From the FED: Monetary Policy in a Zero-Interest-Rate Economy

reply to post by redhatty


the this document link take you to a article discussing the 2003 financial condition of the U.S. The situation we are currently in is fundamentally different. In 2003 the U.S. government had not guaranteed over 1 trillion dollars to businesses.

Yes it's from 2003, but WHO would have envisioned in 2003 that we would be staring down the neck of ZIRP today? Hmmmm.... Maybe the FED?

Bernanke is still working off his dissertation, following it step by step the fight deflation in the US, what makes you think for one minute that the ideas presented in this 2003 paper from the FED would not be implemented?

reply to post by Astyanax


Forget my textbook! I'll just come to this forum to study for my mid terms. Great post Astyanax.

[edit on 9-12-2008 by cognoscente]

Starred and flagged, great thread Redhatty!

Any of you guys ever think there will be a time when the elite will be held accountable, or will they just enact situation x as soon as it gets that close?

reply to post by cognoscente


Thanks for the link. It was an interesting read. I've always liked the idea of competing currencies, produced in the private sector and backed by commodities. But, the thought of money going completely digital is scary to me.

Though I get the idea behind it, I don't see Americans buying into the whole cash timestamp concept. I'm fairly certain that would awaken the masses because the devaluation would suddenly be tangible, as people would now have to dish out money every week to keep their cash valid. (So, no, it wouldn't even be safe under the mattress.) But would people ignore the Fed's demands and continue to exchange unstamped money in protest? Better yet, would bartering soon become more appealing to the people?

Okay, this is scary - I post this thread yesterday, then today...

Treasury Bills Trade at Negative Rates

So if those who purchase T-bills (banks mostly) are losing capital in the transaction, who do you think is going to end up making up for the loss?

Wall Street Journal

DECEMBER 10, 2008, 12:00 A.M. ET

Fed Weighs Debt Sales of Its Own
Move Presents Challenges: 'Very Close Cousins to Existing Treasury Bills'



By JON HILSENRATH and DAMIAN PALETTA

The Federal Reserve is considering issuing its own debt for the first time, a move that would give the central bank additional flexibility as it tries to stabilize rocky financial markets.

Government debt issuance is largely the province of the Treasury Department, and the Fed already can print as much money as it wants. But as the credit crisis drags on and the economy suffers from recession, Fed officials are looking broadly for new financial tools.


The Federal Reserve drained $25 billion in temporary reserves from the banking system when it arranged overnight reverse repurchase agreements.

Fed officials have approached Congress about the concept, which could include issuing bills or some other form of debt, according to people familiar with the matter.

It isn't known whether these preliminary discussions will result in a formal proposal or Fed action. One hurdle: The Federal Reserve Act doesn't explicitly permit the Fed to issue notes beyond currency.

Just exploring the idea underscores many challenges the ongoing problems are creating for the Fed, as well as the lengths to which the central bank is going to come up with new ideas.

At the core of the deliberations is the Fed's balance sheet, which has grown from less than $900 billion to more than $2 trillion since August as it backstops new markets like commercial paper, money-market funds, mortgage-backed securities and ailing companies such as American International Group Inc.

The ballooning balance sheet is presenting complications for the Fed. In the early stages of the crisis, officials funded their programs by drawing down on holdings of Treasury bonds, using the proceeds to finance new programs. Officials don't want that stockpile to get too low. It now is about $476 billion, with some of that amount already tied up in other programs.

The Fed also has turned to the Treasury Department for cash. Treasury has issued debt, leaving the proceeds on deposit with the Fed for the central bank to use as it chose. But the Treasury said in November it was scaling back that effort. The Treasury is undertaking its own massive borrowing program and faces legal limits on how much it can borrow.

More recently, the Fed has funded programs by flooding the financial system with money it created itself -- known in central-banking circles as bank reserves -- and has used the money to make loans and purchase assets.

Some economists worry about the consequences of this approach. Fed officials could find it challenging to remove the cash from the system once markets stabilize and the economy improves. It's not a problem now, but if they're too slow to act later it can cause inflation.

Moreover, the flood of additional cash makes it harder for Fed officials to maintain interest rates at their desired level. The fed-funds rate, an overnight borrowing rate between banks, has fallen consistently below the Fed's 1% target. It is expected to reduce that target next week.

Louis Crandall, an economist with Wrightson ICAP LLC, a Wall Street money-market broker, says the Fed's interventions also have the potential to clog up the balance sheets of banks, its main intermediaries.

"Finding alternative funding vehicles that bypass the banking system would be a more effective way to support the U.S. credit system," he says.

Some private economists worry that Fed-issued bonds could create new problems. Marvin Goodfriend, an economist at Carnegie Mellon University's Tepper School of Business and a former senior staffer at the Federal Reserve Bank of Richmond, said that issuing debt could put the Fed at odds with the Treasury at a time when it is already issuing mountains of debt itself.

"It creates problems in coordinating the issuance of government debt," Mr. Goodfriend said. "These would be very close cousins to existing Treasury bills. They would be competing in the same market to federal debt."

With Treasury-bill rates now near zero, it seems unlikely that Fed debt would push Treasury rates much higher, but it could some day become an issue.

There are also questions about the Fed's authority.

"I had always worked under the assumption that the Federal Reserve couldn't issue debt," said Vincent Reinhart, a former senior Fed staffer who is now an economist at the American Enterprise Institute. He says it is an action better suited to the Treasury Department, which has clear congressional authority to borrow on behalf of the government.

Write to Jon Hilsenrath at [email protected] and Damian Paletta at [email protected]

Oh hell.....

[edit on 12/10/08 by redhatty]

Originally posted by th3dudeabides
After reading the article, I have some questions that hopefully somebody in this thread can answer.

I'm no expert, but I'll try.

I'm under first impresssions that this will be a defacto tax against individuals who save rather than spend.

That is not the primary aim, which is rather the converse of that: to maintain the afordability of credit and encourage borrowing. But yes, effectively it will be a tax against savings and that is intended too, because lots of consumer spending is needed to keep the economy going right now.

However, it is a tax only on one kind of savings, namely bank deposits. Other types of investments, such as equities and corporate debt, continue to pay positive dividends. In fact, right now is a very good time to go into the stock market: share prices and price:earnings ratios are both very low. The former may fall still further, and of course many companies will not survive the next few years, but if you choose carefully, this is a very good time to start assembling a nice little portfolio.

Consider this, one of the more pervasive gripes about Paulson's bailout is that the banks are hoarding the bailout cash and not lending to consumers. If this measure is only applied to banks Libor rate, their overnight borrowing rate, as a lending stimulation measure, the money supply will radically increase and rapidly...

...which is, as noted above, precisely the intention. However, I think the measure will be even more successful if applied broadly.

Massive increases in the money supply reverse this deflationary spiral and yadayadayada we all know the rest.

Precisely.

reply to post by redhatty


The amazing thing is that this document is from 2003.

5 years in the making...

reply to post by redhatty


It seems to me - personally that investment advisors are having their clients go into T-bills - that will produce no income for their clients, or people are doing it on their own.

Yes, investors are looking for "safe havens" for their money and taking it out of the stock market due to the massive fluctuations of it going up and down.

My question is:

Why are people putting their money in U.S. T-bills when right now - they first produce no income from that money? - so it is just like a storage spot.

second - they are putting are giving to the government that is billions of dollars in debt to many other countries in the world.

The U.S. govt. asked the middle east for money
see link:
www.cnbc.com...

On Thursday, Kuwait’s daily Al-Seyassah reported that the United States asked four oil-rich Gulf states for nearly $300 billion dollars to help it curb the global financial meltdown.

Washington has asked Saudi Arabia for $120 billion, the United Arab Emirates for $70 billion, Qatar for $60 billion and was seeking $40 billion from Kuwait, the paper said.

Now, knowing that we are going around and asking for money.

Let me ask this question:

If there is a business that said:

Hey, I am in debt so badly, and I do not produce the product, nor will I ever produce the product to pay back that debt. Besides that I am going to spend massive amounts of money that will increase that debt - on things that my customers are against.
Also, I am also going around the world asking for money - that will not be paid back - but I now what you to put your money in my bank - and when you do that - I am going to use your money - but give you nothing back in return.

Question: If someone presented you the above situation, would you jump at the chance to put your money there? Or would you look at other options?

Considering - the fact we are printing money as never before, other countries - have expressed they are trying to get rid of their dollars,
see links:
www.reuters.com...

BEIJING (Reuters) - The United States has plundered global wealth by exploiting the dollar's dominance, and the world urgently needs other currencies to take its place, a leading Chinese state newspaper said on Friday.

The front-page commentary in the overseas edition of the People's Daily said that Asian and European countries should banish the U.S. dollar from their direct trade relations for a start, relying only on their own currencies.

www.bi-me.com...

INTERNATIONAL. Legendary global investor Jim Rogers believes the recent dollar gains are temporary and are not based on fundamentals.

"The fact that the dollar is gaining rapidly is only temporary," Rogers recently told a group of private bank clients.

"Within a year you'll have to get rid of the dollar," he said.

Rogers has spent a career being one step ahead of mainstream investment thinking. Amongst his many accomplishments, Rogers was co-founder with George Soros of Quantum Fund. During his ten years with the fund, the portfolio gained more than 4,000%, while the S&P rose less than 50%.

All hedge funds were short on the dollar, Rogers said, but because there has been a rapid increase in the dollar's value against other currencies, fund managers want to buy them now.

"This is temporary, Rogers says. "Fundamentally it is a drama."

Rogers also said US government bonds are extremely overvalued. "They are "the world's last bubble."

www.listafterlist.com...

7 Countries Might Abandon the US Dollar
Saudi Arabia: The Telegraph reports that for the first time, Saudi Arabia has refused to cut interest rates along with the US Federal Reserve. This is seen as a signal that a break from the dollar currency peg is imminent. The kingdom is taking “appropriate measures” to protect itself from letting the dollar cause problems for their own economy. They’re concerned about the threat of inflation and don’t want to deal with “recessionary conditions” in the US. Hans Redeker of BNP Paribas believes this creates a “very dangerous situation for the dollar,” as Saudi Arabia alone has management of $800 billion. Experts fear that a break from the dollar in Saudi Arabia could set off a “stampede” from the dollar in the Middle East, a region that manages $3,500 billion.
2. South Korea: In 2005, Korea announced its intention to shift its investments to currencies of countries other than the US. Although they’re simply making plans to diversify for the future, that doesn’t mean a large dollar drop isn’t in the works. There are whispers that the Bank of Korea is planning on selling $1 billion US bonds in the near future, after a $100 million sale this past August.
3. China: After already dropping the dollar peg in 2005, China has more trouble up its sleeve. Currently, China is threatening a “nuclear option” of huge dollar liquidation in response to possible trade sanctions intended to force a yuan revaluation. Although China “doesn’t want any undesirable phenomenon in the global financial order,” their large sum of US dollars does serve as a “bargaining chip.” As we’ve noted in the past, China has the power to take the wind out of the dollar.
4. Venezuela: Venezuela holds little loyalty to the dollar. In fact, they’ve shown overt disapproval, choosing to establish barter deals for oil. These barter deals, established under Hugo Chavez, allow Venezuela to trade oil with 12 Latin American countries and Cuba without using the dollar, shorting the US its usual subsidy. Chavez is not shy about this decision, and has publicly encouraged others to adopt similar arrangements. In 2000, Chavez recommended to OPEC that they “take advantage of high-tech electronic barter and bi-lateral exchanges of its oil with its developing country customers,” or in other words, stop using the dollar, or even the euro, for oil transactions. In September, Chavez instructed Venezuela’s state oil company Petroleos de Venezuela SA to change its dollar investments to euros and other currencies in order to mitigate risk.
5. Sudan: Sudan is, once again, planning to convert its dollar holdings to the euro and other currencies. Additionally, they’ve recommended to commercial banks, government departments, and private businesses to do the same. In 1997, the Central Bank of Sudan made a similar recommendation in reaction to US sactions from former President Clinton, but the implementation failed. This time around, 31 Sudanese companies have become subject to sanctions, preventing them from doing trade or financial transactions with the US. Officially, the sanctions are reported to have little effect, but there are indications that the economy is suffering due to these restrictions. A decision to move Sudan away from the dollar is intended to allow the country to work around these sanctions as well as any implemented in the future. However, a Khartoum committee recently concluded that proposals for a reduced dependence on the dollar are “not feasible.” Regardless, it is clear that Sudan’s intent is to attempt a
6. Iran: Iran is perhaps the most likely candidate for an imminent abandonment of the dollar. Recently, Iran requested that its shipments to Japan be traded for yen instead of dollars. Further, Iran has plans in the works to create an open commodity exchange called the Iran Oil Bourse. This exchange would make it possible to trade oil and gas in non-dollar currencies, the euro in particular. Athough the oil bourse has missed at least three of its announced opening dates, it serves to make clear Iran’s intentions for the dollar. As of October 2007, Iran receives non-dollar currencies for 85% of its oil exports, and has plans to move the remaining 15% to currencies like the United Arab Emirates dirham.
7. Russia: Iran is not alone in its desire to establish an alternative to trading oil and other commodities in dollars. In 2006, Russian President Vladmir Putin expressed interest in establishing a Russian stock exchange which would allow “oil, gas, and other goods to be paid for in Roubles.” Russia’s intentions are no secret–in the past, they’ve made it clear that they’re wary of holding too many dollar reserves. In 2004, Russian central bank First Deputy Chairmain Alexei Ulyukayev remarked, “Most of our reserves are in dollars, and that’s a cause for concern.” He went on to explain that, after considering the dollar’s rate against the euro, Russia is “discussing the possibility of changing the reserve structure.” Then in 2005, Russia put an end to its dollar peg, opting instead to move towards a euro alignment. They’ve discussed pricing oil in euros, a move that could provide a large shift away from the dollar and towards the euro, as Russia is the world’s second-largest oil exporter.

Okay,

Now, armed with the information, that the U.S. is in heavy debt that does not look like it can ever repay, nor even make payments on - then the U.S. is printing money like never before, and we are about to have a complete flood of U.S. dollars in the marketplace. At the same time, other "large" countries are talking about dropping the dollar and infact are taking their dollars and putting them into metals and commodities.

Why in the world would any investment advisor, or any investor - put their money in that sinking basket, instead of in metals and commodities?

Personally - I would not put my money in a situation that I would get no return and who knows in the future - if I will even get my inital money invested back?

Sorry, but people need to look at more than what the MSM or anyone else tells them, including anything I have said in this thread.

Look around do some research than decide where is the best place to protect "myself"? You need to dig around before you follow someone else's advice and possible put your hard earned money in a sinking ship.


















news.yahoo.com
(visit the link for the full news article)

I was trying to ascertain whether the article perscribed this just to banks or the entire community at large. That was unclear in the article and is still unclear.

I understand the need for consumer spending, but historically and innappropriately I believe this has been accomplished through debt financing, credit cards, home loans etc.

This new proposal is a marked departure from this philosophy. Not only are they possibly going to penalize the banks who won't lend, but leech off the savers who won't spend. Is it just me, because this seems semi-contradictory.

People who borrow money from banks don't hoard it, they spend it, and the savers as a general category don't keep high savings account balances, they are diversified. While the spenders who can't borrow any more don't have any savings to begin with.

Goddamn I hate monetary economies, so shortsighted and cancerous.

reply to post by questioningall

7 Countries Might Abandon the US Dollar

Yes, that external reference is correct. Back in February of this year, I posted the following thread, which no one responded to. Here is my post:
www.abovetopsecret.com...

I will save you the trouble of going to it, so here is what Alan Greenspan said:

Alan Greenspan, the former chairman of the US central bank, or Fed, has said that inflation rates in Gulf states, which are reaching near record levels, would fall "significantly" if oil producers dropped their US dollar pegs.

I then said:

In my opinion, Greenspan is partly responsible for causing the dollar crisis today. Now he pulls this move. How can he not be considered a traitor, or at best a manipulator to benefit him and his friends in the CFR.

I believed that in February, and I believe that events have now proven that indeed, Alan Greenspan IS part of the NWO/CFR group that manipulated this entire financial crisis.

If it walks like a duck, swims like a duck, and smels like a duck.....It's a duck.

Here's a new one for ya; since the banks loan out 9x deposits, with interest and with the 'created' money they 'earn' 1200%, and pay depositers 2 or 3%. Why not have the banks PAY borrowers to take their 'fiat' money, since their borrowing allows them to get 1200%? Lower the prime to, say, -2% or lower. Makes sense to me. Whacha think?

reply to post by th3dudeabides

I understand the need for consumer spending, but historically and innappropriately I believe this has been accomplished through debt financing, credit cards, home loans etc.

Consumer spending is not supposed to be financed by credit. Only a fool or a deadbeat borrows to finance his consumption. Yes, the world is full of fools and deadbeats at the moment.

Until the present credit crisis, credit was available to anyone who wanted it. It took many forms - credit cards and home loans among them. But to suggest that they only existed in order to tempt consumers into debt so as to maintain economic growth is, I think, a little far-fetched.

What is true is that central bankers adjust interest rates so as to make credit more or less affordable. This is done mainly to control inflation and/or economic overheating and its main target is business, not consumers. Easily accessible consumer credit certainly plays a role too, but deliberately getting consumers over their heads in debt is going to result in economic disaster sooner or later - as we have seen.

reply to post by Astyanax


Despite the credit crisis, despite the lack of trust with and about consumers, the credit economy ultimately will not be abolished. Will there be changes? Certainly. Is it much harder to get a line of credit or a loan? Absolutely, but I contend a temporary blip. Will a vast number of consumers see their credit caps shrink and be forced to buy used cars or cheaper appliances or (God forbid) flat screen t.v.'s sold over Craigslist? Certainly, but again only for a time.

Remember, allowing someone to borrow money is a very lucrative business. It's why credit card companies do what they do. Even with defaults, the money the companies make on people who carry a balance is staggering. Visa, MC, AMEX -- these guys won't ever go away. They'll tighen. They'll shrink. They'll remold somewhat in this crisis. But they won't go away.

As for all this talk about other countries turning away from the American consumer and the dollar. Yes, it's a risk, but I will argue a very slight one. Remember, they grew on credit just as much as we did, whether they're a manufacturing economy or not. IMF loans, World Bank slavery. Every one has dipped into that pool. To unleverage that completely would be catastrophic, damning everyone into economic depression not seen since perhaps the Black Plague swept through Europe.

We're way to interconnected for the credit system to be abandoned.

But there is a change taking place, and that change will be painful, it may even (which I have believed since day-one) drop us into a Depression. But there will be recovery. And that recovery will start when banks make loans again.