"a world where the global supply of savings is shrinking"
The best advice you told me is, That the more moeny I have the more that I can do to help others, So Ive been working double time so now I can buy gifts for others and still save for that rainy day that no doubt will come. On Nov 27, 9:10 am, "[EMAIL PROTECTED]" <[EMAIL PROTECTED]> wrote: > My comment: Again a waterfall model. They put funds on top of the > banks in the faith that somehow, through magics, spells, or any other > ritual, it will fall toward main street, toward the real economy. > > Again, they walk with one leg (financials), they dismiss the other > leg, economy. Again a top-down approach. > > To put funds into stock markets, credit cards, etc. anything works for > them except where funds create real wealth such as building wind > mills, railways, cheap houses for the people who lose their former > homes, etc. even subsidiasing mortagages in default, subsidiasing > interest rates for acquisition of durable goods, machinery, etc. > > Development is always from below. > ------------------------------------------------------------------------------------ > > Desperate Measures by Desperate Policy Makers in Desperate Times: the > Fed Moves to Radically Unorthodox Policies as Economy Is in Free Fall > and Stag-Deflation Deepens > > Nouriel Roubini | Nov 26, 2008 > > http://www.rgemonitor.com/blog/roubini/254591/desperate_measures_by_d... > > Another batch of worse than awful news greeted today Americans getting > ready for the Thanksgiving holiday: free falling consumption spending, > collapsing new homes sales, falling consumer confidence, very high > initial claims for unemployment benefits, collapsing orders for > durable goods. It is hard to get any worse than this but the next few > months will serve even worse macro news. At this rate of contraction > as revealed by the latest data it would not be surprising if fourth > quarter GDP were to fall at an annualized rate of 5-6%. > > Let us discuss next the financial consequences of such desperate news > and the desperate policy actions undertaken to stem this nasty stag- > deflation… > > Equity markets have shrugged off today’s and the last week awful news > based on a variety of factors: President Elect Obama choosing a first > rate economic team; a major fiscal package to be passed by Congress as > soon as the new administration takes power; the bailout of Citigroup > at terms that – while being a royal rip-off for the US taxpayers – > they lead to a bailout of not only the unsecured debtors of Citi but > also of the common shareholders; and, most importantly, the Fed, > Treasury and FDIC now moving to radical unorthodox policy actions to > deal with the credit crunch. > > As discussed last week in this forum the threat of stag-deflation > (recession/stagnation and deflation) and of debt deflation has already > forced the Fed into a liquidity trap as the Fed Funds rate is > effectively close to 0% and an informal policy of “quantitative > easing” has already started has the Fed has flooded financial markets > with over $2 trillion of liquidity. And as argued here last week the > Fed would be forced into more radical and unorthodox “crazy” policies > to prevent deflation, debt deflation and a nasty credit crunch. > Indeed, as I predicted then in my piece The Deadly Dirty D-Words: > “Deflation”, “Debt Deflation” and “Defaults”. And How Central Banks > Will Have to Resort to “Crazy” Policies as We Have Reached Such > Bermuda Triangle of a “Liquidity Trap” : > > “now a desperate Treasury is starting to think about using the > remaining TARP funds to directly unclog the unsecured consumer debt > (credit cards, student loans, auto loans) market and the > securitization of such debt. Desperate times required desperate and > extreme actions. > > Even “Crazier” Policy Actions Are Required to Reduce Long Term Market > Interest Rates > > But even more desperate or “crazier” monetary actions are needed to > address the increase in real long term market rates. These actions are > needed to prevent deflation from setting in, to reduce the credit > spread (the difference between long term market rates and long term > government bond yields) and to reduce the yield curve spread (the > difference between long term government bond yields and the policy > rate)…. > > Next, the Fed could try to directly affect the credit spread (the > spread between long term market rates and long term government bond > yields). Radical actions could take the form of: outright purchases of > corporate bonds (high yield and high grade); outright purchases of > mortgages and private and agency MBS as well as agency debt; forcing > Fannie and Freddie to vastly expand their portfolios by buying and/or > guaranteeing more mortgages and bundles of mortgages; one could decide > to directly subsidize mortgages with fiscal resources; the Fed (or > Treasury) could even go as far as directly intervening in the stock > market via direct purchases of equities as a way to boost falling > equity prices. Some of such policy actions seem extreme but they were > in the playbook that Governor Bernanke described in his 2002 speech on > how to avoid deflation. They all imply serious risks for the Fed and > concerns about market manipulation. Such risks include the losses that > the Fed could incur in purchasing long term private securities, > especially high yield junk bonds of distressed corporations. In the > commercial paper fund the Fed refused to purchase non-investment grade > securities. Even high grade corporate bonds are not without risk as > their spread have massively widened in recent months from 50bps over > Treasuries to levels in the 500bps plus range. Also pushing the > insolvent Fannie and Freddie to take even more credit risk may be a > reckless policy choice. And having a government trying to manipulate > stock prices would create another whole can of worms of conflicts and > distortions. > > Finally, the Fed could try to follow aggressive policies to attempt to > prevent deflation from setting in: massive quantitative easing; > flooding markets with unlimited unsterilized liquidity; talking down > the value of the dollar; direct and massive intervention in the forex > to weaken the dollar; vast increase of the swap lines with foreign > central banks (an indirect and disguised form of forex intervention) > aimed to prevent a strengthening of the dollar; attempts to target the > price level or the inflation rate via aggressive preemptive > monetization; or even a money-financed budget deficit (an idea > suggested by Bernanke in 2002 that he termed to be the equivalent of > an “helicopter drop” of money in the economy). > > And this week, indeed, the Fed, together with the Treasury, started to > implement some of the “crazier” policy actions that we discussed last > week: a) outright purchases of agency debt and MBS to the tune of a > whopping $600 billion; b) another $200 billion of loans to backstop > the consumer and small business credit markets (credit cards, auto > loans, student loans, small business loans); c) an effective policy of > aggressive quantitative easing as the balance sheet of the Fed – > already grown from $800 billion to over $2 trillion – will be expanded > further as most of the new bailout actions and new programs will be > financed via injections of liquidity rather than issuance of public > debt. > > Effectively the Fed Funds rate has been abandoned as a tool of > monetary policy as we are already effectively at the zero-bound for > the policy rate that signals a liquidity trap; and the Fed is now > relying on massive quantitative easing and direct purchases of private > sector short term and long term debts to try to aggressively push down > short term and long term market rates. > > No wonder that, after announcing $600 billion of purchases of agency > debt and MBS the rate on 30 year mortgage rates has fallen overnite by > 75bps. Even that radical fall in mortgage rates – the largest daily > move in decades – will be of small comfort to debt burdened households > as only those who qualify for refinancing will be able to do that and > the total average monthly savings on mortgage debt service would > amount to a modest $150. > > Desperate times and desperate economic news require desperate policy > actions, even more desperate than any “desperate housewife” could > dream of. The Treasury will be issuing in the next two years about $2 > trillion of additional debt (on top of having to refinance and > rollover another $1 trillion of maturing debt) while the Fed/Treasury/ > FDIC are taking on a massive amount of credit risk via outright > bailouts and guarantees (TAF, TSLF, PDCF, ABCPFFFMLM, TALF, TARP, Bear > Stears, AIG, Citigroup, TALF and another half a dozen new facilities > and programs). These policies – however partially necessary – will > eventually leads to much higher real interest rates on the public debt > and weaken the US dollar once this tsunami of implicit and explicit > public liabilities and monetary debt driven by rising twin fiscal and > current account deficits will hit a world where the global supply of > savings is shrinking – as most countries moves to fiscal deficits thus > reducing global savings – and foreign investors start to ponder the > long term sustainability of the US domestic and external liabilities. --~--~---------~--~----~------------~-------~--~----~ You received this message because you are subscribed to the Google Groups "World-thread" group. To post to this group, send email to [email protected] To unsubscribe from this group, send email to [EMAIL PROTECTED] For more options, visit this group at http://groups.google.com/group/world-thread?hl=en -~----------~----~----~----~------~----~------~--~---
