Darryl
Full time employment: Posting here.
- Joined
- Mar 29, 2007
- Messages
- 577
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.
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.
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.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.
Just curious. If you had been fully positioned, would you have sold.
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.Drives dollar down because everyone knows they're just printing money
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.but somehow printing money drives down the cost of managing debt by driving demand for treasuries up
Everyone's treasury bonds are worth more - but only if they continue to hold and not sell. It's a catch-22and China's holdings on US treasuries are worth more because we just started printing money -- oh geez.
Yeah. And it will happen again. This is what the Fed is for.Has this happened before?
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.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?
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?
Yeah. And it will happen again. This is what the Fed is for.
FRB: Testimony, Bernanke--The economic outlook--March 28, 2007Overall, 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.
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.
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.From the start of this crisis the Fed has mismanaged it greatly.
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.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.
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...Inflation is gonna come back with a roar.........hopefully NOT stagflation.........
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.
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."
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.
To be sure, these financing vehicles have their appropriate uses. But to the extent that some households may be employing these instruments to purchase a home that would otherwise be unaffordable, their use is beginning to add to the pressures in the marketplace.......
Although we certainly cannot rule out home price declines, especially in some local markets, these declines, were they to occur, likely would not have substantial macroeconomic implications. Nationwide banking and widespread securitization of mortgages make it less likely that financial intermediation would be impaired than was the case in prior episodes of regional house price corrections.
Yes, I find this confusing: so in a nutshell the real tie of the Federal Reserve Bank to the US Treasury is through the Board of Governor's, otherwise, they can act independently like a private entity? For T-Al's question, then, the Federal Reserve, a private entity, purchased US Treasury notes - it would be like China purchasing them of some other bank. It could be the word "Federal" that leads one to believe it is part of the US Government....although, isn't the Federal Reserve responsible for M1 (total amount of dollars in circulation)? So wouldn't there be a conflict of interest of sorts in that they own a US Treasury Bond, but they control the amount of dollars that are being circulated? Is that why the statement is made later that the Federal Reserve could affect the long-term interest rates by controlling M1 thereby indirectly (or directly) affecting interest rates?
It seems like the Federal Reserve is one of the 'private-public' entities that can be used by the US Government to control certain aspects of the banking business. However, one would hope that acts such as the one described above wouldn't need to happen very often. I'm not a fan of the government, yet again, going in and fiddling with the knobs not knowing exactly what the systemic response will be nor what the lag factor is....sigh.
Well, the Federal Reserve System is a government operation, for the most part. (I say for the most part because there are clearly some things the Federal Reserve Banks have done that are not government-sponsored but have become integral parts of our economy such as development of the Fedwire system of payments.) And the tie that binds the Banks to the Board of Governors is fairly strong, including the FOMC. Federal Open Market Committee - Wikipedia, the free encyclopedia But the Federal Reserve Banks are curious quasi-governmental entities created by an Act of Congress, performing private and governmental functions. I think many find this confusing but it's simply a few degrees removed from Alexander Hamilton's First Bank of the United States, which was the first Central Bank of the U.S.
You want confusion; try understanding the Federal Home Loan Banks, which are GSEs.
Fed decides to buy Treasurys
It sounds like the government is borrowing money from itself. Help me understand what they did and how it helps. Thanks.
Also why isn't it "treasuries" instead of "treasurys?"
Here's a 3 minute explanation recommended by a well known economist (I got the link from Mankiw):
FT.com / Video & Audio / Interactive graphics - Quantitative easing explained
Basically, the Fed may be "public-private", but it has the right to create the stuff in your wallet. It created some to buy these bonds. It understands that there is real inflation risk in doing this, but is trying to walk a fine line where they do more good than harm.
So, it really isn't a true national bank, but can act both on private as well as public or governmental interests, which makes it a bit dicey to understand, which leads to difficulty in 'regulating' or controlling. To get back to T-Al's question then, as I understand it, what is the significance of the Federal Reserve Bank purchasing Treasury Bonds - it seems it isn't a day-to-day thing that occurs. I guess I'm with T-Al in why is their an uptick in the eyebrow raising and based on the responses here, is it truly a precursor to hyper-inflation. Also, is there a conflict of interest as I described in my previous post in that they can affect the interest rate on the bonds by either adding to the money supply or subtracting from the money supply. Is that ability what is raising the eyebrows? And lastly, what would drive the Federal Reserve to take such an action, if it truly is one that is extreme in nature?
Thanks! Oh, and if I just am obtuse and don't understand what was written before, then I can be re-directed.
"Willy nilly" is a financial term you don't often hear...