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To Monetize or Not to Monetize: Who Cares?
Fed lends money to banks throught the discount window at the discount rate (fed funds rate + 50 bp)
Banks right now instead of lending it out to businesses, individuals etc are afraid. Instead they are hoarding it. They don't really lock the Ben Franklins in vaults. What they do is Buy Treasuries at ridiculously low rates (10-year is now trading at 2.40%). The Fed is basically forcing them to borrow at the window due to the so called "target rate" and they do that by buying the treasuries themselves in competition with the banks. I guess some people here argued that they do that to make them so unattractive so that the banks start lending to real causes again. That's Monetization and it does hurt the currency. Simple laws of supply and demand. Someone also called it very accurately displacement.
So, as of right now the excess monetary supply has not yet hit the real goods market (main street) and that's why we are not seeing any signs of inflation. But at some point the banks will realize that it's stupid to buy T-bills at these stupid levels and find "better" return scenarios in other investments. The spreads between the G-bonds and the C-bonds will close and the corporate market will get flooded with money. That will be the bottom and possibly (if the fed doens't start raising rates quick and drain the market off the excess supply) the start of runaway inflation like some pundits accurately claim. Obama seems to be on top of that (thank god Bush is out) as I heard him talking about it in an interview the other day.
So, watch out for the corporate bond market and watch those spreads. Once the banks flood that market with money, it's like a show of confidence that there will be no bankruptcies, defaults etc and a sign that they are tired of the 2.5% unheard-of yield in the 10 year.
Next step: The companies basically take all this cheaply borrowed money and start spending it in investments, goods, you name it. Then you have too much money chasing too little goods (i.e. inflation), unless of course you have the political muster to stop the bubble, which I haven't seen anyone so far do...
And as far as Gold: I doubt the world is coming to an end. You'll know of WWIII when you see trade barriers going up but we are not even close to that... I would rather much go with Yen or Euro or Commodities...
Jan 10 02:11 AM
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