>>>Can anyone tell me if the recent Fed Reserve action to “monitize the debt” was the first explicit time(not other indirect methods) that they have taken such action? Is this an historical precedent?<<<
Not historic new action... However, it is the first time they have done this since the 60’s.
This action came about because of several reasons.
a. It assures that the auction will have buyers for the treasuries.(It seems that foreign countries are either reluctant or unable to invest in them)
b. Short term rates are almost to ‘Ø’ Only way they can impact the economy is to try to keep down the longer term rates. If buyers were scarce, the long term (10 & 20 year) rates would shoot up, killing mortgages and capital improvement.
c. Japan, England and other central banks are doing the same thing.
The problems are many though.
a. Low rates keep investors out of the market as they seek better returns. Fund managers, retirement funds, insurance companies, and others have to scramble to try to find some investment which gives a better return and does not have high risk.
b. There becomes a perceived devaluation of the US Dollar. There is also an actual devaluation too. With $1.2 Trillion being invested say in 10 year bonds, the interest payment for the 10 years comes to $345.6 Billion expense at the current 2.88% This is an actual decrease in the dollar value, and a forward obligation to the taxpayers.
c. Since these investments only inject money into the economy through government agencies, the net benefit is extremely reduced. Typically the rule of thumb of 80%-20% could be applied. 20% actually getting out to real improvement and 80% being absorbed in increased governmental self investment. More regulators, more regulations, more government capital improvement, more government salaries, more enforcement, more prisons, more dependence on government, more compliance costs, more taxes.
If you have followed the hyperinflation in south african countries a few months ago - they can’t even agree on how high the rate was - some say several trillion%... Their only method to stopping it was to peg their currency to the US Dollar. This did not roll back the inflation, but restricted it to 2-3%. Now, almost all transactions take place in US Dollars - only use of their local currency is for some required governmental fees.
I worry that with the Fed pumping all this money into the pockets of the ‘elite’, as they grab for power, we will see a broader division of our society. Richer rich and poorer everyone else.
Another worry is that with a weakening dollar, the pressure is increasing to create a ‘Universal’ currency. Already we are hearing of Russia and China proposing this for the upcoming G20 meeting. Then the different currencies would all be pegged to the ‘Universal’ valuation. If this were to happen, it would be followed by immediate demands that developing countries be placed on a par with developed countries. Doing this would destroy the value of the ‘Universal’ currency and we unravel everything into chaos.
Why would people encourage such chaos? Because in chaos there are profits to be made. People like George Sorros are counting on that. Regardless of which way the economy goes, the hedge fund operators profit (unless they get too greedy).
As far as Øbamy maxing out our credit cards... With new ‘recovery’ spending calls coming from him even before the current one is approved, and each one bigger and more outlandish than the one before, it won’t take till 2020... Maybe 3 years at most... IMO
I didn’t realize you were so knowledgable about economic matters, GG. Is there anything you don’t know? ;)
I would really appreciate it if you could give me and the readers here an indication of what we could likely expect next. Here is my prediction by ranking of which will happen next which are major landmarks on our road to chaos. Could you please rank them according to your own understanding of our situation? Please add what I have failed to identify.
1. China reduces or fails to purchase US Treasuries
2. Real unemployment hits >25% www.shadowstats.com
3. Commercial Realestate hits major new lows
4. Fed increases the money supply again by >10%
5. Obamaites increases deficit by another 2 Trillion, we will have to have a few more bailout, commercial real estate, newspapers, airlines, etc.
6. US becomes majority owner of more than 50% of Banks
7. few 3rd world countries experience governmental collapse, food riots, tin pot imperialism(land grabs)
8. Huge rapid(days weeks?)currency devaluation ala Iceland
9. Union strikes
10. Russian debt default(intrade.com/widgets/crisis/WorldCrisisIndex.html)
Thank you for your informed opinion. I am bullish on the U.S. People’s capacity to grow our way out of this if the voters were to change direction and demand a laissez faire government, no capital gains tax extreme turn to free enterprise. However, I don’t see that it is likely that people will demand such a change when its much easier to vote gutless and continue voting for a handout, “welfare state” etc. If anything, people will be crying for more handouts and the government to do something, just fix it.
It is on this basis that I can see no other possibility for our country’s financial future than major inflation, currency devaluation, and being hobbled with a European kind of socialist welfare state, no? My only confusion about what scenario is most likely is that even though the US will be undesirable, it’s the only game in town for international investors. That’s because most all the other countries in the world will just be worse off than the US.