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Old 03-18-2009, 06:07 PM   #21
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OK, so where is the Fed getting the money?
Take out a dollar bill and read the top line across the bill. Now, think of billions of this thjing by electronic book entries on the books and records of banks.
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Old 03-18-2009, 07:15 PM   #22
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Originally Posted by Cruising2022 View Post
OK, so where is the Fed getting the money?
From the Newshour report last night, it would go something like this:

Federal reserve computer, "Good Morning Chairman Bernake," "how much money would you like to create today". "$300,000,000,000," he said. "Done," the computer said in a female voice. "have a nice day".
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Old 03-18-2009, 07:30 PM   #23
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ill say one thing, you know those long term

remember the fed has little control normally on long term rates , the only way they can influence long term rates is buy buying treasuries like everyone else and creating demand
actually they have some control over long term rates by doing what they said they were going to do today and that is buy mortgages.
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Old 03-18-2009, 07:36 PM   #24
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No kidding. My January 2025s just spiked up more than 600 basis points.
The 20-year issued this past January jumped nearly 16%. Now there's duration at work.
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Old 03-18-2009, 08:17 PM   #25
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This is what 'quantitative easing' looks like.
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Old 03-18-2009, 08:42 PM   #26
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Been buying TIPS since November and planned to be totally positioned by mid April. I would have preferred they did this 4 weeks from now.
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Old 03-18-2009, 08:55 PM   #27
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Here's my understanding of how this works.

The federal government borrows money using Treasury Bonds (& bills etc).

The Federal Reserve is independent of the government. It is going to buy these Treasuries. Where does it get the money to do this? It has some in its vaults and if there's none left, it prints it. Creates it. Conjures it into existence. It then exchanges this money for the treasuries. Now it has treasuries in its possession. Since there is demand for treasuries in the market, price rises, yield falls.

In the dim & distant future, two things can happen.
a) The fed may want to retard growth/inflation & will sell these treasuries & destroy the cash that it brings in - reduces the amount of money out there. That will cause a glut of treasuries in the market causing the price to go down and yield up.
or
b) the government will run a surplus and stop issueing more. Then, as the treasuries mature, the fed is paid by the government & destroys or recirculates the money.

b) is highly unlikely anytime soon imho.

Do I have it right?
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Old 03-18-2009, 09:18 PM   #28
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Been buying TIPS since November and planned to be totally positioned by mid April. I would have preferred they did this 4 weeks from now.
Just curious. If you had been fully positioned, would you have sold.
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Old 03-18-2009, 09:47 PM   #29
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Take out a dollar bill and read the top line across the bill. Now, think of billions of this thjing by electronic book entries on the books and records of banks.
I was hoping for a different answer. Sigh. This is one of these things where I can understand each step logically, but I can't just quite wrap my head around the overall concept because it's such a non-intuitive action. Drives dollar down because everyone knows they're just printing money, but somehow printing money drives down the cost of managing debt by driving demand for treasuries up -- and China's holdings on US treasuries are worth more because we just started printing money -- oh geez.

Has this happened before?
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Old 03-19-2009, 07:11 AM   #30
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I wonder if there is any danger that in trying to drive down long term rates we will return to an inverted yield curve which has historically been bad for the markets?
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Old 03-19-2009, 07:40 AM   #31
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Just curious. If you had been fully positioned, would you have sold.
No, I'll leave all that to the experts. I'm planning to hold everything to maturity. Yields were trending up and some were north of 2.5% real already. Yesterdays move just took about 1/2% off the real yield on the 18-20 years.
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Old 03-19-2009, 08:15 AM   #32
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Drives dollar down because everyone knows they're just printing money
Of course, so is the UK , and the EU would probably be doing the same if they had a common treasury. The exchange rate is really a reflection of the relative strength of the economy, and there really is no large economy in the world in better shape, so the US$ declining vs the Euro yesterday is not really meaningful.
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but somehow printing money drives down the cost of managing debt by driving demand for treasuries up
Printing money and using it to buy long term treasuries puts more money into circulation, making it available for people to borrow at a lower cost, invest, and stimulate the economy. It is a sign that the economy is in bad shape and needs this boost.

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and China's holdings on US treasuries are worth more because we just started printing money -- oh geez.
Everyone's treasury bonds are worth more - but only if they continue to hold and not sell. It's a catch-22

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Has this happened before?
Yeah. And it will happen again. This is what the Fed is for.
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Old 03-19-2009, 08:19 AM   #33
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I wonder if there is any danger that in trying to drive down long term rates we will return to an inverted yield curve which has historically been bad for the markets?
The markets are already bad and the economy is already in the recession foretold by the inverted curve a year ago. Now there are two different dangers. The first is that the Fed is not successful in stopping deflation and the world economy gest much worse for a long time. The second is the Fed is so successful it creates lots of inflation which becomes systemic and eats up the real value of people's savings.
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Old 03-19-2009, 08:35 AM   #34
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Here's my understanding of how this works.

The federal government borrows money using Treasury Bonds (& bills etc).

The Federal Reserve is independent of the government. It is going to buy these Treasuries. Where does it get the money to do this? It has some in its vaults and if there's none left, it prints it. Creates it. Conjures it into existence. It then exchanges this money for the treasuries. Now it has treasuries in its possession. Since there is demand for treasuries in the market, price rises, yield falls.

Do I have it right?
For the most part you have it right. However, the Federal Reserve System is not independent of the government; it is the government in many senses. The Board of Governors of the Federal Reserve System, with its current Chairman Bernanke, is as governmental as you can get, but they are so supposed to be "independent" of the Executive and Legislative Branch. They are part of the "administrative state" of the Federal Government which runs most of our Governmental operations. The Federal Reserve System includes the Federal Reserve Banks, which are not governmental in many cases; in fact, I think the Banks are owned by "member banks" in terms of "stock ownernship" but the Banks are essentially under the control of the Board of Governors, as the Banks carry out monetary and supervisory policies of the Fed. The Federal Reserve Banks have big balance sheets and the most important one is the NY Fed Bank, which also serves as the depository institution for the U.S. Government!

So when AIG initially received loans from the NY Fed Bank, which only lends when fully collaterialized or secured, the press reported this as Federal money; well, it's probably more complicated than that, but yes in a sense this was Federal money but not "taxpayer dollars." Money that the Federal Reserve Banks have in their vaults is probably dervived from many sources, including services it charges member banks, loans it makes to others, fedwire charges, custodial services, correspondent bank services, etc.

Not sure it's accurate to say that when the Fed does not have anything in its vaults the Fed prints the money. Federal Reserve Notes (american currency) is fiat currency, so the Notes or digital book entry configurations of the currency just increase the supply of currency in circulation and the Fed may also inject liquidity in the economy in a number of ways -- i.e. relaxing "bank reserve requirements."
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Old 03-19-2009, 09:20 AM   #35
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Yeah. And it will happen again. This is what the Fed is for.
I believe the last time they did this they said was 40 years ago? That would be 1969, how did the Fed do from that point forward for say 15 years in having a firm control of monetary policy? How was the unemployment rate managed.



From the start of this crisis the Fed has mismanaged it greatly.

Here is Bernanke in March of 2007:

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Overall, the economy appears likely to continue to expand at a moderate pace over coming quarters. As the inventory of unsold new homes is worked off, the drag from residential investment should wane. Consumer spending appears solid, and business investment seems likely to post moderate gains.
FRB: Testimony, Bernanke--The economic outlook--March 28, 2007

Here is Bernanke in April of 2008:
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On a more positive note, the nonfinancial business sector remains financially sound, with liquid balance sheets and low leverage ratios, and most firms have been able to avoid unwanted buildups in inventories. In addition, many businesses are enjoying strong demand from abroad. Although the prospects for foreign economic growth have diminished somewhat in recent months, net exports should continue to provide considerable support to U.S. economic activity in coming quarters.
Statement of Ben Bernanke Before the Joint Economic Committee (April 2, 2008) - Asiaing.com: Free eBooks, Free Magazines, Free Magazine Subscriptions

So another year later I do not have much faith that the Fed has any idea of what they are doing other than attempting to insure prosperity for their collegiate brethern in the banking industry. Their concern is not for the economy, which should be the Fed goal, where he states it is already in the process of recovery, but in inflating the housing industry so that the paper assets banks still hold quickly recovers and avoids any more banking fallout. AIG/Citicorp is just too much of an eyesore highlighting the Fed's failings.
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Old 03-19-2009, 09:33 AM   #36
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Inflation is gonna come back with a roar.........hopefully NOT stagflation.........
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Old 03-19-2009, 10:04 AM   #37
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From the start of this crisis the Fed has mismanaged it greatly.
While I am not a great supporter of either the Fed or any of the recent Administrations, the problems we are facing are as much the result of we the people. Neither the Fed nor the political leadership are responsible of our collective greed, they just fanned the flames, encouraged, and turned a blind eye.

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So another year later I do not have much faith that the Fed has any idea of what they are doing other than attempting to insure prosperity for their collegiate brethern in the banking industry. Their concern is not for the economy, which should be the Fed goal, where he states it is already in the process of recovery, but in inflating the housing industry so that the paper assets banks still hold quickly recovers and avoids any more banking fallout. AIG/Citicorp is just too much of an eyesore highlighting the Fed's failings.
It does seem that the Fed, current and past, see saving banking and wall street as the critical components to saving the economy. In contrast, it seems the President and staff are more focused on main street. It's not clear we can afford to do both.

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Inflation is gonna come back with a roar.........hopefully NOT stagflation.........
Inflation will only come back if they are successful Such is the threat of deflation that we pray for inflation - the killer of middle class wealth. As for stagflation, IMHO that is the greater risk. IOW, inflation does rise, everyone is happy at first, then we realize that nominal growth = inflation and we're all losing...
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Old 03-19-2009, 10:19 AM   #38
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Leaving aside the issue of whether moderate deflation is a bad thing, core CPI, excluding gas, has been up the last two months, and that's before we really have seen the effect of shoveling the trillions down our gullet. Even the President said that the recession isn't as bad as it seems -- which implies that the higher-ranking officials don't believe in some kind of megadeflation scenario.
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Old 03-19-2009, 10:19 AM   #39
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The cost of money only goes down if the supply goes up.

What happened here in the UK is the government has been buying bonds (from the banks) thus enabling them to increase lending.

But them banking boyz are clever. They just keep the money and improve their capital ratios.

Why the hell doesn't the Bank of England (and your fed) just dole out the money to you and i.

I'd spend it.
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Old 03-19-2009, 10:36 AM   #40
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The cost of money only goes down if the supply goes up.

What happened here in the UK is the government has been buying bonds (from the banks) thus enabling them to increase lending.

But them banking boyz are clever. They just keep the money and improve their capital ratios.

Why the hell doesn't the Bank of England (and your fed) just dole out the money to you and i.

I'd spend it.
Here in the U.S., the Government has become the guarantor of all debt issued by Banks under the Temporary Liquidity Guarantee Program.

Sounds like you're asking for a better model for wealth redistribution. And perhaps the Central Banks, as bank regulators, need to take a look at how bank capital is defined under current international accords so they don't trip over each other, again.
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