Does this mean the foreigners have lost faith in the US government and stop buying the US debt? The Fed buying US debt is like the left hand buying from the right hand.
No, I believe it has almost nothing to do with foreign investment. (Incidentally, foreigners have awesome faith in the US government, as evidenced by the fact that interest rates are as low as they have ever been, and -- frighteningly -- perhaps as low as they can be.)
No, the government buying its own debt is a very famous accounting trick designed to create more money in the economy. This act is the basis of the fractional reserve system, which in turn is the basis of all modern money.
The Federal Reserve bank buys bonds from bondholders (either newly issued bonds from the government or bonds from my safe deposit box). And in return it puts money in a bank account. Where does the money come from? It is just numbers in a database. The Fed just edits the database. Only the central government, which controls the currency, has the power to create money out of thin air in this way, but that power is very important.
(In other times, when the economy is really hot and inflation is soaring and we need to cool down, the Fed does the opposite: It raises interest rates, which causes people to want to buy bonds to get more interest, which causes people to spend their cash for those bonds. And, as each bond is bought, the Fed just erases the cash from bank accounts. The money vanishes! Remember, money is just a score in a game, the game of "keeping the economy working so that people can eat". It's not made of metal or anything. That was the old way, the way that didn't work.)
You can't get the same effect by selling bonds to England, because then England will pay for the bonds in dollars, and England can't create dollars. They have to buy dollars with pounds. So the total supply of dollars in the world would remain constant, which is not the point of this exercise.
(Now if I really understood econ we could go on to talk about why this little exercise might not work this time, about the "liquidity trap" and the "zero lower bound". But my time is up.)
(Incidentally, foreigners have awesome faith in the US government,...
This could also reflect a lack of faith in other governments rather than faith in the US government. If assorted European debt became 10x more risky but US debt only became 5x more risky, that would cause a flight into US debt.
Exactly correct. The U.S. can have economic problems, but as long we are still at the top, we remain at the top.
One of the more interesting reactions to the FOMC’s gloomy appraisal of the economic state of affairs is the surge of strength into the dollar and the corresponding tumble in the euro. The U.S. dollar index — which is heavily weighted to the euro — is up 1.8%. The euro is down against the buck to the tune of 2.1%, a giant move in the forex markets.
Don't get me wrong. I'm the last person to suggest we're unsinkable. I'm only pointing out that our troubles become the troubles of everyone else, just as our success has influenced global economic success.
True, but when you find a Martian index fund that pays better than anything you can find on Earth, be sure to give me a call.
It would actually be a good sign at this point if investors lost interest in buying government debt (from the US or from other governments). Because then they would find something else to invest in... like maybe something that promised some gain, something that would put people to work and make use of idle capacity. The fact that everyone is anxious to hoard cash or cash equivalents, even at miserable interest rates, is an ominous sign: When deflation comes, hoarding cash for as long as you can is a paying proposition, and the economy spirals to a halt as everyone tries to wait through as much deflation as possible before buying anything.
This is a great explanation. Correct me if I'm wrong, but there is an important detail to note, which is the money supply is not being expanded significantly more in this action by the Fed any more than the normal course unless there is newly issued bonds/govt. debt. The problem is the govt. is reluctant to take on more debt, even though stimulus would be welcomed, because deficit worries persist. This Fed move will really seek to push down interest rates a bit more, by creating more demand for existing bonds. Unfortunately, these record low interest rates are not speeding economic recovery, and the money supply is not expanding (inflationary) as we would like, because banks are still hesitant to lend.
> Incidentally, foreigners have awesome faith in the US government, as evidenced by the fact that interest rates are as low as they have ever been, and -- frighteningly -- perhaps as low as they can be.
Interest rates reflect relative opportunities, not absolute value.
The fact that the US is seen as a better investment than, say, China, does not tell you that the US is a good investment.
> "zero lower bound".
0 is not a lower bound for interest rates. You can loan someone $100 today in return for $90 in ten years.
If you're trying to get folks to do something with the money that they borrowed, there are other levers. Or, you could just loan it to different people.
0 is a lower bound for interest rates because almost nobody would make that loan. The "rational actor" theory has some flaws, but it's a safe economic assumption that actors are rational enough to not throw away money like that.
Though, in fact, the US government can loan people $100 in exchange for $90 in ten years.
Or, equivalently, they can print $10 bills and hand them out to people. Simpler that way.
In practice, of course, it is preferable to give people jobs to do in exchange for their $10 bills, like fixing our broken roads or sewers, or building nice public infrastructure. That way we keep our workers and factories in practice, and we don't waste productive capacity, and we distribute the money according to fair rules, and we get some nicely paved streets.
But when you have to stimulate the economy and you're desperate you could literally "fire up the helicopter" (as the metaphor goes) and start dropping dollar bills from the sky.
Unfortunately, the Federal Reserve may not be able to do this. Deficit spending takes an act of Congress, and for various terrifying structural and political reasons the US Congress has punted on the problem of managing the economy.
Yes, buying its own debt is basically license to print money. Which will lead to inflation because China isn't going to buy US bonds/debt anymore, which leads to more printing money ... and so on and so forth.
Given that we're already experiencing zero or negative growth, inflation seems like a really good idea, especially since the Fed can stop anytime it wants and begin raising rates.
...Except it couldn't raise rates. Not with trillions of debt needing to be paid back by both government and corporations (hint: there's no way). So the fed will just print and print and print...until the dollar is worthless.
Right, which is what was supposedly happening with all the TARP and Stimulus and Cash4clunkers and houmebuyer tax credits. Guess what? Still, after 3 years of recession and 2 years of Great Recession, we still haven't gotten that worthless dollar and inflation. In fact, we're talking deflation. AND, wages are steady to up, not down as is to be expected.
"we still haven't gotten that worthless dollar and inflation"
Oh yeah? Dollar is at 85 vs the yen, from 115 three years ago. Food prices doubled (food portions also got smaller), healthcare costs doubled, gas prices doubled, and so on. Are you using the old trusty government CPI for your inflation stats?
Your data seems...wrong. Or at least not consistent with my observations. Currency fluctuates significantly and one currency comparison tells us nothing. I've seen no evidence that food portions are smaller. Food prices don't seem to have doubled. Gas prices have definitely not doubled. I've seen no indication that health care costs have doubled.
If you want to claim that the CPI numbers are full of lies (because of a conspiracy?) then you need to bring serious evidence.
> I've seen no evidence that food portions are smaller.
You need to pay more attention then, it's been nick-named the 'Grocery Shrink Ray' and practically all companies are doing it now. The strategy is basically either change the shape of the container (smaller) and keep the same price or to raise the price. Here is a good link to follow;
Please read the post. The poster was talking about the bailout. The average gas price after the bailout in LA is around 1.69. The average gas price right now in LA is 3.13
"The decision to buy government debt, using proceeds from Fed investments in mortgage bonds..."
If the money is coming from mortgage investments, I don't believe this action is actually increasing the money supply. Knowing the complexities of the Fed, though, I could certainly be wrong.
the massive housing bubble and it inflationary effects HAD to collapse. those who waited out the insanity deserve lower prices. those who were foolish do not deserve to have the rest of us prop up their property values, although our government is foolishly backing every bad bet out there.
I'd like to say thank you, stretchwithme, for all of us who saved enough to buy a house, responsibly, in what just happened to be the middle of last decade and now have cause to sell (moving jobs because the economy stinks). We so deserve to seriously be screwed over because of our timing. Thank you US government. Thank you stretchwithme, your sentiments help the situation tremendously.
Surprisingly, there were actually many people who bought a house in 2003-2005 because they had a down payment at that time and they had jobs and they bought what they could afford.
If you saved enough to buy a house then live in your house.
If you're moving around then don't buy houses. They are places to live. Your problem is that you want them to be investment vehicles to increase your wealth. Well, if they are investment vehicles then you also have to accept that you will make a bad bet and will lose in value.
You want your cake and eat it too. It is like stock investors crying that Intel shares lost value. Well, then they shouldn't have invested in Intel, they should have put their money in a savings account.
You seem to think because you had a down payment, had a job, bought a house you could afford, you "deserve" to be screwed over less by a falling housing market, because you were "responsible".
Just the opposite! The migrant field worker who got a 0% down interest only loan on a 500K house is far less "deserving" of the screw than you, because he has no money to be screwed out of.
sorry, I didn't mean to be insensitive. you don't deserve this mess, but we own the risks we take on. There's simply no other way to run a society.
When the dot com bubble burst and I lost a lot of paper profits, that was unfortunate and unforeseen and I was responsible for the choices that got me there. It would have been nice if someone sent me a check for my losses, but how could the government do such a thing without making someone more responsible pay for my mistakes?
And we don't deserve to have our government doing this to us, again and again, but we own that until we make it clear that they should stop.
Its not China's responsibility or Saudi Arabia's. It ours.
Should we feel sorry for you because you don't have the patience to wait? Because you weren't smart enough to realize that maybe housing prices doubling in 1-2 years don't equate? Did someone make you buy a house at gunpoint?
Deflation also pushes people with large home mortgages closer to the brink, as their debt increases in value, and their banks feel pressure to lower their risk exposure by refusing to refinance or renew loans and pushing loan holders to pay down their debts. It has the potential of making the housing crisis much worse for everyone. That's not even getting into what it would do to the commercial real estate market, which is currently in a tailspin.
> Deflation also pushes people with large home mortgages closer to the brink
...
> thas the potential of making the housing crisis much worse for everyone.
The housing "crisis" happened because people were getting large home mortgages. There shouldn't be people with large home mortgages. I interpret "large" here as bigger than they can chew. If they can't afford their home, they can't afford their home -- time to scale down to a small condo or start renting. Why are we proping up people with large home mortgages and rewarding their stupid buying decisions?
Because they were unfortunately quite common, and not propping them up would put a large portion of the population out on the street, and cause a further surplus of homes on the market, driving values down further in a vicious cycle. The point is they could afford their home when banks lent them money at reasonable rates, when the bank assumed they could always resell the home and get their money back, but when the current appraised value of the homes dropped, banks were left holding much riskier debt, and charging much higher rates to existing customers with variable-rate loans, as well as those due for renewal. This has trapped a huge number of homeowners. The situation is even more troublesome in commercial real estate, as loans are for relatively short periods, after which they must be renegotiated based on current value, against a backdrop of commercial leases for tenants rapidly dropping in many cities. It's the scale of the crisis on so many fronts which has such potential for devastation of the entire economy.
Howso? You mean the owners of the fed/risk? I'd honestly say any additional risk from this purchase is counterbalanced in the reduced risk in their other holdings.
Deflation is dangerous only for the entities that own large amounts of real estate/stocks. For normal people, deflation allows their buying power to increase. The government printing is akin to stealing from your labor right then and there.
Deflation allows personal buying power to increase holding income constant. Deflation is defined as a decrease in prices. You know what else counts as a price? The price of labor. I.e., wages. Average wages decreases under deflation, just like any other price. Deflation is not a magical money machine that makes us all richer.
But the real average wage adjusted for inflation has decreased for a long time. Deflation has in fact happened in labor cost. Now it's the time to bring the rest in line. It's unsustainable to have ever increasing asset price but lower labor cost. No one can afford to buy them at the end.
But the real average wage adjusted for inflation has decreased for a long time.
Is this really true? If you blindly apply inflation calculators to wage statistics, you get this result.
But on the other hand, people earning average wages live a much better life (in terms of goods/services consumed) than people in the past. Even the present day poor live what would have been called a "middle class" lifestyle in the 70's.
Something doesn't add up. Can anyone shed light on this?
1.) You're (like most people on this board) are confusing technology gains with monetary phenomenons.
2.) We went from a mainly single-income family in the 70s to dual-income family today. Notice how most household today goes to hell if even one parent is laid off.
Inflation is a rise in price levels relative to currency. I.e., $1 today should be able to buy $1 / inflation factor in the past. However, people buy more today with wages x inflation factor than the previously bought with supposedly a higher level of wages. That shouldn't happen.
No matter how you cut it, that's a problem with the numbers.
Regarding point 2), we also work considerably less than we did in the past. Hours worked per capita have not gone up significantly.
Your premise seems to be that deflation will affect labor cost less than other prices, thus bringing them into "line".
It's pretty obvious that average income has decreased at a greater clip that CPI (see all those people have their income set to 0?) so I don't see how this is a valid premise.
1.) The US wage stagnation/decline for the last 10-15 years has been caused by globalization of labor/emergence of China/India. It is not a recent phenomenon.
2.) If you think government printing money will increase/steady your wage, look no further then the last bailout/printing. The banks/shareholders got all the money. You got lost wages and lost jobs.
On a side note, man, there's alot of sheeples on this board. Do you all like get up early in the morning to go to work and get robbed?
You're getting downmodded because you're expressing views on economics that are so far off that they "aren't even wrong", and doing them in a way that implies you're smarter than everyone else.
I could be crazy :) I am sitting in a coffeeshop relaxing and spending money from my income-generating business, while I watch worker drones go to work with scowls on their face, awaiting to be blamed for failing profits at their company.
Oh and if you think inflation is near 0%, you're not as smart as I thought you were ;)
Please, then tell me why my arguments are wrong. Don't be offended just because you're one of those sheeples that go to work every day that have to withstand long commute and increasing workloads, so that you can be effectively taxed at 70% after inflation.
To start with, noone in the US is taxed at 70%. That's the "wrong" part.
Second, inflation doesn't even come into play with your tax bill, except maybe in a very tiny way in between withholding and tax day. And that inflation figure is currently about zero. So "taxed at X% after inflation" is meaningless. That's the "Not even wrong" part.
True, it allows people to buy more tomorrow with the money they have today. So what happens? They don't spend the money today waiting for tomorrow. But then tomorrow they realise that if they wait a little longer they'd spend even less.
The end result is that nobody spends for anything that is not absolutely necessary. Hence most companies have an excess of supply: they fire people, and discount they current production.
Now that more people are out of a job and therefore can't spend much, and the discounts have driven inflation even deeper, even less people spend their money.
It's a vicious cycle. It's what's happened to Japan for the last decade, and it's not a pretty place to be in.
Yes, and we are going to have economic correction regardless of whether the government print or not. Printing just makes the correction even greater and the suffering more pronounced.
The US government is printing/robbing you of your savings. Don't believe it for a second it will trickle down to you; the last batch of printing/bailout went to banks and shareholders.
On a side note, man, there's alot of sheeples on this board. Do you all like get up early in the morning to go to work and get robbed?
