Creating money out of thin air

The Federal Reserve has taken some major action in an effort to stimulate the econnomy:

The Federal Reserve escalated its efforts to get the U.S. economic recovery back on track Wednesday, again entering the realm of risky and untested policy in response to the worst downturn in generations.

The plan to pump $600 billion into the financial system is designed to stimulate the economy in large part by lowering mortgage and other interest rates.

Although the approach carries significant risks for both the economy and the central bank’s credibility, the steps announced by Fed policymakers could represent the nation’s best hope for breaking free of sluggish growth, especially with bold initiatives unlikely from a newly divided Congress.

Fed officials concluded that growth is too slow to bring down the 9.6 percent unemployment rate and is at risk of staying that way for some time absent new action. They were also concerned that inflation has been running too low and were looking for a way to encourage modest price increases, which would give consumers and businesses more reason to spend money before its value declined and help energize the economy.

“The pace of recovery in output and employment continues to be slow,” the Fed’s policymaking panel, the Federal Open Market Committee, said in a statement. “Employers remain reluctant to add to payrolls. Housing starts continue to be depressed.”

The Fed usually manages the economy by adjusting short-term interest rates. With those rates already near zero, Fed officials had to dust off a strategy for boosting the economy that debuted during the darkest days of the financial crisis. The Fed plans to create money, essentially out of thin air, and then pump it into the economy by buying Treasury bonds on the open market.

via Fed to buy $600 billion in bonds in effort to boost economic recovery.

I am neither an economist nor an economist’s son, so could someone explain how creating money out of thin air could possibly be a good idea?

About Gene Veith

Professor of Literature at Patrick Henry College, the Director of the Cranach Institute at Concordia Theological Seminary, a columnist for World Magazine and TableTalk, and the author of 18 books on different facets of Christianity & Culture.

  • SKPeterson

    It’s not.

    This is money creation through the purchase of government debt which thereby lowers interest rates. Ideally, these lower rates will induce greater capital investments by firms, who will then hire workers, increase payrolls and thereby initiate a recovery. The money that is created is the $600 billion used to purchase the bonds. So, this money goes into effective circulation immediately as it has now displaced the current money that is out there (i.e., devaluing the currency). The problems resulting from this and similar moves are several: 1) the aforementioned devaluation of the currency; while this is often cited as being great for our exporting industries and also for debtors who pay back loans with lower valued dollars; a devalued dollar means that each dollar now buys less than it used to. Increasing the money supply at such as substantial clip increases the dangers of inflation if not hyperinflation. This bears directly on the economic position of the poor and vulnerable in our society – the injection into the money supply is not spread evenly across the economy. As this money flows out into use it comes generally to the lowest income people last, after prices have risen, their savings have eroded, and their employment position actually weakens because firms want to hold the line on rising input costs. Upshot – higher prices along with rising unemployment and the increasing marginalization of the relatively poor and unskilled.

    2) The artificial lowering of interest rates drives savings away from the investment markets. We generally hold that people save for a variety of reasons – future income from investment returns, or what is termed SUFS – saving up for something. The interplay of the level of savings and the interest rate reveals people’s time preferences for consumption; how much people are willing to give up today, in order to consumer more in the future. The resulting prices (interest rates) then provide signals to firms on what will be profitable to invest in and they access the savings capital, invest and then hire. QE measures (along with other money creation schemes) disrupt this signalling process – telling firms that liens of business that would not, under normal conditions, to be profitable ventures. People now spend on consumer goods and often increase their personal debt levels, which is viewed as good – “consumer spending drives our economy” is the mantra – but, the artificial lowering of interest rates induces firms to investment into ever more marginal lines of business.

    3) When the worm turns (and it always does) the divorce between consumer wants and firm investments becomes apparent; recession and low growth ensue as firms and consumers retrench and reassess the situation. The worm will turn often when inflation begins to pick up speed. How is inflation tamed? By raising interest rates. When these rates go up firms and consumer debtors now find themselves behind the 8-ball. Firms who invested in marginal lines of business (think here of the Dot Com bust, GM) go belly up. Their assets now have been revealed to be the result of mistaken investment – a wasting and squandering of scarce resources due to the artificial signals created by the QE/money supply inflation. Job cuts also results as firms go out of business and/or scale back; the QE has created not just an artificial increase in money supply, but an increase in essentially fake jobs. Individuals now also face higher interest rates on their personal debt, so they either declare bankruptcy or cut back on spending – again, “spending is good” believers get clobbered. So, what happens is the slow, tentative process of firms and consumers and the money supply finding that magical equilibrium (never reached, but also tending toward, btw). Unfortunately, depending on the length and depth of the dislocations, it may take a good deal of time to unwind the bad capital investments, realign the labor supply away from the fake economy and toward the real economy. This is perhaps the most difficult and the source of political demands for STBD (something to be done) – it may require relocation, acquiring new skills, reduced incomes (as the increase in incomes due to the QE for people in fake jobs producing goods people don’t really want inn lines of production that shouldn’t have been entered in to comes to a sad end).

    The bet, and a very risky one it is, is that many of these marginal investments will prove to be ongoing viable concerns that will be able to survive when interest rates rise and consumer demands shift. Hopefully, these firms will be able to grow and become stable quickly, before the inevitable interest rate increases and/or inflation pulls the rug out from under them. Otherwise, we (the monetary authorities that is) will have to do it all over again, or find even more creative QE means to prop up failing firms.

    When you keep doing that for 10, 15, 20 years, the distortions in the economy become ever greater and problems can no longer be swept under the rug. Right now, we have several 40 lb. balls of dirt under the rug. Eventually we’ll have to lift the rug, remove the dirt and clean up the mess. The longer we wait, the mess will be even greater and take even longer to clean up.

  • SKPeterson

    It’s not.

    This is money creation through the purchase of government debt which thereby lowers interest rates. Ideally, these lower rates will induce greater capital investments by firms, who will then hire workers, increase payrolls and thereby initiate a recovery. The money that is created is the $600 billion used to purchase the bonds. So, this money goes into effective circulation immediately as it has now displaced the current money that is out there (i.e., devaluing the currency). The problems resulting from this and similar moves are several: 1) the aforementioned devaluation of the currency; while this is often cited as being great for our exporting industries and also for debtors who pay back loans with lower valued dollars; a devalued dollar means that each dollar now buys less than it used to. Increasing the money supply at such as substantial clip increases the dangers of inflation if not hyperinflation. This bears directly on the economic position of the poor and vulnerable in our society – the injection into the money supply is not spread evenly across the economy. As this money flows out into use it comes generally to the lowest income people last, after prices have risen, their savings have eroded, and their employment position actually weakens because firms want to hold the line on rising input costs. Upshot – higher prices along with rising unemployment and the increasing marginalization of the relatively poor and unskilled.

    2) The artificial lowering of interest rates drives savings away from the investment markets. We generally hold that people save for a variety of reasons – future income from investment returns, or what is termed SUFS – saving up for something. The interplay of the level of savings and the interest rate reveals people’s time preferences for consumption; how much people are willing to give up today, in order to consumer more in the future. The resulting prices (interest rates) then provide signals to firms on what will be profitable to invest in and they access the savings capital, invest and then hire. QE measures (along with other money creation schemes) disrupt this signalling process – telling firms that liens of business that would not, under normal conditions, to be profitable ventures. People now spend on consumer goods and often increase their personal debt levels, which is viewed as good – “consumer spending drives our economy” is the mantra – but, the artificial lowering of interest rates induces firms to investment into ever more marginal lines of business.

    3) When the worm turns (and it always does) the divorce between consumer wants and firm investments becomes apparent; recession and low growth ensue as firms and consumers retrench and reassess the situation. The worm will turn often when inflation begins to pick up speed. How is inflation tamed? By raising interest rates. When these rates go up firms and consumer debtors now find themselves behind the 8-ball. Firms who invested in marginal lines of business (think here of the Dot Com bust, GM) go belly up. Their assets now have been revealed to be the result of mistaken investment – a wasting and squandering of scarce resources due to the artificial signals created by the QE/money supply inflation. Job cuts also results as firms go out of business and/or scale back; the QE has created not just an artificial increase in money supply, but an increase in essentially fake jobs. Individuals now also face higher interest rates on their personal debt, so they either declare bankruptcy or cut back on spending – again, “spending is good” believers get clobbered. So, what happens is the slow, tentative process of firms and consumers and the money supply finding that magical equilibrium (never reached, but also tending toward, btw). Unfortunately, depending on the length and depth of the dislocations, it may take a good deal of time to unwind the bad capital investments, realign the labor supply away from the fake economy and toward the real economy. This is perhaps the most difficult and the source of political demands for STBD (something to be done) – it may require relocation, acquiring new skills, reduced incomes (as the increase in incomes due to the QE for people in fake jobs producing goods people don’t really want inn lines of production that shouldn’t have been entered in to comes to a sad end).

    The bet, and a very risky one it is, is that many of these marginal investments will prove to be ongoing viable concerns that will be able to survive when interest rates rise and consumer demands shift. Hopefully, these firms will be able to grow and become stable quickly, before the inevitable interest rate increases and/or inflation pulls the rug out from under them. Otherwise, we (the monetary authorities that is) will have to do it all over again, or find even more creative QE means to prop up failing firms.

    When you keep doing that for 10, 15, 20 years, the distortions in the economy become ever greater and problems can no longer be swept under the rug. Right now, we have several 40 lb. balls of dirt under the rug. Eventually we’ll have to lift the rug, remove the dirt and clean up the mess. The longer we wait, the mess will be even greater and take even longer to clean up.

  • collie

    S.K. Peterson, thanks for that explanation; I’m one of those who has “woken up” to the mess our congress has made (or I’ve made, since I voted for some of these people).

    All I can say is, I hope the 112th is much more sober than the 111th: worst.congress.ever.

  • collie

    S.K. Peterson, thanks for that explanation; I’m one of those who has “woken up” to the mess our congress has made (or I’ve made, since I voted for some of these people).

    All I can say is, I hope the 112th is much more sober than the 111th: worst.congress.ever.

  • http://www.newreformationpress.com Patrick Kyle

    The Fed is now buying treasury bills because no one else wants to risk it? And who gets all this’ new money’ that they create out of thin air?

    We have a bunch of clowns at the economic helm of this country.

  • http://www.newreformationpress.com Patrick Kyle

    The Fed is now buying treasury bills because no one else wants to risk it? And who gets all this’ new money’ that they create out of thin air?

    We have a bunch of clowns at the economic helm of this country.

  • SKPeterson

    I will add that the clean up process is what we like to call a recession or depression (We used to call them panics, but that was when real money was involved). The bigger the mess the more depressing it becomes. :)

  • SKPeterson

    I will add that the clean up process is what we like to call a recession or depression (We used to call them panics, but that was when real money was involved). The bigger the mess the more depressing it becomes. :)

  • WebMonk

    It’s not quite as dire as SK suggests, though I don’t think it’s a good thing. Having more money in the economy isn’t an automatic evil – it has effects which are good and bad. You’ve got to watch what those effects will be in the particular situation.

    One of the concerns, inflation, is most definitely NOT a problem at the moment, and so the economy won’t be hurt by a modest increase in inflation. As big as $600 billion sounds, it will just barely nudge inflation rates. Interest rates will also receive some pressure to rise from this, but not much as there is still a lot of downward pressure on interest rates.

    One of the benefits of the extra money will be job creation – the money is being provided to companies, not individuals. The money will most likely be used for expanding business capabilities which will typically cause more jobs.

    SK, you put forward a lot of other problems which come from injecting a bunch of money into the economy and I agree with most of them (except for concerns about inflation and interest rates rising a bunch) but let’s not paint too gloomy a picture of the effects. In our current situation, most of the negative effects are less negative than usual, and the positives are more highly desired.

    I tend to disagree with the manipulation of the economy through these sorts of actions, but at this time and place, I think the effects will be generally positive. If I were Bernanke, I wouldn’t do it, but my reasons would be more based on things other than this movement’s direct effect on the economy.

  • WebMonk

    It’s not quite as dire as SK suggests, though I don’t think it’s a good thing. Having more money in the economy isn’t an automatic evil – it has effects which are good and bad. You’ve got to watch what those effects will be in the particular situation.

    One of the concerns, inflation, is most definitely NOT a problem at the moment, and so the economy won’t be hurt by a modest increase in inflation. As big as $600 billion sounds, it will just barely nudge inflation rates. Interest rates will also receive some pressure to rise from this, but not much as there is still a lot of downward pressure on interest rates.

    One of the benefits of the extra money will be job creation – the money is being provided to companies, not individuals. The money will most likely be used for expanding business capabilities which will typically cause more jobs.

    SK, you put forward a lot of other problems which come from injecting a bunch of money into the economy and I agree with most of them (except for concerns about inflation and interest rates rising a bunch) but let’s not paint too gloomy a picture of the effects. In our current situation, most of the negative effects are less negative than usual, and the positives are more highly desired.

    I tend to disagree with the manipulation of the economy through these sorts of actions, but at this time and place, I think the effects will be generally positive. If I were Bernanke, I wouldn’t do it, but my reasons would be more based on things other than this movement’s direct effect on the economy.

  • http://www.bikebubba.blogspot.com Bike Bubba

    What SKPeterson says. More or less, by pumping money into the economy, they promote the interests of debtors and creditors over those of savers. Keep in mind here that the creditor isn’t usually investing their own money, but rather that of savers.

    In the short term, it stimulates consumption, which the Keynesians love because that of course drives factory orders. It’s a temporary goose to GDP that politicians trumpet as “their” effort to save the economy.

    In the long term, of course, penalizing savers means that you don’t create capital–meaning that in the long term, the economy suffers, even if the numbers “look great.”

  • http://www.bikebubba.blogspot.com Bike Bubba

    What SKPeterson says. More or less, by pumping money into the economy, they promote the interests of debtors and creditors over those of savers. Keep in mind here that the creditor isn’t usually investing their own money, but rather that of savers.

    In the short term, it stimulates consumption, which the Keynesians love because that of course drives factory orders. It’s a temporary goose to GDP that politicians trumpet as “their” effort to save the economy.

    In the long term, of course, penalizing savers means that you don’t create capital–meaning that in the long term, the economy suffers, even if the numbers “look great.”

  • Bryan Lindemood

    Aren’t these decisions made by unelected officials? I don’t think Congress can really do anything about it. And when our dollar is worth 10 percent less than it was 2 months ago – that is a backdoor tax that hurts us all! In answer to a comment above – this money is only created to prop up the markets – this is not money that we even have access to. If it were used to help some other more responsible part of the economy – like helping everyday folks pay down debt, then I might be a little comforted. But the way we are monetizing our debt and pouring it into the stock market, really has me worried.

  • Bryan Lindemood

    Aren’t these decisions made by unelected officials? I don’t think Congress can really do anything about it. And when our dollar is worth 10 percent less than it was 2 months ago – that is a backdoor tax that hurts us all! In answer to a comment above – this money is only created to prop up the markets – this is not money that we even have access to. If it were used to help some other more responsible part of the economy – like helping everyday folks pay down debt, then I might be a little comforted. But the way we are monetizing our debt and pouring it into the stock market, really has me worried.

  • WebMonk

    Bryan, don’t get carried away. With this action, each dollar might be worth 0.15% less than it was two months ago whereas it would have been worth only 0.1% less without this action. Using fears of near-hyperinflation as a reason not to do this action is ridiculous.

    If this money were going directly toward helping “everyday folks pay down debt”, I would be VERY nervous. I can’t even begin to estimate all the ramifications of putting $600 billion directly into individual debt payoff. Just like the Fed’s action, there would be good and bad things, but off the top of my head the bad things would be really bad and the good things would be extremely temporarily good and would turn around and bite us really badly.

  • WebMonk

    Bryan, don’t get carried away. With this action, each dollar might be worth 0.15% less than it was two months ago whereas it would have been worth only 0.1% less without this action. Using fears of near-hyperinflation as a reason not to do this action is ridiculous.

    If this money were going directly toward helping “everyday folks pay down debt”, I would be VERY nervous. I can’t even begin to estimate all the ramifications of putting $600 billion directly into individual debt payoff. Just like the Fed’s action, there would be good and bad things, but off the top of my head the bad things would be really bad and the good things would be extremely temporarily good and would turn around and bite us really badly.

  • http://www.biblegateway.com/versions/Contemporary-English-Version-CEV-Bible/ sg

    Wow, gee, what is the annualized rate of the compounding loss in value of 0.15% every two months? I can promise you the Fed knows.

  • http://www.biblegateway.com/versions/Contemporary-English-Version-CEV-Bible/ sg

    Wow, gee, what is the annualized rate of the compounding loss in value of 0.15% every two months? I can promise you the Fed knows.

  • Bryan Lindemood

    By the way, thank you, Veith, for highlighting this problem. I for one am trying to figure out why the Fed seems to be intentionally working to destroy the dollar and in turn the country.

  • Bryan Lindemood

    By the way, thank you, Veith, for highlighting this problem. I for one am trying to figure out why the Fed seems to be intentionally working to destroy the dollar and in turn the country.

  • WebMonk

    That’s just under 1% inflation per year. I picked those more or less at random just to give a general ballpark sense of things.

    Right now the inflation rate is around 1% and for most of this decade the inflation rate has been between 2 and 4%. So this action might bump the inflation rate up from 1% to 1.5% annualized rate.

    That means that our money would be worth about .9975 of what it was 2 months ago rather than .9983 of what it was if the Fed’s action hadn’t taken place.

    Even if it bumps it up to a 2% inflation rate, that is still WAY inside the typical margins of change that businesses and individuals deal with all the time.

    Like I said, inflation is really not a worry at this time.

  • WebMonk

    That’s just under 1% inflation per year. I picked those more or less at random just to give a general ballpark sense of things.

    Right now the inflation rate is around 1% and for most of this decade the inflation rate has been between 2 and 4%. So this action might bump the inflation rate up from 1% to 1.5% annualized rate.

    That means that our money would be worth about .9975 of what it was 2 months ago rather than .9983 of what it was if the Fed’s action hadn’t taken place.

    Even if it bumps it up to a 2% inflation rate, that is still WAY inside the typical margins of change that businesses and individuals deal with all the time.

    Like I said, inflation is really not a worry at this time.

  • WebMonk

    sg, if you had a $100 in an account that gave you 0.15% interest every two months, you would have $100.90 at the end of the year. Conversely, if you turn that to inflation, your $100 would be worth $99.10.

  • WebMonk

    sg, if you had a $100 in an account that gave you 0.15% interest every two months, you would have $100.90 at the end of the year. Conversely, if you turn that to inflation, your $100 would be worth $99.10.

  • Bryan Lindemood

    Webmonks right, developing a program to encourage and help average Americans pay down debt so we can plan for the long term and build savings would certainly be the more dangerous road.

    What was I thinking?!

    Seriously now, Webmonk is partially right that our monetary system is very complicated and nuanced. I’m aware.

    But creating money out of thin air (in the trillions) and dumping it into the hands of only those with the proper “connections” does not seem a very rational plan.

    Because our problem is the intensity of the corruption throughout the “creme of our crop.”

  • Bryan Lindemood

    Webmonks right, developing a program to encourage and help average Americans pay down debt so we can plan for the long term and build savings would certainly be the more dangerous road.

    What was I thinking?!

    Seriously now, Webmonk is partially right that our monetary system is very complicated and nuanced. I’m aware.

    But creating money out of thin air (in the trillions) and dumping it into the hands of only those with the proper “connections” does not seem a very rational plan.

    Because our problem is the intensity of the corruption throughout the “creme of our crop.”

  • Porcell

    Essentially, the Fed with this QE2 move is involved with a hair of the dog solution. Both Greenspan and Bernanke have caved to both political and economic interests who lack the spine to weather normal recessionary periods that correct economic excesses. A major cause of the housing bubble was the easy money that Greenspan created.

    Bernanke has followed Greenspan’s excessively easy money policy and this along with a loss of confidence in equity markets has created a massive bubble in the intermediate and long term bond markets that will inevitably burst when the fed’s excessive printing of money will result in serious inflation.

    To be fair, both Greenspan and Bernanke have had to deal with the results of excessive government spending. Until government over-spending is brought under control, the Fed will be forced to keep interest rates low.

    Washington could learn a lot from recent German policy that has reigned in spending and brought unemployment down to 7.5%. The Germans are properly paranoid about the threat of inflation. We should be too, as it is destructive to the wealth of everyone.

    Cranach bloggers who are heavily invested in American bonds would be wise to move toward GNMA and emerging market bonds along with high quality American and foreign equities that pay decent dividends.

  • Porcell

    Essentially, the Fed with this QE2 move is involved with a hair of the dog solution. Both Greenspan and Bernanke have caved to both political and economic interests who lack the spine to weather normal recessionary periods that correct economic excesses. A major cause of the housing bubble was the easy money that Greenspan created.

    Bernanke has followed Greenspan’s excessively easy money policy and this along with a loss of confidence in equity markets has created a massive bubble in the intermediate and long term bond markets that will inevitably burst when the fed’s excessive printing of money will result in serious inflation.

    To be fair, both Greenspan and Bernanke have had to deal with the results of excessive government spending. Until government over-spending is brought under control, the Fed will be forced to keep interest rates low.

    Washington could learn a lot from recent German policy that has reigned in spending and brought unemployment down to 7.5%. The Germans are properly paranoid about the threat of inflation. We should be too, as it is destructive to the wealth of everyone.

    Cranach bloggers who are heavily invested in American bonds would be wise to move toward GNMA and emerging market bonds along with high quality American and foreign equities that pay decent dividends.

  • http://www.bikebubba.blogspot.com Bike Bubba

    For reference, I believe that this increases the money supply closer to 5-10%, which ought to translate into far more severe shifts in the inflation rate than a mere .5%. For reference, the dollar has lost about 96% of its value since the Fed was founded; let’s NOT underestimate the destructive power of inflationary monetary policy.

    What the Fed is doing here is effectively the same as what was practiced in Weimar Germany in the 1920s and in Zimbabwe more recently, but thankfully on a smaller scale. Smart investors are therefore moving to precious metals like gold, silver, copper clad lead, brass, and ordinance steel.

  • http://www.bikebubba.blogspot.com Bike Bubba

    For reference, I believe that this increases the money supply closer to 5-10%, which ought to translate into far more severe shifts in the inflation rate than a mere .5%. For reference, the dollar has lost about 96% of its value since the Fed was founded; let’s NOT underestimate the destructive power of inflationary monetary policy.

    What the Fed is doing here is effectively the same as what was practiced in Weimar Germany in the 1920s and in Zimbabwe more recently, but thankfully on a smaller scale. Smart investors are therefore moving to precious metals like gold, silver, copper clad lead, brass, and ordinance steel.

  • WebMonk

    Bryan, have you stopped to think of what the effects of directly paying off people’s debts would be beyond the basic detail of they wouldn’t have quite so much debt? Somehow I doubt it. Unintended consequences would bite that action in the butt in a BIG way.

    I’ll ignore the likely political actions which would most likely turn it into a useless pile of junk bit of legislation. Let’s say that we could enforce by fiat that the lower economic half of US households would get that $600 billion split amongst them only to pay off debt and not to buy anything else. That would pay off about $10,000 dollars of debt per household.

    Guess what the average credit card debt is per household here in th US? $15,700. The average household would pay off a big chunk of their credit cards, but not all of them, and wouldn’t even begin to touch mortgages. That is the good part – a very small item.

    Look at the other effects. In no particular order….

    Banks would rake in a MASSIVE profit. Inflation would be affected much more directly than with the Fed’s method. There would be no direct job creation. Consumers would very quickly rack up replacement debt (less than a year to get back to previous levels). Consumer and luxury goods would get a spike from increased spending, and additional jobs would come of that, but they would be strictly temporary jobs. Significant job displacement as jobs would be opening up in related areas, and then going away. Businesses would have an large number of extremely uncertain variables to try to guess at to handle the added business, and businesses tend to be conservative in the face of uncertainty, and this would severely crimp the numbers and types of added jobs, shifting the added jobs heavily toward the temporary side of things. Inflation would spike quickly for a while with the new spending and money. Investment in business capital would at best stay the same, and possibly drop. Long term goods would not be affected. The housing issues wouldn’t be affected directly and not predictably. Mortgage foreclosures would be at best temporarily affected.

    I’m sure it sounds like a very nice thing to do Bryan, but unintended consequences would be a massive amount of trouble should that plan be put into practice.

    From some of the things you’re saying I also suspect that you don’t really know what the Fed is doing. The Fed is buying Treasury securities. Do you know what that means? They are buying bonds put out by the US government. There are effects to that, but none of them match up with what you are claiming they are doing. You might want to do a little research so you know what is actually happening.

  • WebMonk

    Bryan, have you stopped to think of what the effects of directly paying off people’s debts would be beyond the basic detail of they wouldn’t have quite so much debt? Somehow I doubt it. Unintended consequences would bite that action in the butt in a BIG way.

    I’ll ignore the likely political actions which would most likely turn it into a useless pile of junk bit of legislation. Let’s say that we could enforce by fiat that the lower economic half of US households would get that $600 billion split amongst them only to pay off debt and not to buy anything else. That would pay off about $10,000 dollars of debt per household.

    Guess what the average credit card debt is per household here in th US? $15,700. The average household would pay off a big chunk of their credit cards, but not all of them, and wouldn’t even begin to touch mortgages. That is the good part – a very small item.

    Look at the other effects. In no particular order….

    Banks would rake in a MASSIVE profit. Inflation would be affected much more directly than with the Fed’s method. There would be no direct job creation. Consumers would very quickly rack up replacement debt (less than a year to get back to previous levels). Consumer and luxury goods would get a spike from increased spending, and additional jobs would come of that, but they would be strictly temporary jobs. Significant job displacement as jobs would be opening up in related areas, and then going away. Businesses would have an large number of extremely uncertain variables to try to guess at to handle the added business, and businesses tend to be conservative in the face of uncertainty, and this would severely crimp the numbers and types of added jobs, shifting the added jobs heavily toward the temporary side of things. Inflation would spike quickly for a while with the new spending and money. Investment in business capital would at best stay the same, and possibly drop. Long term goods would not be affected. The housing issues wouldn’t be affected directly and not predictably. Mortgage foreclosures would be at best temporarily affected.

    I’m sure it sounds like a very nice thing to do Bryan, but unintended consequences would be a massive amount of trouble should that plan be put into practice.

    From some of the things you’re saying I also suspect that you don’t really know what the Fed is doing. The Fed is buying Treasury securities. Do you know what that means? They are buying bonds put out by the US government. There are effects to that, but none of them match up with what you are claiming they are doing. You might want to do a little research so you know what is actually happening.

  • collie

    Bryan @7 – true, unelected officials are handling this transaction, but doesn’t congress bear a lot of responsibility for getting us this far in debt? And I’m not really just blaming the 111th, it’s just the worst one yet in terms of spending.

  • collie

    Bryan @7 – true, unelected officials are handling this transaction, but doesn’t congress bear a lot of responsibility for getting us this far in debt? And I’m not really just blaming the 111th, it’s just the worst one yet in terms of spending.

  • WebMonk

    Hey Bike, let’s put things in context here; the Fed has been around for nearly 100 years, and yes, the dollar has dropped in value that much, but that’s about 3% per year compounded out. Yes, 96% sounds like a big amount, but when it’s spread over 100 years, it’s not nearly so scary.

    Take this for example. I can give you a 13000% increase on an investment!!! Whoa!! Oh, yeah, it takes 100 years to happen. Not so impressive if you look at it that way.

    And, like Bryan, I don’t think you really know what the Fed is doing here. They are NOT increasing the money supply by 5-10%. Not anything even vaguely like that. They are buying long term Treasury securities. That is NOT adding $600 billion into the money supply. The two things are not even close to being the same thing.

  • WebMonk

    Hey Bike, let’s put things in context here; the Fed has been around for nearly 100 years, and yes, the dollar has dropped in value that much, but that’s about 3% per year compounded out. Yes, 96% sounds like a big amount, but when it’s spread over 100 years, it’s not nearly so scary.

    Take this for example. I can give you a 13000% increase on an investment!!! Whoa!! Oh, yeah, it takes 100 years to happen. Not so impressive if you look at it that way.

    And, like Bryan, I don’t think you really know what the Fed is doing here. They are NOT increasing the money supply by 5-10%. Not anything even vaguely like that. They are buying long term Treasury securities. That is NOT adding $600 billion into the money supply. The two things are not even close to being the same thing.

  • Porcell

    WebMonk, on the issue of the money supply, I should suggest that you read Arthur Laffer’s June WSJ article Get Ready for Inflation and Higher Interest Rates The unprecedented expansion of the money supply could make the ’70s look benign., including the following:

    About eight months ago, starting in early September 2008, the Bernanke Fed did an abrupt about-face and radically increased the monetary base — which is comprised of currency in circulation, member bank reserves held at the Fed, and vault cash — by a little less than $1 trillion. The Fed controls the monetary base 100% and does so by purchasing and selling assets in the open market. By such a radical move, the Fed signaled a 180-degree shift in its focus from an anti-inflation position to an anti-deflation position.

    The percentage increase in the monetary base is the largest increase in the past 50 years by a factor of 10 (see chart nearby). It is so far outside the realm of our prior experiential base that historical comparisons are rendered difficult if not meaningless. The currency-in-circulation component of the monetary base — which prior to the expansion had comprised 95% of the monetary base — has risen by a little less than 10%, while bank reserves have increased almost 20-fold. Now the currency-in-circulation component of the monetary base is a smidgen less than 50% of the monetary base. Yikes!

    I happen to know that not a few serious American investors are so concerned about this parlous monetary reality that they are openly and legally placing a substantial amount of their assets in Switzerland and other safe places around the world.

  • Porcell

    WebMonk, on the issue of the money supply, I should suggest that you read Arthur Laffer’s June WSJ article Get Ready for Inflation and Higher Interest Rates The unprecedented expansion of the money supply could make the ’70s look benign., including the following:

    About eight months ago, starting in early September 2008, the Bernanke Fed did an abrupt about-face and radically increased the monetary base — which is comprised of currency in circulation, member bank reserves held at the Fed, and vault cash — by a little less than $1 trillion. The Fed controls the monetary base 100% and does so by purchasing and selling assets in the open market. By such a radical move, the Fed signaled a 180-degree shift in its focus from an anti-inflation position to an anti-deflation position.

    The percentage increase in the monetary base is the largest increase in the past 50 years by a factor of 10 (see chart nearby). It is so far outside the realm of our prior experiential base that historical comparisons are rendered difficult if not meaningless. The currency-in-circulation component of the monetary base — which prior to the expansion had comprised 95% of the monetary base — has risen by a little less than 10%, while bank reserves have increased almost 20-fold. Now the currency-in-circulation component of the monetary base is a smidgen less than 50% of the monetary base. Yikes!

    I happen to know that not a few serious American investors are so concerned about this parlous monetary reality that they are openly and legally placing a substantial amount of their assets in Switzerland and other safe places around the world.

  • SKPeterson

    WebMonk – buying Treasury securities is the same thing as increasing the money supply when you create the $600 billion ex nihilo. The direness that I speak of is not the result of any one money supply affect or QE effect by the Fed, but the composite, long term impacts of money supply and QE actions taken over several years.

    Moreover, inflation is already looming on the horizon in commodities and basics like food; the CPI value you cited was excluding food and energy. Beef prices are up 13%, milk up 10%, sugar up 9%, eggs up 7%, cereal up 5%. The deal is that food prices are excluded from the CPI. So, we can look at CPI and say inflation is low, but we’re excluding most everything that is running up in price like food and energy, even though these are precisely the things that people are buying everyday and make up a large portion of their budgetary expenditures.

    Also, other basic commodities like cotton are going up by as much as 10%. Beyond getting into GNMA’s like Porcell recommends, perhaps look into a commodities fund like that of Jim Rogers, or even getting into commodities futures and options directly if you’re brave enough.

  • SKPeterson

    WebMonk – buying Treasury securities is the same thing as increasing the money supply when you create the $600 billion ex nihilo. The direness that I speak of is not the result of any one money supply affect or QE effect by the Fed, but the composite, long term impacts of money supply and QE actions taken over several years.

    Moreover, inflation is already looming on the horizon in commodities and basics like food; the CPI value you cited was excluding food and energy. Beef prices are up 13%, milk up 10%, sugar up 9%, eggs up 7%, cereal up 5%. The deal is that food prices are excluded from the CPI. So, we can look at CPI and say inflation is low, but we’re excluding most everything that is running up in price like food and energy, even though these are precisely the things that people are buying everyday and make up a large portion of their budgetary expenditures.

    Also, other basic commodities like cotton are going up by as much as 10%. Beyond getting into GNMA’s like Porcell recommends, perhaps look into a commodities fund like that of Jim Rogers, or even getting into commodities futures and options directly if you’re brave enough.

  • WebMonk

    Actually, I have read that one (I’m a big WSJ fan), and I tend to agree with it (though he did misrepresent a couple of details, IMO). I’m talking pretty narrowly to this particular action by the Fed when I say it won’t do much of anything to inflation.

    That article contains some of the reasons I alluded to in @5 when I said,
    If I were Bernanke, I wouldn’t do it, but my reasons would be more based on things other than this movement’s direct effect on the economy.

  • WebMonk

    Actually, I have read that one (I’m a big WSJ fan), and I tend to agree with it (though he did misrepresent a couple of details, IMO). I’m talking pretty narrowly to this particular action by the Fed when I say it won’t do much of anything to inflation.

    That article contains some of the reasons I alluded to in @5 when I said,
    If I were Bernanke, I wouldn’t do it, but my reasons would be more based on things other than this movement’s direct effect on the economy.

  • Cincinnatus

    WebMonk: Inflation is almost always a bad thing because it disadvantages consumers and taxpayers (and creditors) at the expense of the government. Personally, I would take some good old-fashioned deflation over inflation any day.

  • Cincinnatus

    WebMonk: Inflation is almost always a bad thing because it disadvantages consumers and taxpayers (and creditors) at the expense of the government. Personally, I would take some good old-fashioned deflation over inflation any day.

  • WebMonk

    SK, if you’re talking about long-term and composite effects of things, then I agree that we’re looking at some inflation coming back to hit us in the relatively near future (4 or 5 years). I doubt the Fed will be able to stop the inflation from hitting pretty hard, though I am pretty sure they can mitigate it.

    But by this particular action, inflation won’t be affected in any noticeable way.

    About the creating money thing, yes, it is creating money, but it’s not releasing the money into circulation. They will buy up $600bn in long term Treasuries. The yield on the remaining securities will drop. The effects start rippling out from there. What does NOT happen is $600bn directly added to the money supply. (and even indirectly it doesn’t really get added until you get several cause-effect steps away, and it still isn’t really injected into the money supply)

    Inflation calculations are a hairy topic, and I don’t particularly believe the Dept of Labor’s numbers, but they are the most widely used, so I tend to use them. I am aware that they don’t necessarily include food and energy, but they do have numbers which do include those figures.

    For the last 12 months, inflation WITH food and energy is 1.1%. Without food and energy, the inflation rate is 0.8%. For armchair discussions here on a blog, forgive me if I just round and lump those together to a nice, round 1%.

    http://www.bls.gov/news.release/cpi.nr0.htm

  • WebMonk

    SK, if you’re talking about long-term and composite effects of things, then I agree that we’re looking at some inflation coming back to hit us in the relatively near future (4 or 5 years). I doubt the Fed will be able to stop the inflation from hitting pretty hard, though I am pretty sure they can mitigate it.

    But by this particular action, inflation won’t be affected in any noticeable way.

    About the creating money thing, yes, it is creating money, but it’s not releasing the money into circulation. They will buy up $600bn in long term Treasuries. The yield on the remaining securities will drop. The effects start rippling out from there. What does NOT happen is $600bn directly added to the money supply. (and even indirectly it doesn’t really get added until you get several cause-effect steps away, and it still isn’t really injected into the money supply)

    Inflation calculations are a hairy topic, and I don’t particularly believe the Dept of Labor’s numbers, but they are the most widely used, so I tend to use them. I am aware that they don’t necessarily include food and energy, but they do have numbers which do include those figures.

    For the last 12 months, inflation WITH food and energy is 1.1%. Without food and energy, the inflation rate is 0.8%. For armchair discussions here on a blog, forgive me if I just round and lump those together to a nice, round 1%.

    http://www.bls.gov/news.release/cpi.nr0.htm

  • WebMonk

    Cincinnatus – generally agreed. Which is why I’m not worried about this action by the Fed because it won’t make much effect at all upon inflation by itself.

  • WebMonk

    Cincinnatus – generally agreed. Which is why I’m not worried about this action by the Fed because it won’t make much effect at all upon inflation by itself.

  • Cincinnatus

    Except such actions are being taken by Brazil, China, and others as overtures to a currency war.

    Do not want.

  • Cincinnatus

    Except such actions are being taken by Brazil, China, and others as overtures to a currency war.

    Do not want.

  • WebMonk

    Cin, if what you said were true, then we’ve all been in a currency war for the last 2 years, and this is a relatively small salvo. Don’t worry about a currency war starting from this action. :-)

  • WebMonk

    Cin, if what you said were true, then we’ve all been in a currency war for the last 2 years, and this is a relatively small salvo. Don’t worry about a currency war starting from this action. :-)

  • DonS

    Interest rates have been at record lows for two or so years now. So it’s hard to see how they can be driven down much further, or how that is magically going to suddenly be stimulative. If this injection of money into the economy is insufficient to significantly change the inflation rate or increase the money supply, as Webmonk suggests, than it is also probably an insufficient stimulus.

    The continuing decline of the dollar may marginally help with exports, but the increased cost of commodities and imported raw materials may dampen this effect. In general, this is a useless, desperate, effort, imo.

    Of course, what really needs to happen is for the government to adopt a consistent, predictable, permanent, and pro-business economic and tax policy so that businesses and consumers can actually plan for the future. Temporary monetary intervention is like taking No Doz for a sleeping disorder.

  • DonS

    Interest rates have been at record lows for two or so years now. So it’s hard to see how they can be driven down much further, or how that is magically going to suddenly be stimulative. If this injection of money into the economy is insufficient to significantly change the inflation rate or increase the money supply, as Webmonk suggests, than it is also probably an insufficient stimulus.

    The continuing decline of the dollar may marginally help with exports, but the increased cost of commodities and imported raw materials may dampen this effect. In general, this is a useless, desperate, effort, imo.

    Of course, what really needs to happen is for the government to adopt a consistent, predictable, permanent, and pro-business economic and tax policy so that businesses and consumers can actually plan for the future. Temporary monetary intervention is like taking No Doz for a sleeping disorder.

  • trotk

    The people who are being overlooked in all of this (and this is just one of the unintended side effects) are seniors who live off interest from investments. The lower the interest rates are, the smaller their income becomes.
    For their sakes, deflation would be a good thing.

  • trotk

    The people who are being overlooked in all of this (and this is just one of the unintended side effects) are seniors who live off interest from investments. The lower the interest rates are, the smaller their income becomes.
    For their sakes, deflation would be a good thing.

  • WebMonk

    Well, if this action were intended to drive down interest rates across the board, it would probably fail to have much of any effect.

    Good thing that’s not what this is trying to do.

  • WebMonk

    Well, if this action were intended to drive down interest rates across the board, it would probably fail to have much of any effect.

    Good thing that’s not what this is trying to do.

  • http://www.biblegateway.com/versions/Contemporary-English-Version-CEV-Bible/ sg

    Kotlikoff has been explaining how the US is bankrupt ever since he, Smetters and Gokhale were hired by the Treasury Dept. to audit SS/Medicare.

  • http://www.biblegateway.com/versions/Contemporary-English-Version-CEV-Bible/ sg

    Kotlikoff has been explaining how the US is bankrupt ever since he, Smetters and Gokhale were hired by the Treasury Dept. to audit SS/Medicare.

  • Cincinattus

    WebMonk, your position is “why not”?

    Mine is “why”?

    I think mine is, in this case, the stronger position.

  • Cincinattus

    WebMonk, your position is “why not”?

    Mine is “why”?

    I think mine is, in this case, the stronger position.

  • WebMonk

    WebMonk, your position is “why not”?

    No, no. I think I’ve mentioned several times so far is that I would NOT make this sort of action if I were in Bernanke’s shoes.

    What I AM saying is that this isn’t a disaster in the making, it won’t explode inflation, it won’t just enrich a bunch of bankers, and it won’t start a currency war with anyone, and it should have at least some nicely positive effects.

    It’s not a good idea, but we don’t have to run around claiming the Fed is trying to ruin America or that we’re about to enter a period of hyperinflation because of this.

  • WebMonk

    WebMonk, your position is “why not”?

    No, no. I think I’ve mentioned several times so far is that I would NOT make this sort of action if I were in Bernanke’s shoes.

    What I AM saying is that this isn’t a disaster in the making, it won’t explode inflation, it won’t just enrich a bunch of bankers, and it won’t start a currency war with anyone, and it should have at least some nicely positive effects.

    It’s not a good idea, but we don’t have to run around claiming the Fed is trying to ruin America or that we’re about to enter a period of hyperinflation because of this.

  • SKPeterson

    Cincinattus @30. Most definitely, yes. The economy is a complex thing and the consequences of intervention are unknown and of uneven impact. My biggest concern is that the natural processes of incentive and reward are monkeyed with (again).

    sg – we’ve been effectively bankrupt for years. However, being good honest folk, we’ll print whatever money we need to cover our tab. Just like this perfect encapsulation of our current monetary policy: http://vimeo.com/6727536

  • SKPeterson

    Cincinattus @30. Most definitely, yes. The economy is a complex thing and the consequences of intervention are unknown and of uneven impact. My biggest concern is that the natural processes of incentive and reward are monkeyed with (again).

    sg – we’ve been effectively bankrupt for years. However, being good honest folk, we’ll print whatever money we need to cover our tab. Just like this perfect encapsulation of our current monetary policy: http://vimeo.com/6727536

  • http://www.bikebubba.blogspot.com Bike Bubba

    When commenting on how ‘minor’ the 96% reduction in the value of a dollar “is,” we ought to consider that from 1789 to 1913, the value of the dollar was relatively constant.

    For that matter, back in Roman days, a troy ounce of gold would buy a good men’s suit. Today, it does the same–plus a little bit thanks to nervousness over the actions of Mr. Obama and the Federal Reserve.

    If the value of money is relatively stable, people will save, creating capital. If it is not, it will be spent on current wants, impoverishing the society in the long term. Our society chooses inflation, and the results are pretty straightforward.

  • http://www.bikebubba.blogspot.com Bike Bubba

    When commenting on how ‘minor’ the 96% reduction in the value of a dollar “is,” we ought to consider that from 1789 to 1913, the value of the dollar was relatively constant.

    For that matter, back in Roman days, a troy ounce of gold would buy a good men’s suit. Today, it does the same–plus a little bit thanks to nervousness over the actions of Mr. Obama and the Federal Reserve.

    If the value of money is relatively stable, people will save, creating capital. If it is not, it will be spent on current wants, impoverishing the society in the long term. Our society chooses inflation, and the results are pretty straightforward.

  • WebMonk

    Aaak! My posts are being pulled into the void again! I’m not putting in any links or anything.

    Let me try yet again.

    No, Cin. I’ve stated several times that I would NOT make this sort of action.

    What I AM saying is that it’s not going to be some sort of disaster, it’s not going to explode inflation, it’s not just going to line fat cat pockets, and it’s not going to cause a currency war.

  • WebMonk

    Aaak! My posts are being pulled into the void again! I’m not putting in any links or anything.

    Let me try yet again.

    No, Cin. I’ve stated several times that I would NOT make this sort of action.

    What I AM saying is that it’s not going to be some sort of disaster, it’s not going to explode inflation, it’s not just going to line fat cat pockets, and it’s not going to cause a currency war.

  • WebMonk

    Bike, you’re cherry-picking and then mixing and matching all sorts of different concepts into a rather bizarre set of claims that has next to nothing to do with this action by the Fed and ignores vast swaths of economic history.

    Gold standard does not equal stable money value.
    “stable money value” doesn’t lead to more saving.
    Inflation alone doesn’t discourage savings.
    From 1789 to 1913 the value of dollar swung wildly, and not just in war times.

    This is all basic economic history, backed up with dozens and dozens of examples.

  • WebMonk

    Bike, you’re cherry-picking and then mixing and matching all sorts of different concepts into a rather bizarre set of claims that has next to nothing to do with this action by the Fed and ignores vast swaths of economic history.

    Gold standard does not equal stable money value.
    “stable money value” doesn’t lead to more saving.
    Inflation alone doesn’t discourage savings.
    From 1789 to 1913 the value of dollar swung wildly, and not just in war times.

    This is all basic economic history, backed up with dozens and dozens of examples.

  • Cincinnatus

    Fair enough, WebMonk, and your voice of reason is appreciated. But I think it’s fair to say that most of us agree with you: none of us thinks that this single action viewed in exclusion to all other actions will result in hyperinflation, currency wars, and the end of the world economy. What we are concerned about is that this is yet another instance in a pattern of injudicious monetary choices that, taken together, have contributed to unacceptable inflation and which, in the future, could, in fact, result in currency “wars” and economic catastrophes. The consequences of imaginary money are, past a certain point, not imaginary.

    Because who among us thinks that this is the last time Bernanke and friends will attempt to “stimulate” the economy via inflationary policies?

  • Cincinnatus

    Fair enough, WebMonk, and your voice of reason is appreciated. But I think it’s fair to say that most of us agree with you: none of us thinks that this single action viewed in exclusion to all other actions will result in hyperinflation, currency wars, and the end of the world economy. What we are concerned about is that this is yet another instance in a pattern of injudicious monetary choices that, taken together, have contributed to unacceptable inflation and which, in the future, could, in fact, result in currency “wars” and economic catastrophes. The consequences of imaginary money are, past a certain point, not imaginary.

    Because who among us thinks that this is the last time Bernanke and friends will attempt to “stimulate” the economy via inflationary policies?

  • WebMonk

    “Because who among us thinks that this is the last time Bernanke and friends will attempt to “stimulate” the economy via inflationary policies?”

    Well, I guess we mostly agree. I’m not sure I would use “inflationary” or “injudicious” to describe this move. They’ve already used up a lot of their injudicious moves already. They’re down to using their indirect moves which have a lot less drastic effects.

    Dropping the Prime to almost zero – now THAT would be injudicious.

    Oh … wait. They already did that. Darn!

  • WebMonk

    “Because who among us thinks that this is the last time Bernanke and friends will attempt to “stimulate” the economy via inflationary policies?”

    Well, I guess we mostly agree. I’m not sure I would use “inflationary” or “injudicious” to describe this move. They’ve already used up a lot of their injudicious moves already. They’re down to using their indirect moves which have a lot less drastic effects.

    Dropping the Prime to almost zero – now THAT would be injudicious.

    Oh … wait. They already did that. Darn!

  • http://www.thirduse.com fws

    Hey webmonk and skpetersen and cincinatus. and sg…

    I am in brasil, and I get us dollars which I must convert to the brazilian currency of course , to spend here. the dollar was worth 2.3 brasilian reix in jan 2009. now it is worth about 1.6 that is a HUGE drop. It seems that buying the bonds, will a) RAISE interest rates. few bonds floating about will increase their value. amd b) lower the value of the dollar as a combination of international confidence and more dollars floating about. buying back bonds should inject more dollars into foreign countries right? most bond holders are foreign banks? so in theory they will need to eventually come and buy american stuff right?

  • http://www.thirduse.com fws

    Hey webmonk and skpetersen and cincinatus. and sg…

    I am in brasil, and I get us dollars which I must convert to the brazilian currency of course , to spend here. the dollar was worth 2.3 brasilian reix in jan 2009. now it is worth about 1.6 that is a HUGE drop. It seems that buying the bonds, will a) RAISE interest rates. few bonds floating about will increase their value. amd b) lower the value of the dollar as a combination of international confidence and more dollars floating about. buying back bonds should inject more dollars into foreign countries right? most bond holders are foreign banks? so in theory they will need to eventually come and buy american stuff right?

  • WebMonk

    fws, that’s part of what will happen, though the part about ” they will need to eventually come and buy american stuff” is a quite tenuous link – eventually those dollars need to get used, but there are lots of instances of that “eventually” taking a very long time to arrive.

    The interest rates here in the US will drop if anything from this action by the Fed. There will be the same amount of money chasing fewer bonds because the Fed has bought up a bunch of bonds. That means that the return (interest rate) on those bonds will be lower, in theory. That’s not the goal of the Fed, but it is a possible side-effect. Interest rates are already quite low.

    And, I just realized I said the wrong thing up in post 5. I wasn’t paying attention, I guess, and said interest rates would rise. The price of the bonds would rise (which is the same as saying interest rates would drop), not the interest rates, but the prices can’t rise much because they’re already pretty darned close to max (which is saying that interest rates are about as low as they can go).

  • WebMonk

    fws, that’s part of what will happen, though the part about ” they will need to eventually come and buy american stuff” is a quite tenuous link – eventually those dollars need to get used, but there are lots of instances of that “eventually” taking a very long time to arrive.

    The interest rates here in the US will drop if anything from this action by the Fed. There will be the same amount of money chasing fewer bonds because the Fed has bought up a bunch of bonds. That means that the return (interest rate) on those bonds will be lower, in theory. That’s not the goal of the Fed, but it is a possible side-effect. Interest rates are already quite low.

    And, I just realized I said the wrong thing up in post 5. I wasn’t paying attention, I guess, and said interest rates would rise. The price of the bonds would rise (which is the same as saying interest rates would drop), not the interest rates, but the prices can’t rise much because they’re already pretty darned close to max (which is saying that interest rates are about as low as they can go).

  • http://www.thirduse.com fws

    webmonk @ 40

    Ok dear brother . and what do you predict will happen to the strength of the dollar.

    That affects me ever so very much here.

    the brasilians ideally want 2 of their dollars for one us dollar. they used to think that would be optimal. they are NOT liking the idea of buying back those bonds.

  • http://www.thirduse.com fws

    webmonk @ 40

    Ok dear brother . and what do you predict will happen to the strength of the dollar.

    That affects me ever so very much here.

    the brasilians ideally want 2 of their dollars for one us dollar. they used to think that would be optimal. they are NOT liking the idea of buying back those bonds.

  • SKPeterson

    fws – the dollar will fall. It has decreased steadily over time as the above posts indicate; the saving grace for the dollar has been that it has not deteriorated as quickly as many other currencies. This is the crux of your problem – how much will the dollar decline relative to the real. The question, that I cannot answer, is the relationship between a deteriorating dollar on the Brazilian exchange and any attempts to arrest the dollar decline by making dollar-denominated assets/bonds more attractive.

    The problem is that you cannot escape the consequences of adding several trillion new dollars into the economy in a very short span of time. Price level inflation is directly the result of money supply inflation. What we are facing is a massive increase in supply with little increase in demand. When that happens, as standard economic theory shows, prices of goods fall; money is not immune to this phenomena.

    As to your situation, a large number of dollars (about $2.6 trillion) are held outside the United States. The danger of inflation becomes compounded when people in Brazil or Ecuador or China or wherever, decide that they don’t want to take dollars anymore and they begin to send them back the the U.S. in ever greater numbers. This could conceivably create hyper-inflationary conditions in the U.S. I doubt this would happen, but it could fuel a definite increase in U.S. inflation. The way to soak up that excess money floating around in the system is to raise interest rates. This would increase U.S. bond yields and lower bond prices which may make your dollar holdings attractive.

  • SKPeterson

    fws – the dollar will fall. It has decreased steadily over time as the above posts indicate; the saving grace for the dollar has been that it has not deteriorated as quickly as many other currencies. This is the crux of your problem – how much will the dollar decline relative to the real. The question, that I cannot answer, is the relationship between a deteriorating dollar on the Brazilian exchange and any attempts to arrest the dollar decline by making dollar-denominated assets/bonds more attractive.

    The problem is that you cannot escape the consequences of adding several trillion new dollars into the economy in a very short span of time. Price level inflation is directly the result of money supply inflation. What we are facing is a massive increase in supply with little increase in demand. When that happens, as standard economic theory shows, prices of goods fall; money is not immune to this phenomena.

    As to your situation, a large number of dollars (about $2.6 trillion) are held outside the United States. The danger of inflation becomes compounded when people in Brazil or Ecuador or China or wherever, decide that they don’t want to take dollars anymore and they begin to send them back the the U.S. in ever greater numbers. This could conceivably create hyper-inflationary conditions in the U.S. I doubt this would happen, but it could fuel a definite increase in U.S. inflation. The way to soak up that excess money floating around in the system is to raise interest rates. This would increase U.S. bond yields and lower bond prices which may make your dollar holdings attractive.

  • helen

    #20
    Moreover, inflation is already looming on the horizon in commodities and basics like food; the CPI value you cited was excluding food and energy. Beef prices are up 13%, milk up 10%, sugar up 9%, eggs up 7%, cereal up 5%. The deal is that food prices are excluded from the CPI…

    Also, other basic commodities like cotton are going up by as much as 10%. Beyond getting into GNMA’s like Porcell recommends, perhaps look into a commodities fund like that of Jim Rogers, or even getting into commodities futures and options directly if you’re brave enough.

    Thanks for those numbers, altho I think they are worse at the grocery store, where most of us have to deal with them. If I could afford to invest in “commodities” instead of this week’s bread and milk, perhaps I’d be happier with Bernanke. [Since I thought Greenspan was approaching senility, judging by the way he mishandled the country's money, I doubt it.]

    trotk November 5, 2010 at 2:04 pm #28
    The people who are being overlooked in all of this (and this is just one of the unintended side effects) are seniors who live off interest from investments. The lower the interest rates are, the smaller their income becomes.
    For their sakes, deflation would be a good thing.

    Not overlooked and not unintended: Bernanke himself said that the retirees and small savers would pay for this debacle. Why not? We aren’t going to march on Washington [those demonstrations take money and mobility] and we can’t buy our congressmen. So the people raised to work and save are now the butt of the joke!

    BTW: here’s a great Luther quote on “change” in government [it probably applies equally well in '10 & '08]
    “There is as great a difference between changing a government and improving it as the distance from heaven to earth. It is easy to change a government, but it is difficult to get one that is better, and the danger is that you will not.” (Whether Soldiers, Too, Can Be Saved, 1526, AE 46:111-112)

  • helen

    #20
    Moreover, inflation is already looming on the horizon in commodities and basics like food; the CPI value you cited was excluding food and energy. Beef prices are up 13%, milk up 10%, sugar up 9%, eggs up 7%, cereal up 5%. The deal is that food prices are excluded from the CPI…

    Also, other basic commodities like cotton are going up by as much as 10%. Beyond getting into GNMA’s like Porcell recommends, perhaps look into a commodities fund like that of Jim Rogers, or even getting into commodities futures and options directly if you’re brave enough.

    Thanks for those numbers, altho I think they are worse at the grocery store, where most of us have to deal with them. If I could afford to invest in “commodities” instead of this week’s bread and milk, perhaps I’d be happier with Bernanke. [Since I thought Greenspan was approaching senility, judging by the way he mishandled the country's money, I doubt it.]

    trotk November 5, 2010 at 2:04 pm #28
    The people who are being overlooked in all of this (and this is just one of the unintended side effects) are seniors who live off interest from investments. The lower the interest rates are, the smaller their income becomes.
    For their sakes, deflation would be a good thing.

    Not overlooked and not unintended: Bernanke himself said that the retirees and small savers would pay for this debacle. Why not? We aren’t going to march on Washington [those demonstrations take money and mobility] and we can’t buy our congressmen. So the people raised to work and save are now the butt of the joke!

    BTW: here’s a great Luther quote on “change” in government [it probably applies equally well in '10 & '08]
    “There is as great a difference between changing a government and improving it as the distance from heaven to earth. It is easy to change a government, but it is difficult to get one that is better, and the danger is that you will not.” (Whether Soldiers, Too, Can Be Saved, 1526, AE 46:111-112)

  • Porcell

    WebMonk, at 40: That’s [lowering interests rates] not the goal of the Fed, but it is a possible side-effect. Interest rates are already quite low.

    That is the goal. Bernanke and his colleagues are concerned about the same sort of deflation that occurred during the Depression. Hence, the Fed is buying $600 billion of bonds in order to lower the interest rates and keep bond prices high. The fed assumes that with interest rates low individuals and businesses will borrow and invest in assorted sectors of the economy.

    However, classic economics asserts that in the long run drastically increasing the money supply, as the Fed has done in recent years, including with the QE2 move, inevitably results in inflation, sometimes ruinously, as was the case of Germany in the early thirties.

    Again, to be fair, Greenspan and Bernanke have been forced politically to lower interest rates, partly due to the reluctance of business and political interests to weather recessions, and partly due to Keynesian economic theory that argues that liberal monetary policy along with high government spending is the best medicine to stimulate a depressed or recessed economy.

  • Porcell

    WebMonk, at 40: That’s [lowering interests rates] not the goal of the Fed, but it is a possible side-effect. Interest rates are already quite low.

    That is the goal. Bernanke and his colleagues are concerned about the same sort of deflation that occurred during the Depression. Hence, the Fed is buying $600 billion of bonds in order to lower the interest rates and keep bond prices high. The fed assumes that with interest rates low individuals and businesses will borrow and invest in assorted sectors of the economy.

    However, classic economics asserts that in the long run drastically increasing the money supply, as the Fed has done in recent years, including with the QE2 move, inevitably results in inflation, sometimes ruinously, as was the case of Germany in the early thirties.

    Again, to be fair, Greenspan and Bernanke have been forced politically to lower interest rates, partly due to the reluctance of business and political interests to weather recessions, and partly due to Keynesian economic theory that argues that liberal monetary policy along with high government spending is the best medicine to stimulate a depressed or recessed economy.

  • Porcell

    For an excellent discussion of this issue see Larry Kudlow’s NRO article Leave QE2 Dockside including:

    German finance minister Wolfgang Schaeuble said, “With all due respect, U.S. policy is clueless.” And former Fed chair Paul Volcker said the Fed’s new easing “is not the kind of action that’s likely to change the general picture that I have described of slow, labored recovery.” Volcker also said the Fed’s monetary easing could eventually lead to inflation. He called on the central bank to be cautious about taking further quantitative-easing steps.

  • Porcell

    For an excellent discussion of this issue see Larry Kudlow’s NRO article Leave QE2 Dockside including:

    German finance minister Wolfgang Schaeuble said, “With all due respect, U.S. policy is clueless.” And former Fed chair Paul Volcker said the Fed’s new easing “is not the kind of action that’s likely to change the general picture that I have described of slow, labored recovery.” Volcker also said the Fed’s monetary easing could eventually lead to inflation. He called on the central bank to be cautious about taking further quantitative-easing steps.

  • WebMonk

    Porcell, yes a goal is to decrease the interest rate on T bonds, but that’s not the same lower interest rates across the board (such as for bank CDs and mortgage loans, etc), which is what I suspect most people think of when they think of lowering interest rates.

    Lowering the rate on T bonds (mainly the long-range ones, but probably a tiny bit on the short-term T bonds too) won’t have much (if any) effect on the interest rates that anyone sees in the John Doe average life.

    “Injecting” money in this way has a much smaller impact in the amounts of money in circulation than most other “injection” actions.

    Like the article you linked said, “And all this hot money is going to go to countries in Asia that don’t want the new dollars.” That’s one of the reasons that the Fed can get away with pumping so much money without having much effect on inflation or general interest rates – a lot of it gets “soaked up” overseas. Counter to a lot of predictions, China is still growing rapidly and that means they are going to be receiving a lot of the cash being dumped in right now.

    I can’t say I’m quite as confident as Kudlow that the jobs numbers are going to be quite as solidly positive into the future as the latest numbers came out. For one, we are just now seeing the annual ramp-up in employment for the big Christmas sales season, and most of those jobs are temporary. However, I agree that this action is not needed at this time, and that it really isn’t going to have much of any impact on the economy right now.

    And yes, this sort of policy carried out regularly is going to build up some impressive inflationary pressures that when the recovery does really start getting rolling the counter-inflation pressures will start disappearing and we’re going to have some serious inflation tendencies to deal with. (not hyperinflation, but still serious)

    There are ways to manipulate things to stop inflation (and I am quite sure many of those techniques will be enacted), but those things have side-effects which aren’t desirable. It would be much better (IMO) from a strictly economic standpoint to leave things alone at this point, but like you said Porcell, there is a lot of politics playing in this.

  • WebMonk

    Porcell, yes a goal is to decrease the interest rate on T bonds, but that’s not the same lower interest rates across the board (such as for bank CDs and mortgage loans, etc), which is what I suspect most people think of when they think of lowering interest rates.

    Lowering the rate on T bonds (mainly the long-range ones, but probably a tiny bit on the short-term T bonds too) won’t have much (if any) effect on the interest rates that anyone sees in the John Doe average life.

    “Injecting” money in this way has a much smaller impact in the amounts of money in circulation than most other “injection” actions.

    Like the article you linked said, “And all this hot money is going to go to countries in Asia that don’t want the new dollars.” That’s one of the reasons that the Fed can get away with pumping so much money without having much effect on inflation or general interest rates – a lot of it gets “soaked up” overseas. Counter to a lot of predictions, China is still growing rapidly and that means they are going to be receiving a lot of the cash being dumped in right now.

    I can’t say I’m quite as confident as Kudlow that the jobs numbers are going to be quite as solidly positive into the future as the latest numbers came out. For one, we are just now seeing the annual ramp-up in employment for the big Christmas sales season, and most of those jobs are temporary. However, I agree that this action is not needed at this time, and that it really isn’t going to have much of any impact on the economy right now.

    And yes, this sort of policy carried out regularly is going to build up some impressive inflationary pressures that when the recovery does really start getting rolling the counter-inflation pressures will start disappearing and we’re going to have some serious inflation tendencies to deal with. (not hyperinflation, but still serious)

    There are ways to manipulate things to stop inflation (and I am quite sure many of those techniques will be enacted), but those things have side-effects which aren’t desirable. It would be much better (IMO) from a strictly economic standpoint to leave things alone at this point, but like you said Porcell, there is a lot of politics playing in this.

  • WebMonk

    And, sort of for Frank, this injection isn’t necessarily a death knell for the dollar-real ratio. I’m sure it will lower the dollar, it can’t help but do that some, but it won’t be a massive effect either.

    Just for example, today the dollar is strengthening. The dollar will go up and down, and today’s strengthening dollar isn’t proof that the Fed’s action won’t have any effect, but it is an indicator that it’s not the beginning of a horrendous slide downward to oblivion for the dollar’s value.

  • WebMonk

    And, sort of for Frank, this injection isn’t necessarily a death knell for the dollar-real ratio. I’m sure it will lower the dollar, it can’t help but do that some, but it won’t be a massive effect either.

    Just for example, today the dollar is strengthening. The dollar will go up and down, and today’s strengthening dollar isn’t proof that the Fed’s action won’t have any effect, but it is an indicator that it’s not the beginning of a horrendous slide downward to oblivion for the dollar’s value.


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