The policy makers and the media are using a new (to me, at least) veiled warning, code phrase, euphemism, buzzword, or whatever you want to call it: "quantitative easing". Looks like plain old debt monetization to me, which will likely lead to some degree of price inflation down the line. Thoughts?
You are probably right on----anytime politicians or bureaucrats begin using new "code phrases" it because they want to hide something!
Quantitive easing has come up a time or two before. I found a thread from back in Late November where we talked about it.
http://countryplans.com/smf/index.php?topic=5714.msg73930#msg73930
Since then, I have continued to think about it. and gone back and forth on a buncha stuff. I may have talked about alot of this before but here is where I think this is coming from and what they want to accomplish.
The credit market and the debt market are truly the same thing. They are inverse of the same product. The fed funds overnight target "rate" and the treasury IRX 13 week have been trading proportionally for decades. That means that the cost of borrowing to the US government sets the rate of all borrowing and all debt internationally.
Effective Funds Rate - EFF is the cost of overnight money loaned between banks to balance reserves. The cost is a result of demand for credit...demand up-cost up and vice versa.
Federal Funds Target - FFT is the FEDs target for that cost...cost above target FED add liquidity-cost comes back to target and vice versa.
IRX is cost of 13 week loans to US .gov...if private sector credit demand drops then banks loans to the .gov increase and IRX cost comes down. Credit demand is the only relationship to EFF/FFT.
TNX is cost of ten year loans to US .gov...the cost is dependent on supply of money for .gov debt and demand for money from the .gov... supply down-cost up...demand up- cost up and vice versa.
TNX has no relationship to EFF/FFT... slight credit demand relationship to IRX.
take a good look at this chart showing the relationship between IRX and FFT.
(http://www.loopy.org/fed-follows.jpg)
What that chart is saying is that as demand falls in government debt, the rate increases. When the rate of us yields decrease the target rate does as well. All the talk of the fed lowering rates or raising rates is silly when you understand the core relationship between the market.
In normal business boom/bust cycle, this relationship tracks to inflation/deflation. As money comes in their is appetite for risk and money leaves the safety of bonds the chase more return. When things get unsafe, money flows back.
For the government side, all of this is priced in bonds. Bonds have two sides, a price and a yield. When a bond is in demand, it's price goes up (supply and demand), and it's yield goes down (because something in demand does not pay a high premium). The opposite is true as well. When a bond is not in demand, or the supply overshadows the demand the price must fall (law of supply and demand again). When a price falls, the rate must increase because now the bond seller must offer more premium for someone to buy their offereing. Consider the recent post about GE offering 14% on it's bonds, or GE paying 25%, etc. Same principle here.
The us governemnt has some trillions of dollars in debt they have committed to in some fashion in the bailouts - they now must auction that debt in huge loads. If international demand is not there, and the banks are all broke, then there will be no demand. That means via the law of supply and demand that the rates will go up, which means that the cost of all debt will go up. What exactly would 25% mortgages do to the housiong market these days?
We saw last Fall what a 5% LIBOR does to international commerce. They want to avoid the complete freezeup and this QE approach is designed to accomplish this. When the treasury goes to sell bonds, if the market demands a higher price the NY FED will step in and buy it effectively capping the rate directly. So, they have a ceiling defined for government debt where rates cannot take us back to that.
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All of that said, QE or buying the long end of the curve directly, is not new. It has been the policy of Japan since the early 1990s. They have been on this road for over a decade and have had no inflation. In fact, pull up a chart of their stock market one day to see how broken the model is.
We also performed QE during the 40s and world war2. go take a look at a document from the Richmond virgina fed.
http://www.richmondfed.org/publications/research/economic_quarterly/2001/winter/pdf/hetzel.pdf
Then read up on the treasury-fed accord. QE or federal reserve interaction was required by congressional LAW last time around.
Finally, a long but fascinating read would be the speech made in 2002 by Ben Bernanke himself where he laid the entire plan out.
http://www.federalreserve.gov/BOARDDOCS/SPEECHES/2002/20021121/default.htm
"Making sure deflation does not happen here"
His approach to solving this, (written in 2002!!!)
1) bring cost of debt to zero (done)
2) provide liquidity to the banks keeping the turds from being flushed (done)
3) direct buy of assets (done)
4) announce and enforce debt ceiling (being done)
5) - that's it, he will have fixed us based on his thesis.
Just pointing out that there is no new thing under the sun. 2002 .. they saw this coming and were holding speeches on how to fight it since 2002. Think about that a second.
Muldoon, you apparently have a better memory than I do. The phrase didn't stick from the discussions in November, but I've seen it often enough in recent days for it to finally penetrate. This is a very interesting conversation, and thanks for the chart and links!
Bernanke's speech is interesting, to say the least. He didn't really analyze the situation in Japan, which has been called "stagflation", where the over-leveraged man on the street just barely treads water, in some cases for years, once the flow of ever-cheaper yen was throttled back. Bernanke was candid in his characterization of FDR's devaluation, and the effects of the last of the points of action you listed from the speech:
Of course, in lieu of tax cuts or increases in transfers the government could increase spending on current goods and services or even acquire existing real or financial assets. If the Treasury issued debt to purchase private assets and the Fed then purchased an equal amount of Treasury debt with newly created money, the whole operation would be the economic equivalent of direct open-market operations in private assets.
Bottom line in my view is that we all need to take the last suggestion in Muldoon's post to heart, and for more than a second.........