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Old 03-05-2009, 08:49 PM   #21
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you can also buy up debt creating more demand for it to increase lending, like the TALF
Yup. It's an effort to fix the "they're powerless to make people lend" problem. But what they're doing isn't actually generating new lending. The hope is if people make money buying existing loans & securities with some government aid, they'll be more inclined to underwrite new loans & securities with out it.

Hope it works.
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Old 03-05-2009, 09:33 PM   #22
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That may be true but the tools have practical limits when fighting deflation.

To fight inflation the Fed can increase the cost of money (interest rates) an unlimited amount. To fight deflation the Fed can only lower the cost of money to 0%.

Isn't much of that going on now? What is the current interest rate? Less than 1%?



To fight inflation the Fed can increase reserve and margin requirements to curtail lending all the way to 100%. To fight deflation, the Fed can increase reserves and lower reserve and margin requirements but they are powerless to make people borrow or lend.
One of the problems right now - there isn't much lending or borrowing going on. I believe the current savings rate also points toward deflation.
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Old 03-05-2009, 10:53 PM   #23
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That may be true but the tools have practical limits when fighting deflation.

To fight inflation the Fed can increase the cost of money (interest rates) an unlimited amount. To fight deflation the Fed can only lower the cost of money to 0%.

To fight inflation the Fed can increase reserve and margin requirements to curtail lending all the way to 100%. To fight deflation, the Fed can increase reserves and lower reserve and margin requirements but they are powerless to make people borrow or lend.
The Fed can lower the Federal Reserve Rate to 0% - that is only one of the tools. The Government can increase the taxes on savings - spend or get taxed - or as the Swiss did in the 80s have a negative interest rate on savings.

The Fed can also increase the money supply by buying bonds. There are other tools they have.

The Fed is powerless to make people do anything - inflation or deflation.

Again the cause of the deflation needs to identified first.
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Old 03-05-2009, 11:13 PM   #24
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I do not think we are seeing deflation but merchants liquidating their current inventories to raise cash.

Going forward prices will probably not be as low.
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