THE Federal Reserve Thread pt 2 (merged)

[tex123]

This just doesn't make any sense to me. How can we keep going at this rate? How is it that any country would buy our bonds at all? It boggles the mind how our financial system and dollar hasn't collapsed already.

[Daniel_Plainview]

What I believe this means, is that there aren't enough buyers in the world that are willing or can afford to buy $1.7 Trillion per year to fund the US deficit. That means that the Fed can't stop printing for any length of time. I expect that will lead to higher and higher inflation and at some point, the collapse of the dollar.

This is probably true: the Fed is forced to monetize the debt because there simply are not enough buyers for $1.7T of US debt every year.

My question is whether this is a temporary phenomenon, or whether it will become a permanent, systemic fixture? If this is permanent, then it is a very dire development. Every previous society that has done this has collapsed. It's hard to imagine how this can be merely temporary given that the national debt is increasing exponentially, and that govt spending is becoming a larger and larger component of GDP (govt is now 45% of GDP).

It boggles the mind how our financial system and dollar hasn't collapsed already.

The dollar hasn't collapsed yet because: (1) it is the global reserve currency and nothing has yet emerged to replace it; (2) the Euro and other currencies are also dysfunctional; (3) people are only slowly realizing how fucked the US is because the govt is a pathological liar; (4) people are only slowly realizing that precious metals and commodities are the only cure for a dying fiat currency. Once collapse happens, it could be swift and merciless.

[FloridaGirl]

Daniel_Plainview wrote:
My question is whether this is a temporary phenomenon, or whether it will become a permanent, systemic fixture? If this is permanent, then it is a very dire development.

One way to make this temporary is for our government to eliminate the deficit. I've watched in frustration at the government debates on the budget where even the Republicans' proposal fall way, way short of doing what is needed to save us. They are so intent on not reducing the Department of Defence budget, we have no chance of balancing the budget and avoiding collapse.

What they are not considering is that the collapse of the dollar is a MUCH WORSE fate that what would happen if we reduced the Department of Defence budget. Consider that a collapse will cause our trade deficit to go to zero and that means the loss of a lot of imported oil. That will be a terribly disruptive event.

See http://www.federalbudget.com/ for a nice graph of where the US money is going. We really have to address the big ones, but at this point I have no hope that they will.

I feel like I have written the Pelican Brief.

[Plantagenet]

One way to make this temporary is for our government to eliminate the deficit. I've watched in frustration at the government debates on the budget where even the Republicans' proposal fall way, way short of doing what is needed to save us.

Obama's huge deficits aren't going to be eliminated in one day with one continuing resolution.

Cutting this years spending was a step in the right direction. Using the debt limit legislation to put limits on future spending will be another step. Cutting Obama's 2012 budget request calling for another 1.65 TRILLION deficit next year will be another step.

[vision-master]

Next will be removing the 'bush tax cuts' for the wealthy. What do ya think Planted, good idea?

[Sixstrings]

Between 11/17/2010 and 4/13/2011, the Federal Reserve has purchased $508.9 Billion in Treasuries (http://www.federalreserve.gov/releases/h41/) and the Treasury has issued $475.7 Billion in debt(http://www.treasurydirect.gov/NP/NPGateway).

Interesting, sounds like the Fed bought more t-bills than Treasury auctioned. So what's that mean.. basically the old buyers of treasuries are now just servicing sellers of old t-bills. There must be a shortfall here, more sellers than buyers, so seems like not only is the Fed funding 100% of the deficit but they're also stepping in to support existing sales.

Problem is, when the Fed does all this it's just printing press money. Back when I was a Liberterian, I used to go to party meetings and folks were worried worried worried about the debt. This was around the Perot years. What a laugh now, the debt and deficits were nothin' compared to this. So anyhow, it's funny now.. it never occurred to me back then that we'd just print the money.

I think central banks have a lot of tricks up their sleeves we can't quite understand or imagine now. Sometimes I wonder if they really can keep these plates spinning for who knows, another twenty or thirty years even. So many things central banks can do.. they can whittle away the debt with inflationary policy, devaluations, and debt restructuring. Restructuring is akin to default though, so they'll go the inflation route.

One way to make this temporary is for our government to eliminate the deficit.

That will never happen, and the reason is still a mystery to me. It must have to do with the Fed's monetary policy.. they don't want a balanced budget. And the government's current policy is a weak dollar. The Fed's mission at the moment is ramping up inflation. Which could be the ultimate budget fix -- inflate the dollar and therefore eat away Social Security obligations. That trick won't work with Medicare since providers will raise their fees along with inflation. So that's why they want to change Medicare to a partial voucher, the amount of which will be set to decrease over time. Nasty business here.. inflation eating away Social Security checks, and outright cuts to Medicare.

The one thing the Fed has been VERY consistent about over the years is squashing wage growth. I read an article one time about Greenspan.. he used to carry a notebook and jot down construction wages. If the Joe Sixpacks started making too much, he knew there was a problem. So while inflation is now the plan, don't expect wages to rise.

I feel like I have written the Pelican Brief.

It's amazing how little the public knows about central banking, even though these banks have such incredible power over the country.

[Sixstrings]

This just doesn't make any sense to me. How can we keep going at this rate?

That's the quadrillion zillion dollar question, isn't it?

I think they can keep this up longer than you might expect because most dollars are actually held outside the US. So as we inflate the dollar, we're spreading that inflation out all over the world.

[FloridaGirl]

Sixstrings wrote:
I think they can keep this up longer than you might expect because most dollars are actually held outside the US. So as we inflate the dollar, we're spreading that inflation out all over the world.

But the BRICS (Brazil, Russia, India, China and South Africa) have noticed and are doing something about it now. See the article: http://www.cnbc.com/id/42584565

What was needed, they said in a statement, was "a broad-based international reserve currency system providing stability and certainty" -- thinly veiled criticism of what the BRICS see as Washington's neglect of its global monetary responsibilities.

The BRICS are worried that America's large trade and budget deficits will eventually debase the dollar. They also begrudge the financial and political privileges that come with being the leading reserve currency.

[Sixstrings]

But the BRICS (Brazil, Russia, India, China and South Africa) have noticed and are doing something about it now. See the article: http://www.cnbc.com/id/42584565

Yes, I read about that but I've posted so much on this issue I'm just worn out. Thanks for taking up the banner here, and fantastic post by the way -- actually breaking down the numbers. I don't know why more people on this forum aren't interested.

About the BRICS.. it used to be the BRIC but South Africa just joined. I read that's because of their gold, but not sure if that's just a goldbug talking point. Makes sense though, why else let South Africa join up with the world's premier emerging economies if not because of gold?

So yes, they "have noticed and are doing something about it" BUT it will take time. Ten, twenty years maybe to transition away from the dollar. That's assuming they can get along. Anyhow, getting away from the dollar as global reserve / trade currency is a massive task. From Wikipedia:

The U.S. dollar is the world's foremost reserve currency. In addition to holdings by central banks and other institutions, there are many private holdings, which are believed[by whom?] to be mostly in one-hundred-dollar banknotes (indeed, most American banknotes actually are held outside the United States).

All holdings of U.S.-dollar bank deposits held by non-residents of the United States are known as "eurodollars" (not to be confused with the euro), regardless of the location of the bank holding the deposit (which may be inside or outside the U.S.).

Economist Paul Samuelson and others (including, at his death, Milton Friedman) have maintained that the overseas demand for dollars allows the United States to maintain persistent trade deficits without causing the value of the currency to depreciate or the flow of trade to readjust. But Samuelson stated in 2005 that at some uncertain future period these pressures would precipitate a run against the U.S. dollar with serious global financial consequences.
http://en.wikipedia.org/wiki/United_States_dollar#International_use

So far the BRICS have agreed to exchange their own currencies in deals with each other. But that's a far cry from becoming a global reserve currency -- to the contrary, so far they're acting like an exclusive club. Europe, the US, and Japan will all have to crash and burn before the BRIC could set its basket of currencies up as a global reserve.

The US allied bloc is weakened and withering, but not dead yet. Rather than BRICS currency as global reserve, what's more likely is that they'll keep pressuring to expand use of something like the IMF special drawing rights. But that will require approval from the US allied bloc.

The more I read the less I know on this stuff.. every time something looks bad for the US, things look grimmer in Europe. Finland just voted against bailing out Portugal or some such. So with the future of the Euro uncertain, nobody is going to abandon the dollar. I guess it all comes down to a waiting game.. the BRICS are the future, but for now they are still emerging and not the dominant power bloc quite yet.

One thing is for sure.. precisely because there are SO MANY dollars held overseas, when the dollar does collapse it's going to be brutal on Americans.

[dsula]

One thing is for sure.. precisely because there are SO MANY dollars held overseas, when the dollar does collapse it's going to be brutal on Americans.

what do you mean "when"? The $$ is collapsing as we speak. Check out dollar vs swiss franc exchange rate for the last 50 years.

[sparky]

.
One should keep in mind that the federal treasury is sitting on 300 millions Oz of gold
as the U.S. $ sink ,flushing foreign investors savings down the toilets , this appreciate daily
not a bad rip off actually

[Sixstrings]

what do you mean "when"? The $$ is collapsing as we speak. Check out dollar vs swiss franc exchange rate for the last 50 years.

But the Fed and Treasury have a weak dollar policy. So how do you sort it out, how much of this is intentional monetary policy vs. the market?

One should keep in mind that the federal treasury is sitting on 300 millions Oz of gold
as the U.S. $ sink ,flushing foreign investors savings down the toilets , this appreciate daily
not a bad rip off actually

That's worth about 463 billion dollars. Don't know off the top of my head mow many dollars are in worldwide circulation.. something crazy like 30 trillion. So anyhow 463 billion in gold doesn't back up trillions.. it only backs up 463 billion.

[FloridaGirl]

Sixstrings wrote:
That's worth about 463 billion dollars. Don't know off the top of my head mow many dollars are in worldwide circulation.. something crazy like 30 trillion. So anyhow 463 billion in gold doesn't back up trillions.. it only backs up 463 billion.

There's about $1 Trillion physical dollars in circulation (see FRB's H.4.1) and about $14 Trillion for M3 (physical dollars plus the sum of all of the dollars valued accounts in the world). See http://www.shadowstats.com/charts/monetary-base-money-supply.

The big deal I see with the Fed's continued money printing is hyperinflation. Consider what happened in Weimar Germany in the 20's and Zimbabwe. The Reserve Bank prints money, the government spends it into the economy and so there is more money chasing the same (or declining) resources so prices go up. So now it takes more money printing to have the same affect as before so it becomes an exponential spiral. People may get raises but it won't keep up with the increase in prices so people will find that they can't buy much. In Weimar Germany and Zimbabwe, hyperinflation spiraled out of control in just a few years.

I think what the Federal Reserve and the Treasury/Congress are hoping to do is kick the can down the road enough till the economy turns around like it has always done before. Those of us who are peak oil aware know that it may never turn around. Even flat oil production is devastating in a world with increasing population and a ponzi scheme of a monetary system.

[sicophiliac]

I was reading the other day that some investors/financial experts were concerned that when QE2 ends, that the economy could take a serious hit as that fresh supply of money would dry up. That happens in what June? Lets combine that with a steady 100 dollar a barrel oil (Remember the last recession officially got way late in 2007 when oil was like in the 70s or 80s range if I am not mistaken) Its easy to see prolonged oil prices in the 100 dollar range combined with the current frail "recovery" leading to a new recession perhaps sometime next year? Scary thing is that next time around, the federal government really wont have the deficit producing resources to try to step in and bail us out. With deficits already well past 1 trillion a year, its frightening to think about what would happen if tax revenues plummeted again. Either it would be an outright depression and or quickly the dollar would collapse. It could in a way be a self perpetuating death spiral to the United States. Current high energy prices fuel stagflation, deficits grow as the economy weakens, dollar falls, oil and commodities go yet higher, interest rates on treasuries are forced to climb as fewer and fewer are willing to lend to the united states, interest costs rapidly eat into the federal budget, national debt of 20 trillion or more in the next 5 years, GDP lags.. collapse soon after.

Maybe my logic is flawed but I don't see a happy ending here.

[pedalling_faster]

the only reason other nations sell us oil is -
* their rulers are favored by the US gov., e.g. Saudi monarchy
* they act as if the US $ actually has value.

[FloridaGirl]

Another thing I noticed is that, while the stated deficit is about $1.4 Trillion, the debt is increasing at a rate of about $1.7 Trillion. I suspect that is for things like Fannie Mae and Freddie Mac where the Treasury is loaning them the money but the Treasury has to borrow it to loan it to them. Now I don't think that that money will ever be paid back, but accounting-wise the loan becomes an asset.

[FloridaGirl]

Geithner told Bloomberg Television there was no need to reassure foreign buyers of U.S. debt in the wake of S&P's revised outlook, noting investors still had confidence in U.S. debt and the growth prospects of the U.S. economy.

"You can see that in the price at which we borrow every day, but we have to earn that confidence," he said.

http://www.reuters.com/article/2011/04/19/us-usa-ratings-geithner-idUSTRE73I3LJ20110419?feedType=RSS&ca=rssvzw

And now we know why he's not worried about reassuring investors.

[pedalling_faster]

in 2006, Bush43 through his national "security" adviser Negroponte changed the SEC rules for all firms doing business with the US government.

they were exempted from reporting financial reports according to GAAP (generally accepted accounting principles) - period. reported in BusinessWeek - and since scrubbed from their website.

Michael Ruppert picked up on it and echoed the Business Week article in 2006. now Zero Hedge is doing the same.

http://www.zerohedge.com/article/guest- ... k-complime

"Perhaps some of you might be wondering how J.P. Morgue et al really do it? How they can take such HUGE, LEVERAGED risk and seemingly NEVER lose? Well, here’s a clue: back in early 2006, Business Week reported,

President George W. Bush has bestowed on his intelligence czar, John Negroponte, broad authority, in the name of national security, to excuse publicly traded companies from their usual accounting and securities-disclosure obligations. Notice of the development came in a brief entry in the Federal Register, dated May 5, 2006.

What that means folks, is: “if J.P. Morgan is deemed to be acting in the name of National Security or the National Interest – THEY [and presumably others] CAN “LEGALLY” BE EXCUSED FROM ACCOUNTING."

- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -

maybe i should apply for a government contract ?

or do i have to be part of a special club in order to be excused from SEC accounting rules ?

[smiley]

The FED must be buying most of the treasuries at this point. I can't imagine why anyone outside the dollar zone would buy treasuries. If you would have bought treasuries this january you are already looking at a loss of 20% on exchange rates. And there are no signs that that is going to reverse soon.

The world will not buy treasuries unless the yield increases and the dollar stabilizes. America will not allow the yield to increase since an increase of the interest rate would blow a huge hole in their budget (1% Increase of interest rates increases the annual deficit by 150 billion.)

I think that the US has no other option than to go down the road of Japan. Somehow Japan has managed to rack up a 200% debt and has not been cast back to the third world countries. Largely by buying their own debt. I guess the US is eying that as a business model..

So I guess we'll see QE3,4,5,6,......

[FloridaGirl]

smiley wrote:
If you would have bought treasuries this january you are already looking at a loss of 20% on exchange rates. And there are no signs that that is going to reverse soon.

That's a good point about the dollar falling makes Treasuries a losing proposition to foreigners, especially at the low rate it is paying. So much for safe haven.