Thursday, September 13, 2012

FED Commits to Devalue the Dollar by $40 Billion Per Month: Updated

Gold Spikes as the Dollar is Debased

(9/13/2012 11:27 AM) Bloomberg has an excellent article on the subject HERE:
The Federal Reserve said it will expand its holdings of long-term securities with open-ended purchases of $40 billion of mortgage debt a month in a third round of quantitative easing as it seeks to boost growth and reduce unemployment.
Most people have seen this coming. It is the intersection of election year politics and monetary policy. The money printing is tied to the unemployment rate and assumes that the rate will eventually fall to an acceptable level. Richmond Fed President Jeffrey Lacker dissented and added that interest rates will need to be raised in 2013 in order to deal with inflation.

Standard Keynesian economics ties inflation and unemployment in an inverse relationship that has not existed since the 1970's. We will get the intentional inflation, but unemployment will remain stagnant. Yes, Lacker is being honest, we can't have that.

For those of us who invested in gold, a live AU chart is available here to watch your investment skyrocket.

For most Americans, the price of gold is not rising, the value of the dollar is falling. Thankfully for the Fed, most Americans have their eye on Libya...who's leader wanted to start accepting gold for oil instead of dollars just before we helped overthrow him.

From an investment point of view, you could rush to buy gold and silver or invest in other real assets like small companies, real estate, intellectual property, etc... Consider the "reverse mortgage" ads you see. These are companies trying to buy cheap real estate from people who are damaged by the artificially low interest rates. This example of movement from cash to real assets is known as leveraging.

Update (9/13/2012 10:51 PM): Detailed explanation of the policy. The $40 billion is in addition to current policy.
On September 13, 2012, the Federal Open Market Committee (FOMC) directed the Open Market Trading Desk (the Desk) at the Federal Reserve Bank of New York to begin purchasing additional agency mortgage-backed securities (MBS) at a pace of $40 billion per month.  The FOMC also directed the Desk to continue through the end of the year its program to extend the average maturity of its holdings of Treasury securities as announced in June and to maintain its existing policy of reinvesting principal payments from the Federal Reserve’s holdings of agency debt and agency MBS in agency MBS.

The FOMC noted that these actions, which together will increase the Committee’s holdings of longer-term securities by about $85 billion each month through the end of the year, should put downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative. 
 Fed Chairman Ben Benanke on how this will help: (italics ours)
We are trying to meet our maximum employment mandate. So that is the objective.

The tools we have involve affecting financial asset prices (contractual assets like bank deposits). Those are the tools of monetary policy. There are a number of different channels, mortgage rates, other interest rates, corporate bond rates, but also the prices of various assets, like for example the prices of homes. To the extent that homes prices begin to rise, consumer will begin to feel wealthier. They will feel more disposed to spend. If house prices are rising then people may be more willing to buy homes, because they think that they will make a better return on that purchase. So house prices is one vehicle.

Stock prices, many people own stocks directly or indirectly. The issue here is whether or not improving asset prices generally will make people more willing to spend. One of the main concerns that firms have is that there is not enough demand. There are not enough people coming and demanding their products. If people feel their financial situation is better because their 401k looks better or reason, their house is worth more, they are more willing to go out and spend. That's what is going to provide the demand that firms need in order to be willing to hire and to invest.
(We are inflating an asset bubble.)  
Bernanke on if this will cause the Fed to abandon their inflation targets:
Well our policy approach doesn't involve intentionally trying to raise inflation. That is not the objective. [...]

Well if inflation goes above our target level, as we talked about in our statement in January, we take a balanced approach. We bring inflation back to the target over time, but we do it in a way that takes into account the deviations of both of our objectives from their targets.

(No,but yes we want inflation)
Bernanke on specific economic conditions that will end the policy:
We haven't at this point come to a set of numbers, a set of data that we can put out.
What we are trying to convey here is that we are not going to be premature in removing policy accommodations. Even after the economy starts to recover more quickly, even after the unemployment rate begins to move down more decisively, we are not going to rush to begin to tighten policy. We are going to give it some time to make sure the recovery is well established.
(For the foreseeable future.) 
The issue as viewed by the other members of


K T Cat said...

I'm going to partially disagree. First, it's $85B a month, not $40B. Second, almost perfectly matches deficit spending by the government. So I agree that it's Keynesian in theory, but in practice, without it, you're looking at a Spanish-style collapse where people demand greater and greater interest rates to protect themselves from the growing threat of default.

In short, it's not about stimulus any more. It's about survival.

Doo Doo Econ said...

It is a good theory but it supposes that America can no longer sustain the debt by selling bonds. Thus the Fed is the purchaser of last resort and the last resort is all that is left.

Such a theory would indicate a massive American economic collapse such as the dollar losing its position as the global reserve currency or the reelection of Barack Obama.

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