The figure that everyone has been waiting for: $600 billion. “In addition, the Committee intends to purchase a further $600 billion of longer-term Treasury securities by the end of the second quarter of 2011, a pace of about $75 billion per month. ” 10-year and 3-year rates immediately shot up on the announcement, which is probably not what the Fed wanted but reflects expectations of price inflation down the road.
Source link: http://archive.mises.org/14485/that-fed-announcement/
That Fed Announcement
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It’s probably not enough, but I suppose it’ll have to do. But what makes no sense is the following paragraph:
The low federal funds rate is a symptom of these economic conditions, it’s not a solution. As the excess demand for money is satiated, the real burden of debt will decline and credit demand will rise. Borrowers will begin bidding up interest rates just when the supply of credit begins contracting until the nominal rate once against matches the natural rate. The federal funds rate can be expected to rise because, rather than despite, looser monetary policy.
What’s not enough, the $600B? How much should it be?
$6,000,000,000.05?
I don’t know exactly and neither do the Fed. I would prefer they not state an exact number. The Fed should do whatever is necessary to hit its implicit 2 percent inflation target. I don’t much like inflation targeting, because I believe it can distort relative prices. My policy preferences are not realistic alternatives. But what is needed now more than anything else is some predictability; the Fed needs to commit to some path for future monetary policy.
Why 2%? Seems rather arbitrary to me. Why not 22%? If they’re going to defeat the dreaded possibility of falling prices (Eeek!), let’s go for broke. And broke is what we’ll be if this nonsense continues.
For those who think that price fixing of interest rates can be competently managed by a small group of bankers, why not let them fix the price of bread, eggs, cars, and wage rates too? If we’re going to the elites plan every other facet of our lives, maybe we should go whole hog. Worked wonders for the Soviets, eh?
Why not 1000% inflation? Just think of the boundless prosperity!
The Fed doesnt know anything. It should be abolished.
By that logic, I can think of half a dozen people who should be abolished too.
If you don’t know exactly, what is the basis for your claim that this 600B is not enough, that it will “have to do”?
I am the only one who thinks that the expression “demand for money” is unfortunate and quite misleading? Is increased demand for money increased demand for “nominal money” no matter how much those monies are worth? Hardly. Or is it rather an increased demand for future consumption? A shift in preferences?
You know such a shift in preferences is entirely feasible even in a money-less, barter economy. Then what? My guess is that prices and production will have to adjust to changed preferences.
Now, how is the existence of money making it any different? If the money supply is the problem.. then if the money supply as well as prices and debts get multiplied by ten overnight, then the problem will be solved? Obviously, not, so the problem is not the money supply in itself, but relative prices.
So.. here is the challenge: you have to prove that QE will do just that, fix relative prices and help market participants to achieve their current goals, which are: reduce current and increase future consumption.
The best action of the Fed would be to “Move Over and Get Out of The Way”, let the Free Market take hold and expand.
That’s impossible given the Fed’s existence. It is always conducting some kind of monetary policy: it cannot get “out of the way”. Suppose the Fed were the monopoly supplier of cars. One day the Fed stopped making cars, because, well … y’know, greenhouse gases are bad or sumthing. Anyway, would this be the Fed getting “out of the way” and letting the free market do its thing? Of course not; the Fed is always intervening — always.
Which is why it should be abolished.
The practicalities are problematic. But that is separate from the necessity to end the fed. Abolishing slavery would leave many ignorant and dependent slaves in precarious positions as well as cause disconnection in production. But does this mean that slavery should be perpetuated?
So, like, then a private manufacturer would start making cars? Is that possible?
So explain….why does the Treasury dept need the Fed? It is my understanding that the Fed makes interest of the taxpayer on money they never put up in the first place, by standing between the Congress and the Treasury( un constititonal) and by solely guaranteeing the fiat money printed by the Treasury……. It is also my understanding that the Fed was created so the Congress could spend money without the public knowing it is being taxed!
Cui bono? Who and what will have first dibs on the new credit expansion? Will they take the bite? And how and when will it affect purchasing power at the grocery store and other areas of basic necessity?
Where exactly is the Fed going to get the $600 billion to purchase these Treasury Securities?
Its printing press.
It is digital money. The FED takes over the bonds and tells the owner’s bank it has now transferred such and such amount to his account. The money is withdrawn from nowhere and put on the account by making a transfer out of the blue. Only the FED has the authority to make use such a special accounting method to actually create money. Normally that is how the FED expands money supply – by buying government bonds with transfers from nowhere. The money supply however mostly expands and contracts via the fractional reserve banking system the rules for which are adjusted by the FED and legal system during the business cycle and over time.
Physical fiduciary money: Physical fiduciary money is printed, by the FED system, on demand from the commercial banks and exchanged for digital money they have. Physical money is on demand to the extent people prefer cash instead of deposits.
Additionally, when the Fed conjures up $600 billion out of nowhere, the fractional reserve system turns that into $6 trillion.
Right. To augment my previous reply, commercial banks in the fractional reserve system we have today also have the authority to create money out of thin air as long as this money is backed by something like 10 pct of all deposits in bank holdings of cash (the 10 pct varies). This is called Reserve requirement.
Banks do not necessarily directly lend deposits to other customers. They may simply buy bonds or make other investments using the deposits. So you get inflation in capital markets instead of lending. As with lending the reserve requirement for banks is also about 10 pct (it varies). This is called Capital requirement.
The effect of using deposits for lending, buying bonds or buying other assets is essentially the same, as far as I can see. Because receivers deposit the money thus increasing deposits and making further lending or asset purchases legal for the banks. If laws are not adjusted. They may be (Financial reform ala suggestions by Nouriel Roubini).
Depending on reserve requirements and lending markets 6 trillion is the maximum potential effect. M1 today is about 1.7 trillion. M2 today is about 9 trillion and M3 was about 10 trillion in 2006 when the FED stopped publishing it. However, the full potential probably will not be allowed to happen and reserve requirements will hopefully be adjusted to reduce fractional reserve effects.
Another interesting aspect is the total amount of debt including bonds. This went too high compared to people’s productivity and ability to repay. I wonder if that is being addressed at all. I think it is not and what is happening is an attempt to slowly, slowly restructure via inflation and true restructuring (writing down the nominal debt) while handing money to the creditor banks and institutions via monetary expansion. Monetary expansion transfers money to asset holders from wage earners and money-savers via asset price inflation and dilution of the real value of wages and of money deposits.
So, once again, a kind of hidden theft saves the day for the financial players owning assets and earning money from the interest rate spread between FED funds rates and lending rates as well as capital market yields. In addition, I belive, the FED a year or so ago was allowed to pay interest on the risque assets placed with it by commercial banks against which they borrowed from the FED to bolster their liquid reserves. Again to feed money to them to cover their losses as they are realized over time.
The deleveraging in USA is a long process of transfering from wage earners and money-savers to the banks and instutions that made all the mistakes and also to the pension funds that have promised too much. Bon Appétit.
I think the feds are pretty aware of what they are doing. I am pretty sure they realize the future of western paper currency is limited, they are just trying to buy time.
That QE2 0f $600 Billion Will Do What?
The U.S. government is the first recipient via Treasuries and it will use the money to pay bribes to its fascist friends and to postpone its inevitable bankruptcy. Most definitely it will use some of the flush of counterfeit money to finance warmongering by the military industrial complex.
Dysfunctional and corrupt, the American nation continues down the Road To Serfdom.
Wait. So why does the Fed have the authorization to purchase bonds, exactly? Who suddenly gave them the ability to do quantitative easing and other such things? Does it go over this with Congress? I’m not sure I understand the process.
hehe, authorization, heheheHaHaHAHAHA………..
The Federal Reserve is a “private” bank given 100% monopoly power over the entire monetary supply by Congress. The setup basically gives the bank unlimited powers.
So the Fed is distorting the money supply. What else is new?
Seriously though, since it is obvious that the first spenders of this counterfeited cash benefit the most, why does it always start in the banking industry and gov’t bonds? If the gov’t really wanted to help, why do they not target the distribution of these funds to the poorest individuals? Not only would they get the benefit of first use of the new money on the market before prices rise – they also have the most urgent demands met due to more scarcity in their subjective position.
I’d rather the gov’t direct their charity by giving the lowest earning 50 million people in the US each a one time payment of $12,000 than the few market-tested-and-failed banks and the rest of the purchasers of “Treasury securities”.
But hey, when does the Fed ever use economic analysis on their decisions?
(I just made up the distribution, but it seems that “trickle-down” only is effective with tax incentives that allow the producers to produce better and cheaper products with a better ability to pay factors of production, like labor – while fixed amount cash-infusions do the best from the ground up – precisely because its about a race to get the cash, instead of a race to be more productive)
Ryan – Yes, they do. If you look at a dollar bill you’ll see it says “Federal Reserve Note.” The Federal Reserve is distinct from the national government and for the most part can do what it pleases. It is subject to regulations involving auditing and rules/interventions regarding the election/appointment of its officers, but is otherwise independent. Its was made this way by virtue of a charter granted by congress under the Federal Reserve Act of 1913.
$600 billion may seem like a number pulled out of the Fed board members’ hindmost quarters. When you’re saving a country from a depression by doing nothing but adding electronic digits to various organizations’ balance sheets then how do you know whether $100B, 500B or 10T is required? It’s not like there is a graph you can throw these numbers onto and then just read off the required amount from the X-axis where it equals zero unemployment.
But watch closely – when they seem to be pulling a list of numbers out of their hinie, they are actually retrieving a paper from the back pocket of their pants on which the bankers have written the exact amount that they require in order to stay solvent for another 6 months to 1 year or so. Long enough to pay another huge round of bonuses, declare the recovery well underway (again) and buy up as many commodities and other hard assets as they can find – as quickly and quietly as possible.
“It’s not like there is a graph you can throw these numbers onto and then just read off the required amount from the X-axis where it equals zero unemployment.”
This is what makes Keynesians so dangerous, they actually think one exists, and it just takes experimentation to find it.
Day One And The Joint Congressional Effort To Stop The Federal Reserve.
Hand in hand, with minds of classical liberalism scholarship, Senator Rand Paul and Congressman Ron Paul will immediately begin (and continue) to make the public aware of the destructiveness and immorality of the Federal Reserve.
It is impossible to predict how an ideological change will occur. Will it be slow and methodical or will it be like a torrent? Regardless, it is our duty as Americans to stop the economic terrorism of the Federal Reserve as soon as possible.
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