Approaching Zero 29 comments
James Picerno
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The current 1.5% Fed funds rate isn't long for this world. The Federal Reserve, perhaps in coordination once again with other central banks around the world, will cut interest rates, and soon.
That, at least, is the market's view. The November '08 Fed funds futures contract has all but priced in a 50-basis-point cut to 1%. This announcement of a cut will come as a shock to no one, given the events of late.
Meanwhile, money supply has been rising at extraordinarily high rates in reaction to the extraordinarily dire state of affairs in finance and increasingly on the economic front. M1 money supply (the narrowest measure) surged more than 19% on a seasonally adjusted annualized basis for the three months through September 2008, the Fed reports. A year ago, M1 was up a mere 0.8% over the same time frame.
Such an aggressive creation of liquidity will be met with lower interest rates ... again. But we're coming to the end of this road, and the dangers (psychological as well as economic) are growing. It's no longer beyond the pale to consider the possibility that the Fed will drop rates to zero, depending on how the turmoil unfolds in the coming weeks and months. What happens when Fed funds have sunk to nothing remains an open debate, but this future appears to be rushing toward us.
Moving monetary policy below the 1% rate is explored territory. In the 1950s, Fed funds briefly dipped below 1% and approached but never reached zero. What might happen this time if rates tested and bested those old lows is the stuff of speculation. A new era of monetary experiment, as Vincent Reinhart calls it, awaits. Outcome yet to be determined.
The U.S. isn't alone in facing the potential of venturing into this strange, untested realm of monetary policy. Britain, to name but one of the other candidates looking at zero, is also facing the possibility of virtually giving money away.
Beyond zero, what are the options? Fed Chairman Bernanke explored the issue in a speech back in November 2002, when he was a Fed governor. The bottom line: There are alternative means of creating additional liquidity when rates are at zero, he explained.
As to how effective those alternative levers are, well, stay tuned. Moving into uncharted territory is inherently full of surprises, and not necessarily for the good, and so it's unclear what we're looking at if Fed funds go materially below 1% for any length of time. In some respects, the central bank is the last, best hope for keeping an economic system from imploding when debt threatens to overwhelm. We're still a long way from deflation, but it's not too soon to start thinking about the consequences.
Debt, in short, is the basic issue. The question of how to deal with it is as complex as the threat is simple.
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This article has 29 comments:
inflation will go to the moon,
all this speculation is senseless
a recipe for speculation?
I'll gladly buy a hamburger today
for half the price
of a hamburger next Tuesday.
The central bank is the primary reason we are in the current debt trap in the first place due to their era of "easy credit for growth". Certainly more of the same will fix the problem.
This is the soft underbelly of Keynesianism. Borrowing to increase consumption always leads to excessive debt without the means to repay. The ensuing economic slowdown comes when earnings can no longer support the debt burden. Borrowing stops and the economy shrinks regardless of the interest rate spread that the banks can earn. Lowering the FED rates won't stem the crisis. It will merely prolong it.
Changing fund rates until they are proper,
When the economy keeps ailing,
He'll simply start flailing,
Dropping money from FED helicopters.
I think another 2 trillion outta get things going.... whaddaya say... lets try it!
Government aid is most aptly described from Hurricane Katrina...
The Fed. Gov. comes to the rescue of 'innocent' Americans stranded on rooftops.... They bring food and water and drop 50lb bags of rice and gallons of water from helicopters
that's government intervention.... NORTHCOM 09!
You forget the reserve requirement can be changed by an act of Congress.
should be able to jumpstart the economy with some Fiscal Stimulus...monetary no longer needed...MarvinMBA
For you that live in a vacuum,wake up and smell the cofee...we live in a non-productive society destined to become a third world country...the dumbing down has been successful...
The government should spend some money on building nuke plants, or fixing bridges and levees. And maybe inact protectionist policies for our industries that havent been shipped over seas.
Believe it or not, the market has already priced-in a drop to zero -- Note today's Dow... Say 12:00 Noon to about 2:45 Eastern Time... That's it... That's all he gets... A plus side of almost three hours... I wonder how much it costs the Fed for these little positive bumps???
All of this is an absolute sham. How does anyone expect an investor to get involved in this mess? Has anyone seen the new pathetic commercial from Schwab? Chuck -- looks more like Lucy moved the football on you again and you've falling on your rear end! Then we have the G-7 throwing around their weight... Did you put your money into Yen? Well the G-7 will come along and screw that up for you. Joke. Farce. Fraud.
I heard that firearm sales are really skyrocketing. I told you before that firearm companies were a GREAT investment in this environment. This sucker is going down...
Speaking of odd things... Here is the list of banks that are sucking off the breast of the American taxpayer. Is it just me, or didn't all of the CEO's of ALL of these companies say that they were strongly positioned, sound fundamentals, no problems, no worries, etc., etc., etc.???? So why are all of these companies sucking off of American taxpayers? It doesn't make sense.
We have at the top, Wells Fargo, who reported fantastic results on the quarter. In fact, they were so good, many investors wondered how they did it with their huge exposure in California. Well... Now the question is... Did they do it? Why are they and others taking money from the American taxpayer to prop them up. Let 'em fall. Every last one of them.
My recommendation on ANY firm that takes Paulson's offer to take money from the U.S. Taxpayer: STRONG SELL -- JUNK STATUS --
The Taxpayer Leech List:
FIRST ROUND
Citgroup $25 billion
Wells Fargo $25 billion
JPMorgan Chase $25 billion
Bank of America $15 billion
Merrill Lynch $10 billion
Goldman Sachs $10 billion
Morgan Stanley $10 billion
Bank of New York $3.0 billion
State Street $2.0 billion
TOTAL $125 billion
SECOND ROUND
PNC $7.7 billion
Capital One $3.6 billion
SunTrust $3.5 billion
Regions Financial $3.5 billion
Fifth Third $3.4 billion
Key $2.5 billion
Comerica $2.25 billion
Northern Trust $1.5 billion
Huntington $1.4 billion
First Horizon $866 million
City National $395 million
Valley National $330 million
Washington Federal $230 million
First Niagara $186 million
TOTAL $31.36 billion
That's the firm's/executive/inves... decision.
period.
Fast forward Buffet and other economists warn about derivitives market, low interest rates & give away mortagages. Real Estate prices go vertical- just like Dot com bubble went vertical--- crash & crash again.
What kind of buffonery is this?
So now we're going to get Super-Majority Democrat control and Barney (fannie mae) Frank, who has threatened the most sweeping reform of US financial system since the Great Depression.
This is setting up to be epic bear market.
Don't forget... Your worthless paper money will have the signature of Nancy Pelosi as Treasury Secretary... Somehow, that would be fitting...
who sat at the feet of Ms. Rand.
Her ideas seemed fine
for just the right time,
but till then honest banking be damned.
Thanks.
Our economy (from the government to the constituent, from hedge funds to prime brokers, from lawyers to real estate brokers) squeezed demand from the housing market when the tech bubble's burst left American growth without a source. Best of all, you could lever housing investments 60:1 because of its time-honored appreciative "guarantee."
We're in need of a new bastion for investment; not a bubble, but a sled dog to pull aggregate demand. Alternative energy is a distant candidate, but infrastructure is an immediate open hand.
TARP and liquidity measures have thus far been financed by tapping public debt. Remember, that much of our government's intervention has taken the form of investment via preferred stakes or collateralized loans (regadless of our personal opinions of said actions). As long as these investments don't implode, the Treasury shouldn't have to monetize its debt by printing money. Further, once fear recedes from credit markets, the thirsy for liquidity will wane as well, and central banks will sop up the excess to anchor interest rates.
Instead of lowering the Fed Funds target to zero, unleash a Keynesian solution in recessionary government spending. Fiscal stimulus in the form of infrastructure spending, which will create jobs, improve quality of life, blah blah. The threat of crowding out is limited by the global deflation.
Also, note that the breakeven rate (5yr Treasury yield minus 5yr TIPS) reached a record -43 bps today, indicating deflationary sentiment.
1) The Fed Funds rate is a target, and I doubt banks will lend to one another for 0% because there always exists a risk premium.
2) Your hypothetical junk bond issuer doesn't have access to these 0% interest funds. If anything, they borrow from the banks who do have that access, and the banks will make a profit off an interest spread: borrowing from one-another at 0% and lending to joe-junk-bond at, say, 1%. Therefore, the joe-junk-bond would issue debt to the public for some yield south of the bank offered 1%.
that is scary!
we should kick these bums of the hill!
NORTHCOM 09'
Demand to know for ANY politician seeking election/re-election if they would support the bailout.
If yes, throw them out, or tell them bluntly, I won't vote for you on that premise alone. Make them think about things "not so trendy" -- like socialism, and what legacy they want the United States to be. Sadly, all we are now are a bunch of ill-standard emo' kids looking for handouts while immigrants do all the work for free houses.
Grrrreat.
Also, if you want to ask any politician a notable question, ask them if the US Constitution is a living document...
What a sad state of affairs our nation is in -- literally wallowing in our own $hit.
The stability measures in place are very effective.
The investment community has to acknowledge that all of the measures were not fully implemented yet and that the monetary and the fiscal lags do exist.
It is just a matter of marginal time before the economy and the markets will be heading higher.
The strength in the dollar is the barometer reflecting global consensus as to where our economy stands compared to the others.
Let's acknowledge that the market had discounted a very severe recession ,This is reflected in the severe stock market deconpression.
Within that context ,the economic data and most (but not all ) of the corporate performance is better than expected.
We must acknowledge that there is a cyclical disconnect between the U.S and the rest of the universe as we were the first to acknowledge and addressed the relevant issues.
Some steps would actually accelerate the stabilization/consolid... process.
a) The SEC should impose the naked short rule untill the stability program is fully implemented .
b) The FED should cut the FF by 75 bps as a psychological market assurance.
c)The Treasury should buy the shares in the designated companies in the open market.
Perhaps these measures could be implemented in tandem with the relevant institutions in key economic zones.
I have warned the investnment community at least twice in the media about the financial Armageddon ,last time on September 18 ,20007.
Now I am confident we are on the way to a major rebound having deflected more severe market decompression.
Let's not allow mass paranoia and psychosis to dominate the market decisions.
There are greater issues than just the markets coming to light.
The circus continues but the bread is almost gone.
As TheDozer implies - NORTHCOM '09 might come to pass.