ageczi

Why Interest Rates Will Almost Certainly Rise in 2010

With all due respect to Mr. Smith, his fundamental problem with the FRB and therefore the basis for his conclusion, is the very essence of monetary policy and fast action monetary easing. How else could the central bank pump so much money into the economy so quickly? The FRB essentially doubled the systemic cash value of the bonds sold by the government to quickly increase M1 while the government debated on how to spend it. In essence, it used the markets to distribute the money it "printed", as it should have (Fed employees cannot just hand money out on street corners). My prediction is that the FRB will start selling bonds as part of tightening therefore driving the yield higher in the second half of 2010. However, they will do this over time following capacity and unemployment indicators. The yield curve will steadily increase from that point forward for a prolonged period of time. Likely, the Fed will disregard price indexes at least in the next 6 months.
In the long-run, China will be forced to stop dumping U.S. Treasuries in an effort to shore up the book value of government assets, as the more they liquidate the less the remaining assets will be worth. In the short-run, China might sell, if for no other reason, to make-up for the restricted cash flow due to the declining trade surplus. There are 1.2 billion people to feed. The Chinese government is in no way less dependent on income as its U.S. counterpart, so when the well dries up they must tap into the reserves. As the yield is pressured upward demand for dollars will increase. This valuation change in the dollar will soak up the U.S debt the Chinese were forced to dump.
Finally, who will buy additional U.S. government debt? Simple, the Fed will. But they will buy direct from the government while leaving interest rates largely unaffected. As the U.S. economy strengthens, the Fed will tighten by selling those bonds to eager investors looking for a nice return on a safe investment, while soaking up the excess supply of money.

Unemployment and Excess Capacity

Whether or not the above correlation is indicative of what is to come, I agree that so long as the FRB maintains the will and ability to mop up excess supply of money the moment economic data calls for such action, the current "easy money" policy is justified based solely on the prevailing rates of excess capacity and unemployment. The underlying dual economic problem of the last decade, a prolonged higher than normal and generally rising access capacity along with lower than normal unemployment (prior to the recent recession), is clearly visible. Low unemployment maintained through high finance. As the economy is shifting gear from manufacturing to service based, the FRB must play a more active role in stabilization. These are inherently unstable times. Can America create, in a global marketplace, as much value in services as it did in manufacturing? What is more valuable; goods or their distribution to consumers? Who is more leveraged; a manufacturer or a retailer?

Another Reason Why America's Glory Days Are Over

Just wondering how you would handle the local government expenses like fire and police departments. How about those state penitentiary officers that keep the criminals out of our hair.


On Dec 15 01:22 PM Leftfield wrote:

> ageczi: Since teachers are paid because they are so good, let's
> open up the education market with choice and vote with our property
> tax money to send our kids to schools we choose.

Another Reason Why America's Glory Days Are Over

Typical misguided propaganda by the writer. The scary chart represents State and Local governments. State governments in particular have higher costs, generally because the largest percentage of their budget is education. Teachers are paid near professional wages therefore a comparison to average employer costs is ridiculous. This information is irrelevant. I would be hesitant to reach any conclusion based on this information, especially one of such magnitude.

Markets Have Hit a Bottom, But Is It THE Bottom?

I agree that the market's recovery will be led by the financial sector. Toxic assets will disappear from the books of the nation's troubled banks following the Fed's efforts, making their balance sheets look healthy again. Shareholders' equity will increase virtually overnight which will begin a rally on the financial sector. With luck, QE will achieve its intended purpose of lowering interest rates on government borrowing so that taxpayers are stuck with a smaller bill, as well as aid in restoring the flow of credit to firms and monetizing both consumer and government debt (hopefully within reason). Facing the dual devils of deflation and inflation, I think the choice is obvious. Yes, there will be repercussions. Yes, they will be on the large scale. Yes, we will be paying the price, but we have been enjoying the benefits for years. Fundamentally, we have not hit macroeconomic contractionary rock bottom and we are far from it. Therefore, the market has not met its potential bottom either. Much like the unemployed and the bankrupted, the market's only savior is effective monetary and fiscal policy even if it is the perceived (or real) enemy.

Gold Is Going to Gain

Anybody trading in gold is nothing short of a speculator. Gold has become obsolete the moment economic activity was measured in monetary units. Gold, much like a Federal Reserve Note today, represented one's widely recognizable contribution (or value) to economic activity therefore has no more intrinsic value than any central bank note when demand for it as a commodity is removed. If people actually understood this simple concept and stopped equating it to monetary security and viewed it for what it really is (a commodity), the premium sitting on top of its value would evaporate overnight. It would behave like the price of oil has in the past several months. Faith in gold did not prevent mercantilist policies of the 17th century from contributing to high levels of inflation in Spain, and it will protect against inflation in the 21st century only so long as people fail to understand its true significance. I suppose you can always bank on ignorant people being ignorant, therefore bank on gold.

As far as Keynesian economics is concerned, there is no need to look further than the rudimentary circular flow diagram of economic activity to figure out its potential impact on restoring confidence and growth. However, the implementation choices made in Washington will certainly affect its effectiveness, which is where we can debate until the cows come home.