Fed, worried about recovery, will buy US debt
finance.yahoo.com
finance.yahoo.com
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.)
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.
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.
http://blogs.wsj.com/marketbeat/2010/08/11/oh-man-not-europe...
Said the captain of the titanic.
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.
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.
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.
see: http://krugman.blogs.nytimes.com/2010/08/11/why-we-need-an-i...
By the way, this is not just my opinion. Conservative economist Tyler Cowen (who teaches at GMU) also thinks that a little inflation would be helpful: http://www.nytimes.com/2009/08/02/business/economy/02view.ht...
If you want to claim that the CPI numbers are full of lies (because of a conspiracy?) then you need to bring serious evidence.
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;
http://consumerist.com/tag/grocery-shrink-ray/
Oh, and my favorite one yet, "Now with 25% more!" while not actually offering any more.
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?
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.
[edit: just realized I agree with jbooth on something. I don't know if that's ever happened before.]
Protip: When everyone else is crazy, re-evaluate the possibility that you're the crazy one :)
Oh and if you think inflation is near 0%, you're not as smart as I thought you were ;)
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?
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.
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.
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.
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.
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.
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.
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.
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.
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?
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.
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?