Scary thoughts indeed, they are embarking on a course which could ultimately destroy the financial stability of this country.
Did you see Fed Gov Bernanke's comments from Nov 21??
And also an article written on Nov 18 of similar comments he made earlier this month. These will take a bit of time to read but it is worth it as it reaveals the plans of the Fed.
federalreserve.gov
Excerpt:
Curing Deflation
Let me start with some general observations about monetary policy at the zero bound, sweeping under the rug for the moment some technical and operational issues.
As I have mentioned, some observers have concluded that when the central bank's policy rate falls to zero--its practical minimum--monetary policy loses its ability to further stimulate aggregate demand and the economy. At a broad conceptual level, and in my view in practice as well, this conclusion is clearly mistaken. Indeed, under a fiat (that is, paper) money system, a government (in practice, the central bank in cooperation with other agencies) should always be able to generate increased nominal spending and inflation, even when the short-term nominal interest rate is at zero.
The conclusion that deflation is always reversible under a fiat money system follows from basic economic reasoning. A little parable may prove useful: Today an ounce of gold sells for $300, more or less. Now suppose that a modern alchemist solves his subject's oldest problem by finding a way to produce unlimited amounts of new gold at essentially no cost. Moreover, his invention is widely publicized and scientifically verified, and he announces his intention to begin massive production of gold within days. What would happen to the price of gold? Presumably, the potentially unlimited supply of cheap gold would cause the market price of gold to plummet. Indeed, if the market for gold is to any degree efficient, the price of gold would collapse immediately after the announcement of the invention, before the alchemist had produced and marketed a single ounce of yellow metal.
What has this got to do with monetary policy? Like gold, U.S. dollars have value only to the extent that they are strictly limited in supply. But the U.S. government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost. By increasing the number of U.S. dollars in circulation, or even by credibly threatening to do so, the U.S. government can also reduce the value of a dollar in terms of goods and services, which is equivalent to raising the prices in dollars of those goods and services. We conclude that, under a paper-money system, a determined government can always generate higher spending and hence positive inflation.
Of course, the U.S. government is not going to print money and distribute it willy-nilly (although as we will see later, there are practical policies that approximate this behavior).8 Normally, money is injected into the economy through asset purchases by the Federal Reserve. To stimulate aggregate spending when short-term interest rates have reached zero, the Fed must expand the scale of its asset purchases or, possibly, expand the menu of assets that it buys. Alternatively, the Fed could find other ways of injecting money into the system--for example, by making low-interest-rate loans to banks or cooperating with the fiscal authorities. Each method of adding money to the economy has advantages and drawbacks, both technical and economic. One important concern in practice is that calibrating the economic effects of nonstandard means of injecting money may be difficult, given our relative lack of experience with such policies. Thus, as I have stressed already, prevention of deflation remains preferable to having to cure it. If we do fall into deflation, however, we can take comfort that the logic of the printing press example must assert itself, and sufficient injections of money will ultimately always reverse a deflation.
So what then might the Fed do if its target interest rate, the overnight federal funds rate, fell to zero? One relatively straightforward extension of current procedures would be to try to stimulate spending by lowering rates further out along the Treasury term structure--that is, rates on government bonds of longer maturities.9 There are at least two ways of bringing down longer-term rates, which are complementary and could be employed separately or in combination. One approach, similar to an action taken in the past couple of years by the Bank of Japan, would be for the Fed to commit to holding the overnight rate at zero for some specified period. Because long-term interest rates represent averages of current and expected future short-term rates, plus a term premium, a commitment to keep short-term rates at zero for some time--if it were credible--would induce a decline in longer-term rates. A more direct method, which I personally prefer, would be for the Fed to begin announcing explicit ceilings for yields on longer-maturity Treasury debt (say, bonds maturing within the next two years). The Fed could enforce these interest-rate ceilings by committing to make unlimited purchases of securities up to two years from maturity at prices consistent with the targeted yields. If this program were successful, not only would yields on medium-term Treasury securities fall, but (because of links operating through expectations of future interest rates) yields on longer-term public and private debt (such as mortgages) would likely fall as well.
Lower rates over the maturity spectrum of public and private securities should strengthen aggregate demand in the usual ways and thus help to end deflation. Of course, if operating in relatively short-dated Treasury debt proved insufficient, the Fed could also attempt to cap yields of Treasury securities at still longer maturities, say three to six years. Yet another option would be for the Fed to use its existing authority to operate in the markets for agency debt (for example, mortgage-backed securities issued by Ginnie Mae, the Government National Mortgage Association).
Historical experience tends to support the proposition that a sufficiently determined Fed can peg or cap Treasury bond prices and yields at other than the shortest maturities. The most striking episode of bond-price pegging occurred during the years before the Federal Reserve-Treasury Accord of 1951.10 Prior to that agreement, which freed the Fed from its responsibility to fix yields on government debt, the Fed maintained a ceiling of 2-1/2 percent on long-term Treasury bonds for nearly a decade. Moreover, it simultaneously established a ceiling on the twelve-month Treasury certificate of between 7/8 percent to 1-1/4 percent and, during the first half of that period, a rate of 3/8 percent on the 90-day Treasury bill. The Fed was able to achieve these low interest rates despite a level of outstanding government debt (relative to GDP) significantly greater than we have today, as well as inflation rates substantially more variable. At times, in order to enforce these low rates, the Fed had actually to purchase the bulk of outstanding 90-day bills. Interestingly, though, the Fed enforced the 2-1/2 percent ceiling on long-term bond yields for nearly a decade without ever holding a substantial share of long-maturity bonds outstanding.11 For example, the Fed held 7.0 percent of outstanding Treasury securities in 1945 and 9.2 percent in 1951 (the year of the Accord), almost entirely in the form of 90-day bills. For comparison, in 2001 the Fed held 9.7 percent of the stock of outstanding Treasury debt.
To repeat, I suspect that operating on rates on longer-term Treasuries would provide sufficient leverage for the Fed to achieve its goals in most plausible scenarios. If lowering yields on longer-dated Treasury securities proved insufficient to restart spending, however, the Fed might next consider attempting to influence directly the yields on privately issued securities. Unlike some central banks, and barring changes to current law, the Fed is relatively restricted in its ability to buy private securities directly.12 However, the Fed does have broad powers to lend to the private sector indirectly via banks, through the discount window.13 Therefore a second policy option, complementary to operating in the markets for Treasury and agency debt, would be for the Fed to offer fixed-term loans to banks at low or zero interest, with a wide range of private assets (including, among others, corporate bonds, commercial paper, bank loans, and mortgages) deemed eligible as collateral.14 For example, the Fed might make 90-day or 180-day zero-interest loans to banks, taking corporate commercial paper of the same maturity as collateral. Pursued aggressively, such a program could significantly reduce liquidity and term premiums on the assets used as collateral. Reductions in these premiums would lower the cost of capital both to banks and the nonbank private sector, over and above the beneficial effect already conferred by lower interest rates on government securities.15
The Fed can inject money into the economy in still other ways. For example, the Fed has the authority to buy foreign government debt, as well as domestic government debt. Potentially, this class of assets offers huge scope for Fed operations, as the quantity of foreign assets eligible for purchase by the Fed is several times the stock of U.S. government debt.16
I need to tread carefully here. Because the economy is a complex and interconnected system, Fed purchases of the liabilities of foreign governments have the potential to affect a number of financial markets, including the market for foreign exchange. In the United States, the Department of the Treasury, not the Federal Reserve, is the lead agency for making international economic policy, including policy toward the dollar; and the Secretary of the Treasury has expressed the view that the determination of the value of the U.S. dollar should be left to free market forces. Moreover, since the United States is a large, relatively closed economy, manipulating the exchange value of the dollar would not be a particularly desirable way to fight domestic deflation, particularly given the range of other options available. Thus, I want to be absolutely clear that I am today neither forecasting nor recommending any attempt by U.S. policymakers to target the international value of the dollar.
Although a policy of intervening to affect the exchange value of the dollar is nowhere on the horizon today, it's worth noting that there have been times when exchange rate policy has been an effective weapon against deflation. A striking example from U.S. history is Franklin Roosevelt's 40 percent devaluation of the dollar against gold in 1933-34, enforced by a program of gold purchases and domestic money creation. The devaluation and the rapid increase in money supply it permitted ended the U.S. deflation remarkably quickly. Indeed, consumer price inflation in the United States, year on year, went from -10.3 percent in 1932 to -5.1 percent in 1933 to 3.4 percent in 1934.17 The economy grew strongly, and by the way, 1934 was one of the best years of the century for the stock market. If nothing else, the episode illustrates that monetary actions can have powerful effects on the economy, even when the nominal interest rate is at or near zero, as was the case at the time of Roosevelt's devaluation.
[[The piece below was written on Nov 18, three days prior to the speech above. Which tells us that this was indeed a planned statement.]]
Article written by BILL BUCKLER
November 18, 2002
Between the beginning of 1996 and the middle of 2002, that's six and one-half years or twenty-six "quarters", total US credit market debt has increased by $12 TRILLION - or 65%.
From this total, US financial sector debt has jumped 130% to $9.8 TRILLION.
This credit explosion has run concomitant with an ever shrinking US manufacturing base.
Six And One-Half Years Of DEBT:
The US has been a political entity, a nation, since 1787 when the Constitution was adopted. That's two hundred and fifteen years. Almost exactly two-thirds of ALL US debt - 65% of it or $12 TRILLION, has been piled up over the past six and one-half years.
This gigantic mountain of debt is the underpinning as well as central cause of the geopolitical/strategic unbalancing of the USA. That enormous sum of $US 12 TRILLION was willingly made available for borrowing by the sum of all US lending agencies, it was duly borrowed, and then it was SPENT. Now, this huge $12 TRILLION of additional debt has to be serviced with interest payments as they become due. On top of that, at least some symbolic repayment of small amounts of the principal sum owing has to be made to perpetuate "confidence" in eventual repayment.
In 2000, the Fed finally saw what its policy had wrought. "High tech" stocks, which Mr Greenspan had been praising for years as the main "engine" of unprecedented "productivity", toppled and fell. That was the first step in leaving an enormous mountain of debt and an economy increasingly unable to service, let alone repay, this debt.
The predictable response came in 2001. The Fed cut and Cut and CUT, interest rates, that is. Over that one year, the Fed cut rates eleven times from 6.50% in January to 1.75% in December.
Now, after an eleven-month hiatus, the Fed has panicked and cut interest rates again. This cut was nominally 0.50%, taking the Fed Funds rate from 1.75% to 1.25%. In reality, the Fed cut US rates by 28.6% of the way to ZERO.
ALL of these rate cuts, and especially the most recent one on November 6, 2002, were done in the hope that with interest rates this low, the mountain of debt could continue to be serviced.
As new Fed Governor Ben Bernanke said in a luncheon address a couple of weeks ago: "We have 175 bp left" (now it's only 125 bp - basis points) "and the legal authority to buy as much as $10 TRILLION of currently outstanding fixed income securities." Please reread that - with care. We ask you to do this because this statement is one of the most frightening that the Captain, Officers and the crew of The Privateer has ever seen in print. It was stated with apparent calm - by a Governor of the US Federal Reserve! Another $US 10 TRILLION! This time, coming straight out of the Fed. The obvious reason for this statement is that the US financial system has created $12 TRILLION in credit/debt. If any of this debt were to fall over (through inability to service or outright bankruptcy), the lender stands with a massive loan/loss write-off and takes a hit right on the balance sheet.
Oh no they don't! Here stands the Fed, already "armed" with the legal authority, courtesy of Congress, nd prepared to pick up such fallen debt paper with up to an additional $10 TRILLION of fresh, new FEDERAL RESERVE NOTES (aka US Dollars). Such an operation would certainly "save" the financial institution with the dud loan, but if anything remotely close to $10 TRILLION in new freshly printed US Dollars were to be "created" - the US Dollar would be DESTROYED in the process.
It Shows - THEY KNOW:
Truly, a sane mind boggles at the above. But the sheer wonder of it all is that here stood the Fed looking with unseeing eyes as the US Financial System created $12 TRILLION in credit in just six and a half years. This could not have been done if the Fed had not itself set the pre-conditions in place to make it possible! Now, after that $US 12 TRILLION in credit/debt has been created and is now here, the Fed itself has a "contingency plan" to storm out and, at the Governor's level, assure the worried that it now stands prepared to create another $10 TRILLION in US paper Dollars to turn the credit created into cash PAPER "money". If there is a better description of total intellectual bankruptcy, nobody on deck at The Privateer can find it. The most frightening of all is that ANY Fed Governor should make such a statement with the purpose of offering a "solution" or "reassurance"!
Ó 2002 – The Privateer
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