intention of debt repayment. Analysis shows that the crisis confronting the U.S. cannot be ultimately resolved through currency depreciation. On the contrary, it is likely that an overall crisis might be triggered by the U.S. government’s policy to continuously depreciate the U.S. dollar against the will of creditors.

The whole thing reads like a litany of complaints about the US economy. We have to say, though, you don't usually see the word "introspected" in a ratings downgrade:

The U.S. government has not introspected on the question of the development and management model of the national economy from the global strategic perspective, which makes it very difficult for the U.S. to fundamentally change the passive situation of economic development.
Its conclusion:

Dagong believes that the occurrence and development process of the credit crisis in the U.S. resulted from the long-standing accumulation of the contradictions in its economic system; the U.S. debt burden can be relieved only to a certain extent through large-scale printing and issuance of the U.S. dollar; however the consequent decline of the U.S. dollar status and national credit will block the debt revenue channel which is vital to the existence of the United States to a greater extent. The potential overall crisis in the world resulting from the U.S. dollar depreciation will increase the uncertainty of the U.S. economic recovery. Under the circumstances that none of the economic factors influencing the U.S. economy has turned better explicitly it is possible that the U.S. will continue to expand the use of its loose monetary policy, damaging the interests the creditors. Therefore, given the current situation, the United States may face much unpredictable risks in solvency in the coming one to two years. Accordingly, Dagong assigns negative outlook on both local and foreign currency sovereign credit ratings of the United States.

[Andrew J.]

Let's say the US devalues the dollar by half which would roughly double the price of oil and all its products.

Whoa wait, what? I thought that gas prices don't increase linearly with oil prices because most of the cost comes from refining instead of raw materials. Wouldn't a doubling in oil prices only raise gas by like 20% or something?

[J]

Whoa wait, what? I thought that gas prices don't increase linearly with oil prices because most of the cost comes from refining instead of raw materials. Wouldn't a doubling in oil prices only raise gas by like 20% or something?

It doesn't follow perfectly but it's close enough.
Oil futures price
RBOB gasoline futures price
Heating oil futures price

There's seasonal variations in gasoline & heating oil prices but over the course of a year it more or less averages out.

[ShadowOfMadness]

Her speechwriter knows what he's talking about, at least.

Except the number is $600 billion :/ I remain completely unimpressed with Palin's ability to state the obvious and inability to do even *that* correctly.

http://abcnews.go.com/US/wireStory?id=12075418

Federal Reserve Chairman Ben Bernanke defended the Fed's new $600 billion program to aid the economy on Saturday, rejecting concerns that it will spur runaway inflation.

[J]

It's actually $900 billion in total; $600 billion in new purchases and up to $300 billion in repurchases of existing debt.
http://www.streetinsider.com/Economic+D ... 73490.html