Silicon Investor (SI) -- The First Internet Community

STOCKTALK

We've detected that you're using an ad content blocking browser plug-in or feature. Ads provide a critical source of revenue to the continued operation of Silicon Investor. We ask that you disable ad blocking while on Silicon Investor in the best interests of our community. If you are not using an ad blocker but are still receiving this message, make sure your browser's tracking protection is set to the 'standard' level.

Strategies & Market Trends : The Epic American Credit and Bond Bubble Laboratory -- Ignore unavailable to you. Want to Upgrade?

To: pogohere who wrote (99988)	12/1/2008 1:57:15 PM
From: pogohere	2 Recommendations Read Replies (2) \| Respond to of 110194

Whaddya do when velocity falls and the multiplier ceases operating? If all else fails, devalue the dollar The Fed is mothballing its $559bn supplementary financing program. Or, to put it even more obliquely: Washington - The balance in the Treasury’s Supplementary Financing Account will decrease in the coming weeks as outstanding supplementary financing program bills mature. This action is being taken to preserve flexibility in the conduct of debt management policy in meeting the government’s financing needs. The SFP is the principle means by which the Federal Reserve has been offsetting - since September - its massively expanded liquidity operations. It’s basically a Treasury bill issuance scheme: by issuing new Treasuries, the Fed basically drains capital from the system, offsetting or ’sterilising’, in Fed jargon, the excess liquidity created by its vastly expanded open market ops. But there is a problem. What with the TARP, as well as a host of other government interventions, there is a huge financing need at the Treasury. One which will need to be funded through issuance of Treasury bonds and bills. There’s consequently then, something of a glut. One which would be - somewhat - alleviated by ending the SFP. And the SFP can be unwound because the Fed is effectively sterilising its open market ops by another means: encouraging massive excess reserves. Banks have to post reserves at the Fed - normally around $7bn worth. But bank reserves deposited at the Fed are currently pushing $1 trillion. Part of the reason for this is that the Fed has increased the interest rate it pays on reserves (or rather, decreased the penalty to the target rate). Part of this is because banks are looking for somewhere safe to hoard cash. Depositing with the Fed, in the current market, is a competitive store of value. And in terms of monetary supply, banks increasing their reserves with the Fed acts just like the SFP does, because it is a drain on liquidity in the system. … This is all remarkably similar to the policy of quantitative easing adopted by the Bank of Japan in the 1990s. It’s odd really that the Fed is not giving much clarity on its actions. Odder yet that people aren’t looking to Ben Bernanke’s numerous papers on fighting deflation to see the germ of current policy. We reprise the below, from 2002: … "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." ftalphaville.ft.com