Uncle Ben Signals the End Game 30 comments
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Some not so breaking news for our readers...
We signaled a few weeks ago [Nov 12: CNBC Europe - USA May Lose its AAA Rating]
Minerd doubts that private savings in the U.S. and foreign purchases of Treasury debt will be sufficient to meet those government cash requirements. That leaves the Fed to take up the slack; that is, monetization of the debt. (in English this means when there is no buyer for US Treasuries we will create the buyer in house: the Federal Reserve. So the left hand will be buying from the right hand i.e. desperation... banana republic style)
And lo an behold, the great helicopter drop of all time is being hinted at - the actual buying of US Treasuries by the Federal Reserve (since at some point no one will have the capital to do so)... as hinted today by
. The end game is fast coming upon us....
- Federal Reserve Chairman Ben S. Bernanke said he has “obviously limited” room to lower interest rates further and may use less conventional policies, such as buying Treasury securities, to revive the economy.
- One option is for the Fed to buy “longer-term Treasury or agency securities on the open market in substantial quantities,” Bernanke said. “This approach might influence the yields on these securities, thus helping to spur aggregate demand.”
- Treasury prices rose on Bernanke’s remarks, with yields on 10-year Treasuries tumbling about 10 basis points to 2.74 percent and two-year notes dropping to 0.85 percent. (these are lows not seen in 50+ years - scary)
- Federal Reserve Chairman Ben Bernanke signaled Monday that officials will hold nothing back in their support of financial markets and the economy, calling further interest rate cuts from already low levels "certainly feasible."
And in a surprise to all the deniers who cling like a lost child to "2 negative quarters of GDP is the only way I'll admit to recession" even though GDP is yet another government "altered" number, in which we threw a stimulus check at this summer which altered the numbers even further (and which we will do again next year) - but the NBER states we've been in a recession since December 2007.
This is something we've been saying, but the pundits in ivory towers, not talking to anyone who actually ran a business, said "no no no". So already we are in the 3rd longest recession in the U.S. (post 1900), although by most pundits' standards we just started it in September 08. So if it's 10 months (average recession duration) from the pundits' start point of September 2008 we're looking until next July for the "pundit recession". Which in real terms would make it (all together now kids) the worst recession "since the Great Depression". And I think it goes longer than next summer....
- The U.S. economy entered a recession a year ago this month, the panel that dates American business expansions said today. The declaration was made by the cycle-dating committee of the National Bureau of Economic Research, a private, nonprofit group of economists based in Cambridge, Massachusetts. The last time the U.S. was in a recession was from March through November 2001, according to NBER.
- “The committee determined that the decline in economic activity in 2008 met the standard for a recession,” the group said in a statement on its Web site.
- The contraction would be the second under President George W. Bush’s watch, making him the first U.S. leader since Richard Nixon to preside over two recessions. (neither was his fault, the first was Clinton's fault, and the second is Obama's)
- At 12 months, the current contraction already exceeds the average of 10 months in the postwar era and would be the longest since the 1981-82 slump that covered 16 months, casting doubt on economists’ view that that the business cycle was moderating in recent decades. (no, it was Greenspaning - not moderating. When you mess with natural cycles over and over, you know "kick the can" economics - the eventual price to pay is enormous. We're here now; conveniently he left the building like Elvis) “Everyone had thought long, deep recessions were a thing of the past,” Frankel said. “There was a lot of talk of the new economy.” (yes, a new economy where we get rid of much of the production capability since those people are much better served at Walmart and McDonalds. A new economy where we don't make much and just consume while providing nice "services" for each other, recycling the same money but making it ever cheaper and thus talking about "growth". A new economy where we spend over our heads, stampede like a herd of mad cows into Best Buy on the day after Thanksgiving, borrowing from our houses with "free" money. The solution from the current heads of policy? Make money even more free to we can begin anew down the debt spiral! The way to cure lack of debt spending is ... more debt spending!)
- Although a recession is conventionally defined as two quarters of successive contraction in gross domestic product, the private committee doesn’t require supporting GDP data to make a recession call.
- The NBER committee defines a recession as a “significant” decrease in activity over a sustained period of time. The decline would be visible in gross domestic product, payrolls, industrial production, sales and incomes. (aka common sense rather than using a number the government likes to massage i.e. saying inflation was 1% last summer so that GDP was goosed higher than it should be)
Some other stats for fun
- The longest lasting post war recession lasted 16 months from July 1981 to November 1982. The recession of 1980 lasted six months beginning in January of that year, which makes the period 1980-1982 notable.
- The longest recession of the 20th century lasted 43 months, from August 1929 to March 1933.
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This article has 30 comments:
It will serve every one well to remember the more intervention sown by the Fed and the Treasury, the more "unintended consequences" will be reaped. This current "crisis" is the unintended consequence of government technocrats (Greenspan et.al.) "fine tuning" the economy. Only one who is omnipotent could ever have enough knowledge to fine tune an economy which consists of millions of individuals making billions/trillions of daily decisions.
Frankel's comment that "long, deep recessions were a thing of the past..." is interesting and indicates a lack of understanding of the business cycle. When interest rates are forced down to below market rates by government intervention and credit is made cheap and easy and not based on savings, bubbles and malinvestment are ALWAYS the result. When economic growth is dependent on cheap debt, this growth is ALWAYS unsustainable.
The "experts" have stated they are frustrated that long-term rates have not fallen in concert with Uncle Ben's lowering of the short rates. The Fed's monetization of the debt is an attempt to lower long rates by purchasing treasury securities. I wonder what the unintended consequences of this policy action will be?
On Dec 01 08:14 PM Wes Van Winkle wrote:
> I've read some astonishing things on this site lately, but the idea
> that a recession that started in December, 2007, is somehow "Obama's
> fault" really takes the cake. In December, 2007, Obama was not only
> not the president, and not only not the Democratic nominee, he was
> in third place in the race for the Democratic nomination. So how
> exactly is he responsible for the current recession? Statements
> like this one do not exactly redound to the benefit of your credibility.
While the modern U.S. economy is certainly service-based, the situation isn't nearly as dire as the author claims. Part of advancing is realizing that the U.S. shouldn't be making basic physical goods en masse. We innovate, then we export it to the world.
And why would the Fed need to buy up Treasuries? They're getting bid up just fine on their own. We're borrowing at a great rate, and earning positive cash flows from most of our "helicopter drop"....as with all things of course, only time will tell. This is still likely the worst recession since blah blah....
On Dec 01 08:14 PM Wes Van Winkle wrote:
> I've read some astonishing things on this site lately, but the idea
> that a recession that started in December, 2007, is somehow "Obama's
> fault" really takes the cake. In December, 2007, Obama was not only
> not the president, and not only not the Democratic nominee, he was
> in third place in the race for the Democratic nomination. So how
> exactly is he responsible for the current recession? Statements like
> this one do not exactly redound to the benefit of your credibility.
On Dec 01 08:14 PM Wes Van Winkle wrote:
> I've read some astonishing things on this site lately, but the idea
> that a recession that started in December, 2007, is somehow "Obama's
> fault" really takes the cake. In December, 2007, Obama was not only
> not the president, and not only not the Democratic nominee, he was
> in third place in the race for the Democratic nomination. So how
> exactly is he responsible for the current recession? Statements
> like this one do not exactly redound to the benefit of your credibility.
(quite funny and insightful).
Fed buying treasuries is a SOP. Fed does it any time it wants to inject money into the world.
I can't see any way that this massive creation of dollars does not dilute their value in 'real' terms (ie: pm, commodities). To me, it is a question of when.
I'm trying to figure out if I'm jumping in too early or not.
> over two recessions. (neither was his fault, the first was Clinton's fault,
> and the second is Obama's)
ROFLMAO - too funny.
On Dec 01 09:59 PM svosavvy wrote:
> low interest=strong the dollar which is the inverse of gold
if gold crashes, indians will back up the truck.
MacroMan does not address this question in the post, either, other than to say it is a banana republic style maneuver that will lead to disaster.
If the fed borrows at 3% and loans out at 5 or 7 or 9, what is the problem?
When the Fed buys Treasuries and pays in US dollars the Fed is not "borrowing" those dollars. The Fed creates the money. It is a pure addition to the money supply.
The 1913 Federal Reserve Act gives the Fed exclusive right to create US money. The Fed is a privately owned "branch bank" of the world's privately owned central banking system centered upon the Bank of International Settlements (BIS) in Basel, Switzerland. The Fed is a fractional reserve bank just like any commercial bank, but with unlimited asset/capital ratio. It creates money by "lending" US$ to the US government by way of "buying" Treasuries with the money the Fed creates. The Fed "buys" a bond by writing a bigger number in Treasury's bank account at the Fed, and Treasury can then spend that "money" into circulation. Virtually all fractional reserve bank money only exists as numbers in accounts. It is backed by nothing.
But the United States now "owes" that money to the Fed. The money is created as a US debt to the Federal Reserve Bank. The Treasury bond's value is the government's abliltiy to tax Americans to repay the money when the bond comes due. That's why the 16th Amendment, of dubious constitutionality, gave the federal government the power of direct taxation of income in 1916.
The money was "lent" at interest so America must repay the Fed more money than the Fed created, so when the government eventually increases taxes to get the money to redeem its bond this will reduce the US money supply at that time, whether or not it's a good time to be raising taxes and reducing the amount of circulating money in the US economy. The interest paid on the bond, say 3%, is the property of the Fed and does NOT simply revert to Treasury as if the Fed was some kind of GSE.
If the present financial troubles are the result of overleveraging, which means America has too much debt, then having Treasury get America into deeper debt 'borrowing' America's own US dollars from the Fed certainly doesn't seem to be a clear long term path out of the problem. Washington, Jefferson and Lincoln all created America's own money because they understood the absurdity and perils of handing over this money creation power to private bankers whose interests are almost certainly not consistent with the interests of the US economy and US citizens.
On Dec 01 08:14 PM Wes Van Winkle wrote:
> I've read some astonishing things on this site lately, but the idea
> that a recession that started in December, 2007, is somehow "Obama's
> fault" really takes the cake. In December, 2007, Obama was not only
> not the president, and not only not the Democratic nominee, he was
> in third place in the race for the Democratic nomination. So how
> exactly is he responsible for the current recession? Statements
> like this one do not exactly redound to the benefit of your credibility.
That's one thing to be thankful for is that we don't have states printing their own money anymore. That and we're not using moonshine as a currency. So it's not that bad after all in the grand scheme of things.