This is wicked. Devaluation of dollars basically is a flat tax on all US dollar holders. Since the lower class has higher percentage of wealth in US$, they will be hurt more by hyperinflation percentage wise. What will the Japanese and Chinese do? Will they print more money as well? Will they buy more US debts? http://www.nytimes.com/2009/03/19/business/economy/19fed.html?hp Fed to Buy $1 Trillion in Securities to Aid Economy Article Tools Sponsored By By EDMUND L. ANDREWS Published: March 18, 2009 WASHINGTON — Saying that the recession continues to deepen, the Federal Reserve announced Wednesday that it would pump an extra $1 trillion into the mortgage market and longer-term Treasury securities in order to revive the economy. “Job losses, declining equity and housing wealth, and tight credit conditions have weighed on consumer sentiment and spending,” the Fed said, adding that it would “employ all available tools to promote economic recovery and to preserve price stability.” As expected, the Fed kept its benchmark interest rate at virtually zero. But in a surprise, it dramatically increased the amount of money it will create out of thin air to thaw out the still-frozen credit markets that have cramped lending to consumers and businesses alike. Indeed, the immediate effect on the bond markets was striking, with prices rising and yields dropping sharply on the news. The yield on the 30-year Treasury bond, about 3.75 percent before the announcement, fell quickly to 3.4 percent and remained volatile. At the same time, the dollar plunged about 3 percent against other major currencies. Stocks moved higher on the Fed action. The Dow Jones industrial average was down about 50 points before the 2:15 p.m. announcement, but ended the day up about 90 points. The Fed said it would purchase an additional $750 billion worth of government-guaranteed mortgage-backed securities, on top of the $500 billion that it is currently in the process of buying. In addition, the Fed said it would buy up to $300 billion worth of longer-term Treasury securities over the next six months. That would tend to push down longer-term interest rates on loans of all types. All of the Fed’s measures would come in addition to what has already been an unprecedented expansion of lending by the Fed. Since last September, the central bank has roughly doubled the size of its balance sheet to nearly $2 trillion from $900 billion — even before Wednesday’s action — mainly because of its efforts to rescue credit markets. Despite a trickle of encouraging economic data in the last few weeks, Fed officials were clearly unimpressed and in no mood to cut back on their emergency efforts. Fed policy makers sharply reduced their economic forecasts in December, predicting that the economy would continue to experience steep contractions for the first half of 2009, that unemployment that could approach 9 percent by the end of the year and that there was at least a small risk of an across-the-board drop in consumer prices akin to what Japan experienced for nearly a decade. Hours before the Fed announced its decision on Wednesday, the Labor Department reported that consumer prices climbed 0.4 percent in January, the second consecutive monthly increase. The news provided some relief from deflation worries, but most analysts still expect prices to remain nearly flat for the foreseeable future. In their most recent forecast, Fed policy makers predicted that consumer prices would rise 0.3 to 1 percent this year — well below the central bank’s unofficial inflation target of nearly 2 percent. The Federal Reserve slashed its benchmark interest rate to virtually zero in December, declaring that it would keep the rate at that level for “some time” and focusing its additional efforts to revive the economy on a wide range of new lending programs. In a sign that it is even more worried than at its last meeting in January, the Fed said on Wednesday that it would keep its benchmark rate, the federal funds rate, at virtually zero for “an extended period.” While the central bank had said for some time that it was considering the possibility of buying longer-term Treasury bonds, Fed officials had played down that idea in the past month as they focused their attention instead on more targeted intervention in the credit markets. In their statement on Wednesday, however, the Fed policy makers offered little explanation for the decision to go ahead with the Treasury purchases after all, saying only that the move was intended to “improve conditions in private credit markets.” Since last September, new lending programs — including money for bailouts of individual companies like Citigroup, American International Group and Bank of America — have caused the Fed to print new money at the fastest pace in history. But much of that money has remained dormant, because the economic downturn has made banks reluctant to lend and businesses and consumers either reluctant or unable to borrow. The Fed and the Treasury are in the process this week of starting a joint venture called the Consumer and Business Lending Initiative in their latest effort to revive the still-frozen credit markets. The program, also known as the Term Asset-Backed Securities Loan Facility, or TALF, will start out by offering $200 billion worth of financing for consumer loans, small business loans and some corporate purposes like equipment leasing. Fed officials have said they hope to expand the program next month, possibly to include the huge market for commercial mortgages, and both the Fed and Treasury hope the program will eventually provide up to $1 trillion in total financing.
On the flipside, it also makes debt easier to manage. Since we're getting crushed by debt, inflation is actually possibly the quickest way out. Inflation stops the decline in home prices, stops people from getting underwater, etc, etc.
It does solve the debt and other problems. But the key is whether the Japanese and Chinese will play along. Inflation basically is a way to transfer money from the lender to the borrower. We will simply keep our spending way in the future. Not sure how long we can party as usual until our lenders (Chinese and Japanese) pull the plug.
As much as talk about Japanese/Chinese holding our debt, we shouldn't forget how much we hold ourselves. Most retired folks invest in fixed income types of assets which would greatly diminish in value with inflation. Also, this means that future borrowing is much more expensive, meaning that its very expensive to purchase a home, businesses to borrow to grow, etc.
At the end of the day, the Fed might just become the only bank that is willing to lend us newly printed money with a discounted rate.
and do what? not real bright for either to "pull the plug" on the world's overwhelmingly largest consumer if you wish to sell products.
Not if the fed will just print more money to solve the problem. If they do that on a large scale the dollar will be just like the toilet paper and no one will want to hold any us treasuries or lend US anything.
With the amount of leverage the banks were using I think the money supply might not be getting bigger.
I don't think it is China's intention to dump dollar at this point, but if the Fed continues to print out more money I am sure at some point all the nations that hold treasuries will dump it to cut their losses. I assume this printing is very limited stop gap measure and will not continue in the long run, if it does the US government might as well declare bankrupcy.
Its makes up for all the dollars that are no longer in the system due to deleveraging and write downs. Currently there is less money in circulation because of the credit freeze. The money being printed is just making up for it a little bit.
Basically yes. Banks create money by lending. For example, lets say I found a million dollars in the my backyard and deposit it into a bank. The banks historically would keep 100K in its vaults and lend out 900K. That 900K will eventually end up in a bank somewhere because people don't stick money under their mattress. That bank will keep 90K and lend out the the remaining 810K. This will go on until all the money is a vault or wallet. So that 1 million bucks eventually becomes 9 million dollars in circulation. The problem is the banks in recent years weren't keeping 10 percent like the old days. They were leveraging around 30 to 1 ( 60 to 1 in some parts of Europe), so for every 30 dollars they lent out they only kept 1. In this example that 1 million would be 30 million dollars in circulation. So essentially in recent years, wall street has just been printing money by the trillions and they got to keep a percentage. Since the crisis started last year, the banks have been deleverage and keeping more cash on hand, which decreases the money supply. That is why we haven't seen any significant inflation because overall the money supply is still smaller than it was last year eventhough the Fed has pumped trillions of dollars into the banks recently.
