*This action is indefensible on economic merits. This move is not motivated by sound monetary policy. It’s motivated by politics. This is a payback to Obama. Shame on the Fed for mixing politics with money.
*We will not go two years with this monetary policy without inflation (measured by core) exceeding the previously stated commitment by Bernanke that policy would not be allowed to rise above 2%. Bernanke and the dove members that signed onto this policy have lied to the American people. Bernanke has done it on 60 Minutes. He has done it to Congress. Shame on all of them.
The Fed has taken away its ability to react to a situation that would require them to tighten. We are now on a one-way street. There is no way to turn around anymore. I believe the Fed has abdicated its responsibilities under the dual mandate. The have no ability to react if inflation should pop up in a year from now. Even worse, they have no policy options should there be a run on the dollar. The possibility of a run on the buck has gone up exponentially as a result. Should that happen, the Fed will have left us economically defenseless.”
run on the dollar??
how bout a run from the dollar..
best have gold and bullets in readiness.
embutler
“run on the dollar??
how bout a run from the dollar..”
Same thing…..language is funny that way…
Converting to…..say Swiss Francs….if enough do that the dollar goes down…not the SF going up.
talking about shooting blanks . . . that is what you call an empty magazine.
Banking on Canada might be wise. In more ways than one.
Banking on Canada is great … except that Canada does not have enough resources to satisfy the demand that a flight from US currency is going to create.
We are small potatos baby.
The upside of this for Canadians is that if you have capital assets …. they are going to be very easy to cash in.
BTW …. this reminds me of some people who were complaining that our interest rates were too high… I suppose those same people are going to continue this argument?
OMMAG:
I don’t think that interest rates are too high. But what I can’t figure out is how we can avoid following the US down the pit and devaluing our own dollar – with all of the inflation fun that will follow.
Sure I understand that, if the BOC kept its focus only on the fundamentals of the Canadian economy and adjusted accordingly, our standard-of-living compared to the US would rise with our dollar…all else being equal.
But all else is not equal. We’re just too darn dependant on the US. I remember reading somewhere that if Canada doubled its exports to India, China, and Europe, it would equal around 10% of what we export to the US.
So, if they’re going to scrub their whole economic system in the inexorable march to “default-by-printing”, how can we avoid taking similar steps to devalue our own currency?
Setting out the timeline that far is stunning.
So if one had set up a significant short dollar position, this would certainly solidify it and remove a considerable risk component – if not give the USD a shove in the downward direction.
This afternoon the USD fell off a cliff after steady gains the last few sessions.
Good thing Soros has shut down the public aspect of his investment fund so he doesn’t have to report to regulators.
How will it all work out?
A dozen or so years ago the Fed rate is reduced to 3% to stimulate, reinflate the economy.
Then, 3 or 4 years ago, zero FR to stim/reinflate.
Now a promise/signal to keep zero fed for 2 years.
Two years from now will we have a promise of zero for 5 more years? Even ten more years?
Result? – a generation loaded up with low IR bonds and one year low IR mortgages and then … presto? Green back hits the inevitable wall, run, devaluation, hyperinflation? And no matter what the Fed says or does, IR spike?
What will this do to medium term bond holders? Bath time? And all those renewing mortgages? Instant doubling of monthly mortgage payments?
Am I missing something? Will this save all the indebtors through inflation and so all will be good because this group is so large? A $Trillion here and a $Trillion there and it soon adds up.
I called it on another forum, that Bernanke would do anything and everything in his power to save the big banks and big bankers. They are the only firms and people the man gives a damn about. ZIRP allows the big banks to borrow from the Fed for nothing, invest that money in almost anything safe at just a couple of percent yield, and earn profit. Profit that can be used on the one hand to shore up the awful bank balance sheets (still hiding truckloads of mortgage losses) and on the other to siphon off for the bank execs.
I’m not sure if Bernanke is outright evil or just plain stupid. I tend more toward the latter. He’s a career academic wonk who truly believes that the big banks must be saved above all else, and the destruction of the American economy that results is just an unlucky outcome unpredicted by his economic theories. When it all comes crashing down, he’ll be left there sputtering, “Buh-buh-buh-buh.. But that shouldn’t have happened!”
When America needs great leaders the most, she is led by the most vain, stupid, pig-headed fools I’ve ever witnessed. She’d be far better off at this point if a pair of asteroids wiped Washington DC and Wall Street right off the map.
This whole matter of being the reserve currency is a lose lose for the US. Yes, we get to borrow a lot of money cheap, and go deeply into debt, but our exports are overpriced and our domestic industries can’t compete with imports, all so bankers can make big bucks and politicians can buy votes.
I vote that the Euro become the reserve currency, or the Yen, or Yuan, or whatever the Chinese use.
Excellent choices, Tim!
Between the Euro, where there is no mechanism to print, or tax, Pan-Europe.
Or the Reminbi, which is not transferable to Yuan, other than for citizens or other “approved” entities.
If you think that a falling US dollar vis-a-vis other currencies make our exports more expensive, well, let’s just put it this way.
You can cut the cards.
Ron-
What about those pesky un-foreclosed upon non-performing mortgages that the TBTF banks now own the origination and the dun to make the securities perform? That’s the abyss Unca Ben sees over the parapet. The TBTF banks are bleeding cash and are too big a part of the US economy now, that to let them fail (and B of A’s goin’ first) would guarantee the next leg down.
You’d be loading your Depends too, with all that on your plate.
What this really signals is that the fed now accepts (expects) that the US is going to see very little growth over the next two years (and may dip back into a recession). This is the bad news – no quick recovery on the horizon. However, guaranteeing low interest rates for 2 years,reduces borrowing risk and this will definitely help re-build the economy long term. It also lets the banks know that if they don’t want to lend they better be prepared not to lend for 2 years. The last thing this does is that it basically lets everyone know that they are not going to do any quantitive easing. Bush pumped 1.6T into the economy and Obama pumped 600B into the economy (as liquidity quick fixes) and it did not work (longer term obviously because you still leave to get back into a producing economy). The bottom line is that the US economy has to get healthy (some people don’t like it but too bad) and it will take time. Everyone is in trouble if the US does not get healthy (including the pundit in this article).
Rinky-
Nice Math! The Porkulus was good for $1.2T alone.
There’s a much simpler explanation for the Fed’s decision: interest costs.
The US federal government owes 14 trillion dollars. Each 1% that it lowers interest rates saves it $140 billion each year. The fed has been shortening the average maturity of its bonds (it no longer issues 30 year bonds, for example), and the shorter term bonds have much lower coupons. The ten-year bond yield fell to just over 2% yesterday; the 2 and 5 year bonds yield 0.19% and 1% respectively. Really short term notes (3, 6, and 12 months) have NO COUPON at all. When you’re going to have to borrow another $1.4 trillion a year, reducing the carrying costs of the debt is an important consideration.
I don’t disagree with the idea that the Fed is operating a money pump for the big banks. They borrow billions at zero interest, and reinvest in a bond paying 2-3%. Bingo – guaranteed profits of $20 million on each billion you borrow. The Bernank’s confirmation that rates will be kept low for at least two years takes the risk out of the trade. Borrowing short and lending long is a risky strategy if rates go up; knowing that rates will be stable helps Wall St. sleep better at night.
The people who get screwed are pensioners and anyone else trying to live on fixed income. A young colleague at work was musing about winning a million dollars, and retiring. I had to point out to her that even if she invested all of it in 3% bonds, her income would only be $30,000/year, which would let her live, but hardly in luxury.
I hear Obama is contemplating joining the Catholic faith. His advisors have suggested he travel to Lourdres, and to the Grotto at Massabielle, where he could pray to Saint “Burn-A-Debt.”
Mr. Dylander
Ha!..nice…gotta laugh…
Melinda,
The problem is that the dollar does not seem to fall. Money just keeps flowing in. At least it does not fall fast enough. Everybody seems to manage to keep their currency that much lower except the unlucky Swiss.
Oh and one other thing, Melinda,
I think that the assumption of the US ability to raise taxes whenever required is invalid, and has been shown to be so. This is the real reason for the downgrade IMHO, because the power to tax the US economy has always supported the AAA rating as an implicit assumption. You point out that the Euro has no power to tax, well maybe the US is out of such power as well.
I think of the Tea Part more like the bull being led down the path to slaughter, or at least eventual slavery to the debt, raising a ruckus and potentially escaping, and everybody else complaining that it is messing up “the system.” Cry me a river.
tim-
Setting aside taxation, the decisions made by free thinking individuals determine what is the “market” for anything, this includes the dollar and the swiss franc. The market determines value, not governments “managing” their currency. The flow of private capital to the US is a fear that the “Euro” will cease to exist, hence raising the risk of private capital being diluted in any number of ways, let alone confiscation by tax.
Your assumptions as to the state’s power over the market seem coyly iron, as in curtain.
You can’t fight the fed, but their actions are so utterly predictable that you can take steps to protect yourself from the worst effects of their actions. If you have savings, invest them in energy stocks, commodities, mining stocks, gold and silver. That is one way to protect yourself from the horrific debasement of the currency that is underway. Forget about GIC’s; if you buy those, inflation is going to destroy your savings.
Well, somehow free market currencies seem to get pegged just little bit low enough to make products cheap compared to the American dollar. I am thinking of the Canadian dollar here, for one. Yes, in times of great turmoil, the power of central banks to stem the tide can be tested, but central banks buy and sell currency and set interest rates to influence the value of currencies outside of the free market all of the time.