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Strategies & Market Trends : The coming US dollar crisis -- Ignore unavailable to you. Want to Upgrade?

To: Tommaso who wrote (33274)	12/10/2010 9:04:29 AM
From: carranza2	Read Replies (2) \| Respond to of 71454

I would not worry about an abrupt rise in interest rates. The Fed is targeting real interest rates with its QE program. It seeks to lower them, though its methods seem stupid considering that direct reductions in rates are impossible. All it has left is QE. In that regard, here is a very interesting (and revealing) talk by the head of the Minneapolis Fed: minneapolisfed.org How QE supposedly lowers real rates: "Thus, QE lowers long-term real interest rates by signaling the FOMC’s intentions about future short-term rates. However, QE also lowers long-term real interest rates in a second, more direct, way. The holder of a long-term Treasury is exposed to interest rate risk, because the value of that bond fluctuates as interest rates vary. When the Fed buys $600 billion of long-term bonds, the bond portfolio of the private sector is now less exposed to this kind of risk. As a consequence, private investors will demand a lower premium for holding other bonds that are exposed to interest rate risk, and all long-term yields fall." Finally, an awesome, incredibly illogical statement concerning inflation and QE: "QE creates more reserves in banks’ accounts with the Fed. The standard intuition is that this kind of reserve creation is inflationary. Banks can only offer checkable deposits in proportion to their reserves. Economists view checkable deposits as a form of money because, like cash, checkable deposits make many transactions easier. In this sense, bank reserves held with the Fed are licenses for banks to create a certain amount of money. By giving out more licenses, the FOMC is allowing banks to create more money. More money chasing the same amount of goods—voila, inflation. Given some of the criticisms of the Fed that have been voiced over the past two weeks, it is important to understand that this basic logic isn’t valid in current circumstances. Banks have nearly $1 trillion of excess reserves. This means that they are not using a lot of their existing licenses to create money. QE gives them $600 billion of new licenses to create money, but I do not see why they would suddenly start to use the new ones if they weren’t using the old ones." Crazy. Banks are keeping excess reserves in check because they have to provide for potential new liabilities. Give them more money, and they will go into the lending business. And that will be inflationary. I have noticed this myself. After a brief hiatus of zero percent offers from banks, I am again getting flooded with junk mail offering me credit cards at extremely attractive rates.