Fed to Buy U.S. Debt, Saying Recovery Has Slowed

The New York Times ^ | August 10, 2010 | The New York Times

[John W]

Acknowledging that the recovery has slowed, the Federal Reserve announced Tuesday that it would use the proceeds from its huge mortgage-bond portfolio to buy long-term Treasury securities, The New York Times’s Sewell Chan reports from Washington.

By buying government debt, the Fed is taking an unmistakable step to maintain the large amount of money that it pumped into the economy, starting in 2007, to prop up the financial and housing markets.

[GourmetDan]

"If it wasn't for the combined Fed & Treasury activities, we'd be living Mad Max right now. Still, all they've done is kick the can. Nothing has been solved, so unless 'organic' lending activity somehow miraculously picks up from increased final demand, we still have our date with destiny."

Oh, they can just pull a 'mexico' and lop a few zeros off and start over.

A global currency is the real goal.

[GourmetDan]

"Touche'- very clever. Yes, what is the gold exchange rate today for FRN's? $1,200 per ounce?"

Clever?

Does the fact that we can exchange fiat for six-packs mean that the currency is beer-based.

Doh! is more like it.

[GourmetDan]

"Isn't Federal Express part of the Federal Reserve?"

Yes.

UPS is also owned by the USPS.

Just a couple of 'little-known facts'.

[GourmetDan]

"... the $USD acting as the global reserve currency might have had something to do with it."

Bingo, we have a winner!

Don worry. The US of A will come out on top once again.

Why do you think the Fed 'stores' other countries' gold for them? Because when TSHTF, the gold will stay right here. We'll pass out FRN's as 'settlement'.

The U.S. Screwing all the countries that nobody else will...

[dragnet2]

Thanks!

[semantic]

Does the fact that we can exchange fiat for six-packs mean that the currency is beer-based.

I didn't see where EP had stated that the $USD was gold based, rather than one could exchange FRNs for gold. My bad.

However, technically, FRN's are backed by Ts, and now GSEs, which are "unofficially" backed by Ts (wink-wink, nudge-nudge, know what I mean?). Ts are supported by the assumed going concern nature of the USA, which itself is based on its taxation authority.

Since said authority is levied against all economic production, including beer, then I think we can safely conclude that FRNs are indeed backed by a beer-standard. LOL

[Varsity Flight]

++++++++ This isn’t printing more money. It’s taking existing money that exists as principal payments on toxic mortgages and using it to buy US Treasury securities.

In effect, another step closer to the “backstop.” Missing from the discussion...BACKSTOP. The “players” will never allow their heist to inflate beyond a certain level. (And by the way..we already HAVE inflation).

Leverage “bundling” at the heart of the derivatives. The BACKSTOP factored in, without calling it a “bailout.” If they’re “called in”, prepare for the backstop, heavy oppressive taxation, attempted hidden, or VAT.

[Fingolfin]

Excellent! So how does the state benefit by putting $1 billion in the bank and only getting to use $900 million?

Because it would be an ongoing process. The state bank could build up capital by acting as a depository for state tax revenues, just like the Bank of North Dakota does.

And yet, still wrong.

I highly doubt an official document put out by the Federal Reserve could be wrong about something so basic.

Your deposit is still at the bank, your statement says $1000 yet the cash in my hand says $900. See how the money supply grew?

Exactly. I don't understand why you object to my assertion that your loan proceeds did not come from my deposit. They might have served as the basis for the loan, but they are still safely at the bank. Besides, your loan proceeds would not be paid out in the form of cash, they would be paid out by a check, i.e. bank credit, i.e. not my cash. You are confusing the issue by talking about cash when loans are paid out with electronic credits in the real world.

[wendy1946]

A true fiat currency would not involve public debt; a government would simply create it and could either lend it into circulation or spend it into circulation.

[wendy1946]

You’re not the only person to experience being called names for trying to explain banking to toddster...

[Toddsterpatriot]

The state bank could build up capital by acting as a depository for state tax revenues

Ellen Brown feels that a state bank would allow more "free" spending by a state. "Building up capital" would reduce money available for state spending. In this example, by $100 million.

I highly doubt an official document put out by the Federal Reserve could be wrong about something so basic.

And yet, it is.

Your deposit is still at the bank, your statement says $1000 yet the cash in my hand says $900. See how the money supply grew?

Exactly.

Change your mind so soon?

I don't understand why you object to my assertion that your loan proceeds did not come from my deposit.

Because they do come from the deposit.

They might have served as the basis for the loan, but they are still safely at the bank.

Because when you take out a home or auto loan, the money stays in your account at the bank?

Besides, your loan proceeds would not be paid out in the form of cash, they would be paid out by a check

You deposited $1000 cash in the bank. If they held onto the cash, their $900 loan check to me would bounce. They have no balance in their account at the Fed.

[Toddsterpatriot]

true fiat currency would not involve public debt

The Fed does not cause public debt. If the Fed managed the money supply by buying and selling GE bonds, would you still be whining about debt money?

[Pelham]

“Our present government debt is not funded if your idea of funded is that it be at least theoretically possible to repay the entire debt including principle”

Paying off the entire debt certainly isn’t my idea of a funded public debt, nor Hamilton’s, although it may well describe Jefferson’s preference. A funded public debt simply has to pay its interest, not unlike what a large corporation does. Neither corporations nor governments have fixed lifespans so debt can be rolled over. Sinking funds were used to retire the national debt in the past, but paying off the debt perversely seems to have coincided with economic downturns. Which isn’t a surprise if the debt functions as part of the money supply and paying it off contracts the money supply.

“it’s funded only by the skin of its teeth if all you have in mind is paying interest in perpetuity. “

That would be a serious problem if it were true. It’s not, although Obama seems headed in that direction. If and when there is a danger of defaulting on the debt then the bond vigilantes will let everyone know. Interest rates will soar if there is a danger of default. Default is not exactly what current interest rates are indicating. Deflation maybe, default no.

“The effect that is having on the economy is severe. Middle class people have no way of investing money at present. “

The last time I checked the stock and bond markets were both still open, and they are more than willing to let you invest.

“Our whole system is a house of cards at present and the part of the system which includes bankers creating money and fractional reserve banking clearly needs to be replaced.”

Von Mises describes fractional lending as the definition of what banks do. It’s the credit part of his Theory of Money and Credit. Your plan would in effect do away with all banking other than hard money loans, which would make getting loans something only for the very few.

“They create money out of thin air and lend it at interest without putting the money to pay the interest into the system at the same time.”

Banks indeed don’t create extra money for paying interest, one reason being that there is no need for them to do so. You are making the common mistake of confusing a money flow (interest payments) with the quantity of money (principle).

“A government, on the other hand, assuming it had anybody’s trust to do so or was somehow limited to infrastructure spending via such a process, could create money out of thin air without interest being due i.e. eliminate the middle men (bankers) along with their inflation and interest schemes.”

Apparently you missed the part where Congress sets the national debt. That’s what you pay interest on, via your taxes. You don’t pay a cent of interest on money, and in fact there is no conceivable way that you could pay interest on the money you use even if you wanted to.

Governments have made money out of thin air in the past. John Law. The French assignat. The Continental Dollar. Weimar. The history of what politicians do to money when they are in charge is why no one in their right mind gives them control of monetary policy.

[Pelham]

“Sure sounds like the Fed is going to own some of our debt.”

I’m not sure what you want me to explain. I said the Treasury doesn’t own any of our debt, which it doesn’t.

The Treasury isn’t the Fed. The Fed on the other hand holds a very large portion of our national debt, which it uses to manage the money supply. The Fed purchases, or monetizes, Treasury debt when they want to put liquid money into the banking system. They are doing this right now to counteract deflation that is occurring from debt default. The Fed will sell that Treasury debt back to the banks to soak up liquid money when they begin to see inflation.

[Pelham]

“It doesn’t sound to me as if you know what you are talking about.”

Perhaps you need to read it again.

[wendy1946]

You’re basically wrong on every point. Granted there’d be a big problem with simply letting our present federal govt. just print money, what we’re doing now in allowing banks to create money from thin air and charge us interest for it while simultaneously counterfeiting it at a ten to one ratio via reserve banking is insane. There has to be a better way.

[palmer]

The Fed will sell that Treasury debt back to the banks to soak up liquid money when they begin to see inflation.

Easier said than done. The "begin to see inflation" was 2008 but we saw a massive credit contraction right after that. As for the Fed selling that smelly stuff to anyone, the only reason anyone is buying any of it is that Fed is the greatest fool who will take it off someone's hands. It's quite telling to see "flight to safety" each time that the market thinks there will be "deflation". In reality it is the market loading up for short term speculative profits. The t-bill market is strictly pump and dump knowning that the ultimate greatest fool of all time will be there to buy no matter how bad things get.

Until of course the Fed decides to regain its sanity.

[Toddsterpatriot]

allowing banks to create money from thin air and charge us interest for it while simultaneously counterfeiting it at a ten to one ratio

How long has it been since I showed the idiocy of your theory? Banks loan less than deposits, no counterfeiting involved. I could show you the math.

[Toddsterpatriot]

As for the Fed selling that smelly stuff to anyone, the only reason anyone is buying any of it is that Fed is the greatest fool who will take it off someone's hands.

Treasury debt is "smelly stuff"? At these yields the market thinks it smells best.

In reality it is the market loading up for short term speculative profits. The t-bill market is strictly pump and dump

Which Treasuries are pump and dump? The six month at 0.183%? The one year note at 0.235%? The two year note at 0.517%?

[palmer]

All of them. Prices are high (those absurdly low yields you pointed out) because the current buyers plan to dump them very soon to someone else who is even a greater believer in deflation. But that entire market wouldn’t exist were it not for the greatest fool at the end of the chain. Obviously nobody at all is going to hold a two year note to maturity in this environment.