An Exit From Record Monetary Stimulus
Readers suggested a topic on what creates bubbles. “The government should not be in the business of buying or guaranteeing private debt. Yes/No? I’ve concluded this system is absolutely ripe for abuse, as we’ve seen in the education and housing bubbles. When government starts buying or insuring debt in a sector, purportedly to drive down costs, the price of the goods in that sector skyrocket, primarily benefiting connected insiders. Typically bond market participants. Those who wind up paying more are those who take on debt to pay for the increasingly expensive goods.”
A reply, “I agree. For a bank to get it’s charter it should be forced to allocate it’s loans sector by sector, and by location without regard to race. Same for insurance companies.”
From Reuters. “Frustrated Federal Reserve policymakers on Monday sought an explanation from mortgage lenders as to why the benefits of lower interest rates were not filtering to home buyers as quickly as in the past even as investors benefited. This clog in the passage between the primary and secondary markets undermines an important reason for the Fed’s monetary stimulus: kick-starting a housing sector that was at the heart of the 2007-2009 financial crisis and that has only just begun to show some life.”
“Industry experts raised some common reasons that could be driving the spread higher, including the inability of lenders to meet robust demand for loans. One prominent analyst said a reason for the increase was likely capacity constraints as mortgage bankers can’t add resources fast enough to process requests for loans with rates at such low levels.”
“Another expert said lenders are unwilling to extend loans to lower-quality borrowers because they could become delinquent, leaving lenders on the hook if they are forced to buy back the loan. Still, this put-back risk was relatively small given the high quality of loans made since the crisis, the analyst said.”
“Not everyone saw a problem. One investor argued there was nothing unusual in the wider primary-secondary spread and it was a foreseeable consequence of the Fed’s aggressive policies. Journalists were restricted from identifying speakers.”
“‘There is clearly something that is manifesting as a form of constraint’ in mortgage lending, Jeremy Stein, a Fed governor, said at a Boston conference. Stein highlighted odd differences in the availability of credit, depending on the type of loan, where lenders seem to treat mortgages more conservatively than they do auto loans made to the same household.”
“‘Whether it’s a regulatory or a put-back risk,’ he said, ‘there’s clearly just quantitatively not the volume happening.’”
From Bloomberg. “A decision by the Federal Reserve to expand its bond buying next week is likely to prompt policy makers to rewrite their 18-month-old blueprint for an exit from record monetary stimulus. Under the exit strategy, the Fed would start selling bonds in mid-2015 in a bid to return its holdings to pre-crisis proportions in two to three years. An accelerated buildup of assets would also mean a faster pace of sales when the time comes to exit — increasing the risk that a jump in interest rates would crush the economic recovery.”
“Krishna Memani, director of fixed income at OppenheimerFunds Inc., said a too-rapid sale of assets risks disrupting the $5.2 trillion market for agency mortgage debt. ‘They have to find ways of unwinding the balance sheet without dumping all of it in the marketplace,’ said Memani, who oversees a bond portfolio of about $70 billion, including about $6 billion of mortgage-backed securities.”
“Asset purchases have made it harder to change the federal funds rate when the time comes to raise borrowing costs. In the five years before the crisis, excess bank reserves averaged $1.7 billion, so the Fed could alter interest rates by buying or selling comparatively small amounts of short-term debt in open-market operations. Those reserves are now more than 800 times larger at $1.4 trillion.”
“The Fed’s other tool is to extinguish reserves by selling bonds back to dealers. Even a fully-explained plan could push up home borrowing costs as traders account for hundreds of billions of dollars of new supply flowing back into the market. ‘We are deep into experimentation at this point,’ said. ‘It’s understandable that people are worried.’”
The Aucklander. “The two faces of the North Island property market are reflected in new figures out today that show Auckland prices still largely surging while other cities and the provinces are struggling to reach the boom levels of five years ago. The median sale price of a home in central Auckland is now $690,000 - slightly up on the previous quarter and 12.5 per cent on the 2007 boom. Pockets of the city, including Grey Lynn, Pt Chevalier and Sandringham, are now up 23-30 per cent on the 2007 peak, according to the Herald Property Report published today.”
“‘Provincial New Zealand must be scratching its head at the endless headlines of soaring prices,’ says report writer Bruce Morris.”
“Economist Rodney Dickens said the Auckland spurt was a ‘reasonably decent cyclical upturn,’ but the stimulus of the low mortgage rates could be wearing off. He expected a slowing of increases over the next year, probably led by suburbs that had moved the most lately, and then a levelling-off as higher interest rates kicked in.”
“The news is even less cherry for owners of holiday homes and coastal properties. Douglas Wealleans of First National Mangonui estimated prices were back at 2002-2004 levels and it might be another four or five years before they began to move. ‘I would like to be more positive, but I’m afraid parts of the Far North are disaster areas at the moment.’”
From Ottawa South. “We are a nation in debt. In mid-October, the average debt-to-income ratio of Canadian households hit an all-time high of 163 per cent. That means for every dollar we earn in a year, we owe an average of $1.63. As a result of this news, finance ministers across the country went all nanny-state on us: ‘What’s wrong with you people? Get your fiscal houses in order.’”
“Indeed, every few weeks or so, federal Finance Minister Jim Flaherty finds it prudent to stand behind a podium to at some posh event and collectively slap the wrists of Canadians for being so careless with their funds. But he’s hardly leading by example. Despite inheriting a massive surplus from his Liberal predecessors, Flaherty’s government racked up the biggest deficit in Canadian history in a move to - guess what? Boost consumer spending in the wake of the recession. In other words, governments tell us to spend one week and then reprimand us for doing so the next, all the while committing the sin of overspending themselves.”
“Of course, governments like to couch their overspending in terms like ‘investing for the future.’ The problem is the future never comes, so they just leave mammoth debt balances for the next generation without any accountability whatsoever. As a result for governments and the citizens they govern money has taken on a rather mythical quality.”
“We live in a time where the value of money has become meaningless for most people. Never mind the fact that half of Canadians would likely find themselves in a food bank line should they miss a single paycheque. Just as there’s always another squeeze of toothpaste in the bottom of the tube, it seems there’s always more money available in the credit line or what I like to call, the pot of gold at the end of the rainbow.”
“The government should not be in the business of buying or guaranteeing private debt.”
What’s the alternative?
According to Darryl, it’s “…cascading debt default into depression.”
I suppose depressions are just hunky-dory, so long as you mask them with sufficient velocity of money?
Can you have a depression with a high velocity of money?
Don’t know.
But you certainly can use a high velocity of money to hide a depression. It’s kind of like keeping a brain-dead patient on life support. All the vital signs seem to be just fine, until you notice there is no brain activity.
So it goes with a housing bubble economy on artificial life support. There is no pressing need to invest massive amounts of stimulus in U.S. housing when we face a birth dearth coupled with a mass wave of incipient Baby Boom retirements. Yet the central planners have decreed that it is time to reflate real estate construction and investment.
Don’t be surprised if the brain-dead economy that results seems to deliver a sub-par performance over an indefinite future time horizon.
So the zombies created will be shamblers, not sprinters?
“It’s kind of like keeping a brain-dead patient on life support.”
You just described Darryl.
You just described Darryl.
It was more or less Darrel’s point- you could keep the patient alive with cash infusions, but it would bleed out in the trade deficit.
These discussions are almost meaningless. What do you mean “high velocity of money”? That sounds like a “economist’s” voodoo mathematics.
Nothing works in isolation.
If you had a FIXED amount of money in an economy and it is changing hands at a rapid pace, then, of course, you have a high level of economic activity, assuming the money isn’t being siphoned off into government waste traps (which is alway happening).
If you mean the government is printing money very quickly and then putting it into the “economy”, you can have high levels of money changing hands with ever increasing prices because no one has done any “Production” to correspond with the money transactions. People are “buying up” assets, providing no real wealth generation. If you put in enough money, fast enough, you get Wiemar Germany or Zimbabwe.
So, YES, you can get a depression, a major depression, as the price of everything becomes unaffordable. Look at todays food prices. I watch every couple of weeks, and my grocery bill is continually climbing. If people would simply stop buying food, that will solve this problem. Not likely.
The current situation is more is the result of excessive DEBT. Many people OWE more than they can pay. As a result, no matter how much money they earn (high levels of dollars changing hands by working more hours), they still fall short of the amount due, and others, expecting to get paid don’t get their money either. IN this case, although the “velocity” is high, amount anticipated exceeds amount received, resulting in SLOWER new sales because High velocity, at LOW volume results in Less net money going into New purchases. The Keynesians believe they can counter this problem by money-printing, going back to the previous argument about what level of “money printing” should be allowed. I think we’ve already well exceeded any reasonable amount of “stimulus”, with negative results.
So, naturally, when a policy has failed, rather than admitting failure, we get Paul Krugman (a dumber mind is nowhere to be found) extolling the virtues of massive money printing and claiming we must “DO MORE”, the very definition of insanity.
I would call it lunacy, but I see the Democrats in congress have passed a Bill to remove that word from the Congressional bills, past and present, and so calling someone a “lunatic” will henceforth be considered a “hate crime”. You are likely to be arrested and jailed under a “FEDERAL LAW” for expression of your opinion, as the opinion is considered inflammatory. Like any political and sociological discussions will not always border on such a place as that.
But, I digress.
In any move to change the world, you cannot change X, without effecting Y and Z.
Democrats and the world do-gooders are always surprised when they provide “benefits” to the poor and find the roles expanding, rather than contracting. Free money always has a way of finding more takers, but the value of the money will decline to what it is: FREE.
And, if it’s free, and WORTHLESS, then it doesn’t matter how fast it “circulates”, it won’t buy anything. People will simply find other things of value to trade to get on with their daily lives, in spite of the government’s best intentions to re-direction and “re-distribution”.
Velocity means nothing if it can’t be compared to quantity and value of the units moving around. It would only be meaningful if all other factors where static, which they are not.
‘These discussions are almost meaningless. What do you mean “high velocity of money”? That sounds like a “economist’s” voodoo mathematics.’
Let me bring it down to earth for you, pal.
So, as usual, you read absolutely nothing I read, or simply chose to ignore it, to double-down on your commentary, thereby demonstrating your intelligence in this discussion.
Here’s the problem. Your example is a “closed system”. It assumes all things constant, just as I refuted. The money is fixed. The number of players is fixed. There is no “government stimulus”. There is no Federal Reserve distorting the economy.
So, let’s try it another way for simple minds.
Farmer A has no money, but the FED prints up some and he goes and buys a tractor for $100.
Farmer B has $100 and buy a tractor, too.
Farmer B got his $100 by putting $100 worth of corn on the market.
Farmer A didn’t produce any corn, but plans to, sometime in the future.
The TRactor salesman has $200 to buy corn.
There is only $100 of corn available for sale.
What happened to the other $100 worth of Production??? Well, gee, it doesn’t exist?
It is a “CREDIT”, an “expectation” of FUTURE production. What if he doesn’t PAY BACK THE LOAN???
The “economy” got cheated by Money printing.
The solution, of course, is for the Saleman to demand payment by foreclosing on Farmer A’s tractor, to get the value of his $100 he received from Farmer A which has proven to be worthless since he can’t get the “value” as represented by the money that was put into circulation.
CREDIT is the heart of the financial system for any expansion, but it needs to be PAID BACK by future production, so as to add value to the system. It should never be extended to people who are not “creditworthy”, and money-printing and “debt forgiveness” screw all the other farmers out of their labor and risks they have taken to actually produce something of value.
People “buying things” (consumer economy) is a fantasy, unless other people are MAKING THINGS to have available to purchase. People having money (consumers) can be about free exchange or government stealing, the democrats preferred method of providing people with “More money”.
Unfortunately, the people who actually provide REAL goods and services get the shaft, providing FREE food and shelter to those who don’t.
You are trying to present a “Closed system” of Free exchange and trade in an economy that is more and more “rigged” by government intrusion and MONEY PRINTING by the FED.
So, if you want to create a REAL world example we need to see a Rube Goldberg design of how money actually gets “created” and injected into the economy.
Your example is a barter example, with dollar amounts in the trade. You don’t have the STEALING by the government from “inflation targeting” and Paper dollars from nowhere.
As I have pointed out, rather clearly, if you would learn to read, rather than posting excerpts from other “economic thinkers”, Weimar and Zimbawe had a lot of “velocity” until the money was WORTHLESS>
We don’t live in a “barter society”. Not yet.
“…thereby demonstrating your intelligence in this discussion.”
Sorry, I’m pretty busy these days, so don’t have time to read non-stop, interminable rants from start to end.
“Not everyone saw a problem. One investor argued there was nothing unusual in the wider primary-secondary spread and it was a foreseeable consequence of the Fed’s aggressive policies. Journalists were restricted from identifying speakers.”
Bloomberg successfully used a Freedom of Information Act request to get the Fed to release information that should be public. Would this approach work to identify speakers whom the Fed presumably pays with public monies to make secret presentations behind closed doors?
Let me guess who might attend the Fed’s top-secret pow-wows:
Jamie Dimon
Lloyd Blankfein
John Stumpf
Brian Moynihan
James Gorman
Richard Davis
How am I doing?
Especially if they say things like this: ‘there was nothing unusual in the wider primary-secondary spread and it was a foreseeable consequence of the Fed’s aggressive policies’
That’s the speaker I would like to identify. I’m thinking it’s probably some academic big-wig who lobs bombs at the Fed in exchange for the invitation to make a presentation.
Sounds entertaining, no?
That reminds me of the “we’ve NEVER had a national decline in prices in housing”. Remember all that talk.
So, we can’t have a Housing Bubble, because no matter how high prices go all over the country, they’ve never declined “nationally”.
So, yea, there may be some “Froth” in some areas of the Country, but this will all sort itself out in the near future.
These were all the “experts”. REmember? I do.
So, when the collapse started, it was: “no one could have seen this coming”.
I was frothing at the mouth trying to contain my utter disgust with the way all this was being eaten up by the media and what did we get from the “policy makers”??? FULL STEAM Ahead.
There may be icebergs, but we’ve never lost a passenger vessel in the north atlantic from striking a berg, and we’re much better now.
We’re Unsinkable. Stay the course. “Mr.Greenspan, more coal in the boilers, please.”
“ay, sir”
“Mr. Paulsen, more speed to the engines”.
“ay captain”. WE’re gonna set a record!!
We, the experts, no how to drive an economy.
The same “experts” are now at the controls of a jet-car, having taken the controls from Evil Knievel and are ready to jump the Grand Canyon. Get ready.
“The Fed’s other tool is to extinguish reserves by selling bonds back to dealers. Even a fully-explained plan could push up home borrowing costs as traders account for hundreds of billions of dollars of new supply flowing back into the market. ‘We are deep into experimentation at this point,’ said. ‘It’s understandable that people are worried.’”
I completely miss the need for all the hand-wringing about the Fed’s ongoing monetary policy experiments. So long as they can keep buying and burying $40 bn of mortgage backed securities a month, or whatever amount is needed to keep mortgage rates pinned to the floor, where is the worry? I also don’t get the qualms over the need to push supply back into the market; why can’t the Fed keep their bonds forever entombed?
‘where is the worry’
‘In the five years before the crisis, excess bank reserves averaged $1.7 billion…Those reserves are now more than 800 times larger’
“…more than 800 times larger”
I can’t get my brain around the real implications of this.
Anyone who has a crystal ball which provides insights to likely future scenarios for the Fed to unwind their unprecedentedly ginormous positions is highly encouraged to share.
My crystal ball runs on facts and logic. And it says these positions can’t be unwound. You can’t just keep borrowing. And then you can’t just keep avoiding repaying. Something bad must happen. MUST.
“And it says these positions can’t be unwound.
…
Something bad must happen. MUST.”
Why are you such a pessimist? What’s to prevent the Fed from buying and burying whatever quantity of any assets it chooses for as long as it deems necessary in order to bring back jobs and economic prosperity for all Americans?
“Asset purchases have made it harder to change the federal funds rate when the time comes to raise borrowing costs. In the five years before the crisis, excess bank reserves averaged $1.7 billion, so the Fed could alter interest rates by buying or selling comparatively small amounts of short-term debt in open-market operations. Those reserves are now more than 800 times larger at $1.4 trillion.”
Aren’t those massive reserves really no more nor less than what the Fed says they are, as evidenced by an electronic entry into its computerized balance sheet?
I have a hard time separating the real from the imaginary when it comes to monetary strawmen.
I found this Bloomberg article interesting because not much is said about this plan, and the implications are kinda large:
‘The Fed announced the exit strategy in June 2011 as it sought to assure investors that it had the means to avoid igniting inflation once job growth, wages, and demand started moving up. The plan was part of Bernanke’s push for greater transparency and predictability. The goal is to return the balance sheet to a pre-crisis size in two to three years and eliminate holdings of housing debt “over a period of three to five years.”
‘First, the Fed would allow assets to mature without being replaced, a process that will be slower now that the Fed has extended the average duration of its holdings. It would then modify its guidance on how long it plans to keep the federal funds rate near zero and begin temporary operations to drain excess bank reserves. The Fed would next raise the federal funds rate, and finally, it would start selling securities.’
‘The balance sheet averaged about 6.3 percent of nominal gross domestic product during the decade before the financial crisis. Today, a balance sheet of that size would be around $995 billion rather than $2.86 trillion. If the Fed were to start bringing its holdings back to their pre-crisis level today, it would have to sell almost $2 trillion over a period of two to three years under its current exit plan. Assuming holdings grow to $4 trillion, asset sales could come to $3 trillion over the same period.’
‘The central bank could lose credibility if its policy actions don’t move the federal funds rate, said Marvin Goodfriend, a former adviser at the Richmond Fed. “The Fed needs to delicately acquire inflation credibility in the exit,” said Goodfriend, a professor at Carnegie Mellon University’s Tepper School of Business in Pittsburgh. “We are used to tightly managed short-term interest rates.’
‘The Fed could ask to swap longer-term Treasury debt for short-term bills and notes, thus reducing the maturity of its portfolio to accelerate the runoff. The Fed and Treasury could do this partly in a one-time swap, and partly by allowing the Fed to bid on new issues and pay with its holdings of long-term Treasuries, Crandall said.’
‘Because the Fed would have less debt to sell to return its portfolio to a normal size, it could be “more aggressive in the liquidation” of housing-agency securities, he said, which was a priority for Fed officials when they announced the exit strategy.’
“and finally, it would start selling securities”
My wife wants to know what I’m giggling at.
“Today, a balance sheet of that size would be around $995 billion rather than $2.86 trillion. If the Fed were to start bringing its holdings back to their pre-crisis level today, it would have to sell almost $2 trillion over a period of two to three years under its current exit plan. Assuming holdings grow to $4 trillion, asset sales could come to $3 trillion over the same period.’”
Was this the sort of thing the Fed was doing during the Volcker era (1979-1982)? I’m wondering if selling lots of Treasurys might help explain why Treasury yields climbed to 14 percent during that period.
Two problems.
They pretend that only their decisions will count and none from the international “bag holders”.
The discounts from 2T sales will have to be covered by the gov. How?
Somebody said here that “Winston Churchill said the Americans will always get it right - after they have tried everything else”
“The discounts from 2T sales will have to be covered by the gov. How?”
Accounting shenanigans.
http://www.reuters.com/article/2011/01/21/us-usa-fed-accounting-idUSTRE70K6OK20110121
USF as the world’s currency can only be traded to an unknown uncertainty. Try placing 1.4T into a market capability of only X (being the velocity needed) in a recessionary economy, and then having to accelerate that placement because you are at the limit of your credit card - and the Repubs will not budge (and rightly so) !
With a world awash in USF being able to change the interest rates can now be decided by China as well - and perhaps others. They might force interest rates up to protect their horde of USF.
When a sole proprietor’s business runs into a bad spell the owner will take his savings to support it. But when the economy continues to run badly and his savings are gone, his banksters will only help so long before they lose confidence. With the Europeans on the ropes how long do you think it will be before X will arrive? Do you think they might want their bond money back? Maybe at that point the Fed will say we need a higher rate to keep that money here. Otherwise, on top of being tapped out on gov’s credit card, not able to influence interest rate stability because of the quantum, and now with redemption pressure - do you think the gov can survive higher interest rates?
Yes higher taxes on high incomers is appropriate. But it will not solve anything.
The problem is gov overspending. And soon it’s inability to not spend today’s npv dollars because of international pressure.
“They might force interest rates up to protect their horde of USF.”
If the Chinese were smart, they’d first force up U.S. interest rates, then buy Treasurys and U.S. real estate at fire sale prices (the latter in foreclosure auctions).
If the Chinese were really smart, they’d be doing everything in their power to keep the American consumer consuming.
“Frustrated Federal Reserve policymakers on Monday sought an explanation from mortgage lenders as to why the benefits of lower interest rates were not filtering to home buyers as quickly as in the past even as investors benefited. This clog in the passage between the primary and secondary markets undermines an important reason for the Fed’s monetary stimulus: kick-starting a housing sector that was at the heart of the 2007-2009 financial crisis and that has only just begun to show some life.”
I’m missing the point of beating a dead horse to death. Don’t these people know the history of financial manias? In particular, all bubbles pop, and efforts to reflate them are doomed.
Need I go on?
Equally obvious from the history of financial manias is that efforts to reflate the bubble are performed, regardless of how doomed they are.
Here is another useful tidbit from financial history:
The reflation stages of past bubbles have resulted in many a greater fool jumping in too soon, only to get severely burned at the point when reflation efforts fail.
efforts to reflate them are doomed.
Perhaps just efforts to reflate them to their previous size are doomed. They may be able to reflate them a bit, and thus avert a total crash.
I think such actions may even be in the Fed’s mandate.
there is no mandate. They are supposed to keep the dollar stable.
they have never done that.
The one thing we learn from history is that we never learn from history.
The other thing we learn from history is that in the highest echelons of government, there are no overarching rules to rein in discretionary policy actions. Does anyone else recall Richard Nixon’s dismay upon discovering his misfortune to have rules applied to him which he believed were not applicable to the CIC?
The great thing about QE-to-infinity-and-beyond is that it can not only be extended indefinitely, but at any future point, it can be extended further.
“Under the exit strategy, the Fed would start selling bonds in mid-2015 in a bid to return its holdings to pre-crisis proportions in two to three years. An accelerated buildup of assets would also mean a faster pace of sales when the time comes to exit — increasing the risk that a jump in interest rates would crush the economic recovery.”
As of mid-2015, they can extend the bit to unwind their positions until 2017-2018.
And in mid-2018, they can extend out to 2021.
This could potentially go on for a century…
This could potentially go on for a century…
No. They will totally kill off the consumer class in the nation at some point, sooner rather than later. Stuff like this can go on only when there’s a society functioning. People are going to work. People are raising kids. People are paying taxes. And most of all, people aren’t so desperate that they’d put on camo, take up rifles and start killing for the necessities of life.
This could potentially go on for a century…
It took us a half century to get within sight of paying off GD1/WW2 (til Ronnie, and later W turned on the spending afterburners).
But there was no QE to help before The Bernanke took office, was there?
Come on baby, let’s do the Twist…
Cantankerous
With respect, I disagree. The only result would be a sudden acceleration in need denominated in rapidly decending npv dollars at one point within a reasoned time frame.
“Reasoned” would be decided by world market needs as long as the USD remained the currency of choice.
The perpetual energy machine hasn’t yet been found as too many outside variables influence it.
Gold anyone?
as the Feds balance sheet gets bigger and bigger, that door marked EXIT gets smaller and smaller. BTW that’s the same door that all holders of mid to long dated paper have to go through. Just keep hoping that no one yells fire …
Anyone still think bonds are a safe bet? Keep hoping …
FIRE!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
“BTW that’s the same door that all holders of mid to long dated paper have to go through.”
But seriously, now, why does the Fed ever have to go out the door with all those other holders of mid-to-long dated paper.
To play the devil’s advocate to your point, what if the Fed chooses to step up as ‘buyer of last resort’ for all the holders of the mid-to-long dated paper who may want to head through the exit door?
What’s to stop the Fed from (1) never selling any of its own paper; (2) buying and burying any and all paper from those who decide to head through the exit door?
What’s to stop them?
Here’s one … People no longer accept dollars … It no longer serves as a universally recognized store of value and people invent alternative mechanisms to exchange goods and services.
I’ve been in many places in this world where that was the case for the local currency. The value of a stable currency is often overlooked and taken for granted. I bet you most of those Fed PHDs never lived through situations like that.
Just imagine the panic that it would provoke in the general populace. Can’t happen here in the US? Keep hoping …
That’s what I thought when I visited Vietnam a few years back.
It was kind of fun to become a ‘millionaire’ in dong in exchange by parking a mere $60 into the ATM machine. The reason for this was that one dollar was worth 16,666.6667 dong, so $60 was worth 60 X 16,666.6667 dong = 1,000,000 dong.
As I type, $1 buys 20,840.02 dong, which means that nowadays you can become a dong millionaire for only 1,000,000/20,840.02 = $48.
The other truly beautiful memory I had was how $12 was enough to buy a truly fine French meal. (Recall that Vietman is a former French colony…)
“People no longer accept dollars”
I see no evidence this is happening, do you?
No I don’t. But if you look at potential consequences, it should be on the board. Assign a low probability to it. But just imagine the consequences should people lose confidence in the $.
Could the Fed’s actions increase confidence in the dollar?
“But just imagine the consequences should people lose confidence in the $.”
People have worried about those same consequences of lost confidence in the dollar for as long as I have paid attention — back to the late 1980s, and even before I paid attention, during the 1970s.
If confidence isn’t gone by now, then why worry?
Why worry? Hmmm … How about the sustained use of unconventional tools by the Fed PHDs?
When doing risk assessments, engineers work very hard to mitigate risks that have a very low probability of occurrence yet a catastrophic impact if they do occur. I guess econ PHDs don’t have to.
“I guess econ PHDs don’t have to.”
I think their risk management strategy is that if they hatch a plan which is likely to cause a financial panic, they make sure it is of the time-bomb variety, and that they are long out of office before it blows up.
Why can’t the Fed just be the economy from now on? Having trouble selling your enchiladas? The Fed will buy them. Nobody wants your pirate store junk? The Fed does. Not sure how to liquidate that obsolete inventory? The Fed will happily take it off your hands. Mattress store on the rocks? Fed’s Beds to the rescue. It’s a can’t lose.
Totally agreed, Grizz. If the Fed can reflate housing in the wake of a historic crash, what can’t it reflate if it chooses to do so?
And further, if the Fed is able to create jobs by stimulating housing, think how many more jobs the fed could create by stimulating EVERYTHING ELSE. They could do a much better job of reflating the economy if they targeted everything, rather than limiting themselves to housing and T-bonds.
‘Why can’t the Fed just be the economy from now on?’
Because, as much as the media and govt would like us to believe, that isn’t how the economy works. We have to have income to buy those tacos and pirate sashes. Or at least credit. But what’s been cut out in this downturn is confidence to buy or borrow. Note that the Fed is complaining about low rates not being passed on to house buyers. What do they want, 1% house loans? How absurd is that?
It’s the same old discussion; the Fed is all powerful; don’t fight the Fed. But they are idiots out standing in their field, while everyone in the media pretends they know what they are doing and are going to save us all from doom.
You know what? We have nothing to lose but our chains.
What do they want, 1% house loans?
Yes, it would seem.
How absurd is that?
By what standard of judgement? It’s a bizarro world any more. It would allow us to “pay” more for houses…
On my desk at home, I have a few 100 Trillion Dollar bill from Zimbabwe, to give to my kids when they are old enough to understand so they can understand the dangers inherent in a government run amok with Fiat currency.
1. Bag holders can see “emerging interest rates” being forced on them.
2. The longer the term the less the value probably any way you want to calculate it.
I like the concept of the “exit door”. Totally agree - it is only so big and perhaps they have put too much behind that door.
The escaping pressure might do a lot more damage than we can even dream of if the “needed velocity” is too high.
Besides, only dogs are efficient at hiding bones.
I hate to see those Fed PHDs get so stressed when their models fail to predict the future. Here’s an idea to help get home sales cranked up like auto sales…put all homes on wheels. Then if you miss a couple of payments, your house gets repo’d. That’s right, towed away. You can get it back if and when you catch up on the payments. Not only would it solve the PHDs latest conundrum but it also makes a great reality show.
You could put all these wheeled houses in special “parks” with other wheeled houses…
If they stop the stimulus, interest rates rise and house prices will crater again.
Really think they’d let that happen?
Below is an interesting point regarding the sustainability of the Fed’s and government’s interventions. The current front the Fed is projecting is that its balance sheet can contain an infinite amount of debt. That it could buy every mortgage, every shred of government debt, and put it on its balance sheet. However, that would almost certainly be quite inflationary as the confidence that the currency accurately represents the fruits of human endeavor would be severely undermined.
A Proper Accounting: The Real Cost of Government Loans and Credit Guarantees
Published: December 05, 2012 in Knowledge@Wharton
Flaws in the way the government accounts for its loans and credit guarantees understate the costs that taxpayers are bearing with student loans and other credit programs totaling more than $2.5 trillion, plus more than $5 trillion in mortgages backed by the federally owned companies Fannie Mae and Freddie Mac. In fact, a proper accounting — like that required of most businesses — would make the government’s budget deficit even larger than the officially reported amount.
http://knowledge.wharton.upenn.edu/article.cfm?articleid=3126