U.S. Weakening May Push Fed to Buy Government Notes

bloomberg ^ | March 10 2003 | Craig Torres

[TLBSHOW]

Washington, March 10 (Bloomberg) -- The Federal Reserve may opt for unconventional tactics, such as direct purchases of Treasury notes, to fight deflation should a possible war with Iraq weaken an already flagging U.S. economy.

Word that the nation lost 308,000 jobs in February raised odds that the Fed next week will cut its benchmark interest rate by a quarter-point to 1 percent, the lowest since July 1958. Even that may not be enough to keep the economy growing if a war starts and takes too long to resolve, some economists said.

[duk]

A little over my head. How about layman's terms?

[ml/nj]

The Federal Reserve may opt for unconventional tactics, such as direct purchases of Treasury notes, to fight deflation ...

These are unconventional words to say that the government is about to print some more money.

What is really happening is that the Treasury will print some IoweMe's, and the Fed will print another batch of IoweMe's, and all of this paper will be worthless until there is an exchange. Then both agencies will count the other's paper as an asset.

ML/NJ

[Lysander]

Roughly-- Fiat currency backed by nothing but debt, is backing the debt with fiat currency.

We have counted on inflation as a hidden tax. We pay back the debt with dollars that are of lower value than when they were borrowed. With deflation we pay back debt with money that costs more than when it was borrowed. Debt is of no advantage to our government in a deflationary setting, and is very harmful to business.

[Digger]

The ponzi game is nearing its apex. See what these New World Order guys have done to this nation. Now we have no manufacturing to pull up our economy & thanks again to Nixon who took us completely off of the gold standard.... No country has ever sustained a fiat money system. Maybe when this shortly crumbles we will go back on the gold standard. But with the allowance of proping the Klintoons up so one can run the only superpower & the other the rest of the world where is anything positive.

[TLBSHOW]

New World Order

why Bush Sr was just talking about his hope for the nwo a few weeks ago.

[Willie Green]

A little over my head. How about layman's terms?

"Think what you do when you run into debt;
you give another power over your liberty."

-- Benjamin Franklin (1706 - 1790)

"And I sincerely believe, with you, that banking establishments are more dangerous than standing armies; and that the principle of spending money to be paid by posterity, under the name of funding, is but swindling futurity on a large scale."

-- Thomas Jefferson to John Taylor, May 28, 1816

[Fractal Trader]

Who thinks the Fed is going to open the spigots and pour money into the economy? IIRC, OMO's were last used in the Carter adminisitration.

I think this is "scare" talk. I also do not believe that the economy is in such dire shape, especially relative tor deflationary fears. What are your thoughts?

Free Republic Stock Market/Economy Discussion List. Freep Mail me if you want on or off this list.

[CrimeOf73]

Influencing longer-term Treasury yields would take billions of dollars of purchases by the Fed, so the banking system could also be flooded with cash. While that would create its own set of challenges, such as driving the fed funds rate to zero anyway

So what is the fed funds rate target under a Treasury monetization regime? Does it even mean anything?

If the Fed keeps a fed funds target, it ends up fighting itself. It has to pull money out of the banking system to offset the downward pressure on the fed funds rate the Fed itself caused by monetizing Treasurys in the first place.

[freeper12]

>>A little over my head. How about layman's terms?

How about: We are all screwed.

[Fraulein]

"Under circumstances of financial stress or war, the Federal Reserve stands ready to provide all the liquidity that the financial markets need, no questions asked, no penalties, no keeping track."