Why the Fed can’t lower rates

[we_are_toast]

Re: Why the Fed can’t lower rates

The 3 month bond is yielding .06% ! Gold up $54!

Is this an absolute panic flight to safety?

Have we gone straight from Ka to SHTF/POOM?

EJ? FRED? What's your take?

[phirang]

Re: Why the Fed can’t lower rates

The 3 month bond is yielding .06% ! Gold up $54!

Is this an absolute panic flight to safety?

Have we gone straight from Ka to SHTF/POOM?

EJ? FRED? What's your take?

I have recently found out that central banks AND governments have been selling gold into the market.

[c1ue]

Re: Why the Fed can’t lower rates

PMs will retain value as the dollar declines.

But except for mania or panic situations, PMs will not outperform the delta.

Thus while everything ELSE you own is being smashed by a dollar depreciation - i.e. food, fuel, real estate, consumer goods - your PMs will be going up.

If you don't need the PMs to survive, then it is fine.

But if you do, then you're going to find yourself selling PMs in order to survive and thus forgoing any future PM appreciation.

Keep in mind also that as times get worse, the nominal cost of survival also goes up: physical security, maintenance of lifestyle as overall lifestyle levels go down, etc.

[sn1p3r]

Re: Why the Fed can’t lower rates

I think it is possible for food and fuel to behave like a PM depending on how bad the scenario gets...just my $.02

[FRED]

Re: Why the Fed can’t lower rates

In my lights, this question and EJ's answer expose the central weakness of the argument. Itulip believes that the Fed will be able to execute its chosen strategy--money from helicopters.

No, we have never said that. We say that the Bernanke "helicopter" speech was misunderstood. You see, not everyone gets a pallet of money. The helicopter drops are limited to certain groups. AIG gets one. Lehman doesn't. Fannie and Freddie do, and so on.

You may have noticed no one has offered the discount window to you.

This means that the Fed CANNOT botch the timing of its moves as it approaches the zero bound. Additionally, it assumes that there will be a currency event before the zero bound is breached.

We have limited faith that the Fed can pull this off. Maybe the currency crisis occurs before the zero bound or at it or even slightly below it. That is unknowable. You have to look for other signs that the government is proaring to lock your money inside the US, such as:

There's A Law That Takes Away Money If You Leave U.S. Citizenship?

How much faith do we have in the Fed? From the looks of it, we better have a good deal, for the rapidity of recent events--Fannie, Freddie, Lehman, AIG, Merrill--suggests that the escape window for the Fed may be very small indeed.

When the markets perceive that the window has effectively closed, that's when the accident occurs.

In no way do I mean to downplay the value of the insights and analysis here, but it is important for me to understand as clearly as possible the hinge on which the inflationary/deflationary issue swings.

For Ka-Poom to follow, we expect that the Fed will be sharply attentive, have perceptive foresight, and act decisively.

To avoid "Poom" the Fed has to be brilliant and coordinate brilliantly with foreign central banks and Congress. The record is spotty, and our faith is limited.

[jimmygu3]

Re: Why the Fed can’t lower rates

For Ka-Poom to follow, we expect that the Fed will be sharply attentive, have perceptive foresight, and act decisively.

To avoid "Poom" the Fed has to be brilliant and coordinate brilliantly with foreign central banks and Congress. The record is spotty, and our faith is limited.

cmraynew,

Do you think the Argentine central bank was "sharply attentive", had "perceptive foresight", and "acted decisively"? Pretty serious Poom there.

Jimmy

[Supercilious]

Re: Why the Fed can’t lower rates

As we mentioned in Future inflation fears topple TIPS, by reducing exposure to inflation-index bonds the US government is not preparing for deflation.

A once-in-a-century crash may occur if the Fed botches this and we get too close to the zero bound before the economy grows again. At this point in the race between the disinflationary impact of recession and debt deflation and the inflationary impact of moving all manner of worthless assets onto the Fed’s and Federal Government’s balance sheets, disinflation may be winning.

Seeing things from a completely different perspective, I believe EJ is absolutely right here. Gee .... it's the second time it happens

At some point before the zero bound is reached, never mind the point of actual deflation (negative inflation rate such as -2%), if the US experience is like any other net debtor's in history a currency accident will occur as global financial markets realize that the US position as a safe haven relative to its trade partners has reversed. A rapid, self-reinforcing process of capital flight and dollar depreciation that we call “Poom” will begin.

Here we go back to normal. I don't see an Argentine scenario for US (save for a case of a major and unexpected calamity/war independent of Ben's control)

IMHO things are a little bit brighter. At the moment of collapse, Argentine didn't have it's currency as the major standard of forex reserves. Argentine could not keep foreign central banks hostage to their peso reserves.The surplus of their creditors was not recycled in pesos but in dollars.

The Fed knows this. It is doing everything it can to keep inflation above zero and maintain dry powder, and that means keeping the Fed Funds rate target over 2%.

I wouldn't be surprised to see that target lowered lowered significantly in the near future by an "emergency" meeting.

I don't think such an "emergency" will be a sign the Fed is forced to do something or can't do anything else. IMHO it would be a sign that everything goes according to the plan and industrials are the future miracle for the next 8-10 years.

(Am I allowed to steal Barts's avatar ? )

[phirang]

Re: Why the Fed can’t lower rates

Seeing things from a completely different perspective, I believe EJ is absolutely right here. Gee .... it's the second time it happens


Here we go back to normal. I don't see an Argentine scenario for US (save for a case of a major and unexpected calamity/war independent from Ben's control)

IMHO things are a little bit brighter. At the moment of Argentine didn't have it's currency as the major standard of forex reserves. Argentine could not keep foreign central banks hostage to their peso reserves.The surplus of their creditors was not recycled in pesos but in dollars.



I wouldn't be surprised to see that target lowered lowered significantly in the near future by an "emergency" meeting.

I don't think such an "emergency" will be a sign the Fed is forced to do something or can't do anything else. IMHO it would be a sign that everything goes according to the plan and industrials are the future miracle for the next 8-10 years.

(Am I allowed to steal Barts's avatar ? )

I haven't sold my US Steel, banking on > 0 demand and weaker bonar.

[rchdenton]

Re: Why the Fed can’t lower rates

"The operative phrase here is "fixed expenses." Depends on your definition of "fixed" of course. We can leave the roads and bridges to fall apart, and continue to have one of the worst K-12 education systems in the world. Our 3rd world school system and infrastructure are not making US workers more competitive. A visit to any 3rd world country will disabuse Austrian ideologues of the theory that all money not spent by workers on taxes results in greater competitiveness.

Under the cover of "free-markets" national economic policy was in the early 1980s ceded to the banks and Wall Street, and they quickly figured out how to take all of the American workers' money not spent on taxes and spend it on interest on debt instead."


Excellent stuff. To me it is about quality of regulation against quantity. The political process seems to favour high quantity not quality (socialism/command economy). The market fundamentalist approach favours zero quantity and encourages fraud, theft and coercion(gangsterism).

A truly civilised society is characterised by fairness and freedom of choice. I think the reason business owners (who are used to doing business in a free and fair manner) are so easily seduced by the market fundamentalist's marketing is they think they value free choice. They do not - they only value their own freedom and have no respect for anyone else's. In short they are gangsters who pretend respectability.

Brilliant article by the way.

[rdgmail]

Re: Why the Fed can’t lower rates

EJ:

As always, thank you for the thoughtful and thought-provoking analysis.

Question: When you talk about the U.S. "printing" money, I assume you don't mean literally printing without selling treasury bills/bonds? I assume you mean that the government would continue to "print" as it already does- by selling bonds to whomever will buy (China, Brazil, Japan), but that it will be "printing" more because of ever-increasing $ commitments (i.e., selling more Treasuries) and that the "investors" will increasingly demand a higher and higher interest rate as a result of (and causing) erosion of the value of the US Bonar. Thanks again.

-Rob

[marvenger]

Re: Why the Fed can’t lower rates

I agree. Thanks for putting it more eloquently than I can.

[LargoWinch]

Re: Why the Fed can’t lower rates

I think it is possible for food and fuel to behave like a PM depending on how bad the scenario gets...just my $.02

I think so too, but the odds are against you; especially for energy.

After all, it is easier to stop driving (especially when you have no job) then stop eating.

[LargoWinch]

Re: Why the Fed can’t lower rates

"The operative phrase here is "fixed expenses." Depends on your definition of "fixed" of course. We can leave the roads and bridges to fall apart, and continue to have one of the worst K-12 education systems in the world. Our 3rd world school system and infrastructure are not making US workers more competitive. A visit to any 3rd world country will disabuse Austrian ideologues of the theory that all money not spent by workers on taxes results in greater competitiveness.

Under the cover of "free-markets" national economic policy was in the early 1980s ceded to the banks and Wall Street, and they quickly figured out how to take all of the American workers' money not spent on taxes and spend it on interest on debt instead."


Excellent stuff. To me it is about quality of regulation against quantity. The political process seems to favour high quantity not quality (socialism/command economy). The market fundamentalist approach favours zero quantity and encourages fraud, theft and coercion(gangsterism).

A truly civilised society is characterised by fairness and freedom of choice. I think the reason business owners (who are used to doing business in a free and fair manner) are so easily seduced by the market fundamentalist's marketing is they think they value free choice. They do not - they only value their own freedom and have no respect for anyone else's. In short they are gangsters who pretend respectability.

Brilliant article by the way.

That is why the US is ... sorry - should be - a Republic and NOT a democracy.

[jtabeb]

Re: Why the Fed can’t lower rates

That is why the US is ... sorry - should be - a Republic and NOT a democracy.

We are one now.

The Republic of the United Socialist States of America (RUSSA)

[Chris Coles]

Re: Why the Fed can’t lower rates

We are one now.

The Republic of the United Socialist States of America (RUSSA)

Perfect; absolutely perfect. I have added that to my dictionary. Brilliant observation.