GaryD

FOMC: Forking Over More Currency?

Jason, you are proposing that the banks borrow from the Fed and then loan to major financials(?). The major financials already have access to Fed money at prime. Why on earth would they borrow from other banks at 5 points over prime as you suggest? You also mention that loaning money to REITs has no material likelihood of immediate default. True, but since the banks won't be able to get these loans off their balance sheets anymore by packaging them into make-believe mark-to-fantasy bundles and selling them to clueless foreigners, they will need to keep that garbage on their own balance sheets, which will require them to set aside more capital, which they don't have, which is the problem in the first place.

The End of U.S. Investing as We Know It?

You state that "while, housing and auto may be contracting, the other 90% of the U.S. economy is still expanding." Could you please justify the implied assertion that the financial sector is expanding. My interpretation of the available information is different.

Time's Running Out as Wholesale Prices Keep Rising

Winemaker, the fed creates inflation by allowing money to be created out of thin air. They do not fight inflation, they merely create more or less of it. The rise in prices that we are seeing is due to all the money pumping that has been going on since 2001. Rising prices are a consequence of the excess money creation. There is nothing the fed can do now. Prices will reset to higher levels that reflect the current amount of money in circulation. If the fed tries to prevent this they will cause a depression. If they try to slow it they will cause a recession (which they are strongly discouraged from doing by Congress). In all likelihood they will respond by creating even more money. This may kick the day of reckoning a few years down the road, but it won't solve the fundamental problem which is that our currency has been farcked by the powers that be.

What many people don't understand is that a huge portion of America's wealth is due to the status of the greenback as the world's reserve currency. Foreigners have stockpiled massive amounts of US currency in order to ensure that they can buy commodities, food, and oil (all of which are denominated in US dollars). If the greenback is knocked off its pedestal as the reserve currency of the world a tsunami of US currency will flood back to the United States making the current inflation look meager and contained. The fed has played, and continues to play, a dangerous game with our currency.

Inflating Away Debt

I am under the impression that most government debt is short term and revolves every few months. For the deflation scenario to work, the government would need to push rates to 2% and keep them there for a very long period (forever?). The 2% rates might provide a temporary respite, but won't the underlying problem still be there? Won't they still have a compounding debt problem? The T-Bill rate went from 5.1% in 2006 to 3.8% in 2007, but interest payments still went up. .Won't this eventually undermine the currency, forcing interest rates on the debt back up? Who is going to accept 2% on a bill whose currency value is eroding by 3-4% per year? I believe your point about asset deflation in things like real estate, but I have a hard time believing that the government has the power to precipitate deflation when it needs to create huge amounts of currency to maintain interest payments (even at 2% interest). That doesn't even include the amount of currency that will be repatriated of Iran starts selling oil in Euros, a sum that I don't have a grasp on but must be enormous.