I was following the LiveBlog on WSJ. Here's a link to the FOMC statement.
"All men having power ought to be distrusted to a certain degree." -James Madison
"If government were efficient, it would cease to exist."
So according to the fractional reserve, does it mean we are gonna have 6 trillion new credit in the economy?
Adding some additional information: here is the NY Fed's statement detailing purchasing plans.
Haha, I just got an e-mail notification about this happening and I was about to post a thread talking about it.
Can someone explain to me what the Fed is doing in general and the implications it holds? I'm still not very good at understanding some economic things.
My translation of the Associated Press article on this topic:
The Federal Reserve announced a bold plan Wednesday to try to kill the U.S. economy by buying $600 billion more in Treasury bonds from the subprime U.S. Federal government by expanding the money supply which devalues it.
The Fed said it would buy about $75 billion a month in long-term government bonds through the middle of 2011 to lower the dollar’s value to create fear of growing inflation to incentivize consumers to spend money before it devalues more.
The idea is for cheaper loans to get people to spend more and stimulate hiring. Hyperinflation will happen depending on the money’s circulation speed, but Fed officials assured investors they will meet that challenge when it arises.
My translation of the Associated Press article on this topic: The Federal Reserve announced a bold plan Wednesday to try to kill the U.S. economy by buying $600 billion more in Treasury bonds from the subprime U.S. Federal government by expanding the money supply which devalues it. The Fed said it would buy about $75 billion a month in long-term government bonds through the middle of 2011 to lower the dollar’s value to create fear of growing inflation to incentivize consumers to spend money before it devalues more. The idea is for cheaper loans to get people to spend more and stimulate hiring. Hyperinflation will happen depending on the money’s circulation speed, but Fed officials assured investors they will meet that challenge when it arises.
Well they have to do something! Do you want them to sit idly by and do nothing? The electorate will not stand for that.
The idea is for cheaper loans to get people to spend more and stimulate hiring. Hyperinflation will happen depending on the money’s circulation speed, but Fed officials assured investors they will meet that challenge when it arises.translation of the Associated Press article on this topic:
quick question....
how does the fed determine which banks get the new money?
do banks fight over who gets to sell toxic assets or treasuries back to the fed?
limitgov,
The Fed will conduct I kind of auction, I think. I don't know how it works exactly. Where the money goes depends on who the seller is.
Banks may just hold additional reserves, but non-bank sellers will find themselves with money in place of a bond. They will likely spend that money on other financial assets, i.e. lend it out to earn interest. The borrower then spends the money on real goods and increases aggregate demand. But notice how the banks haven't expanded credit in this story. I don't expect them to until aggregate demand rises a little more and reduces the risks of lending. The channel through which quantitative easing will stimulate the economy is not necessarily the fractional reserve lending route.
Sorry for all the Keynesian words.
The Fed doesn't conduct the auction, the Treasury does. The Fed will buy Treasury notes of specified maturity each month. The money than goes from the Treasury to the banks through the Office of the Comptroller of the Currency.
The Fed will hold its auction for selling its stock of various T notes and bills when it's time to constrict the money supply, but that won't happen until inflation becomes a worry as opposed to a goal.
No one in the Fed is an elected official, so they could do nothing and the electorate would have absolutely zero recourse.
1 trillion in bonds.
"If we wish to preserve a free society, it is essential that we recognize that the desirability of a particular object is not sufficient justification for the use of coercion."
The "100 billion dollars" line isn't absurd anymore...
Purchases will be conducted with the Federal Reserve’s primary dealers through a series of competitive auctions operated through the Desk’s FedTrade system. Consistent with current practices, the results of each operation will be published on the Federal Reserve Bank of New York’s website shortly after each purchase operation has concluded. In order to ensure the transparency of our purchase operations, the Desk will also begin to publish information on the prices paid in individual operations at the end of each monthly calendar period, coinciding with the release of the next period’s schedule.
I wish we were still $3 trillion in debt. That point in time seems so good now.
limitgov:how does the fed determine which banks get the new money?
http://www.newyorkfed.org/markets/opolicy/operating_policy_101103.html On November 3, 2010, the Federal Open Market Committee (FOMC) decided to expand the Federal Reserve’s holdings of securities in the System Open Market Account (SOMA) to promote a stronger pace of economic recovery and to help ensure that inflation, over time, is at levels consistent with its mandate. In particular, the FOMC directed the Open Market Trading Desk (the Desk) at the Federal Reserve Bank of New York to purchase an additional $600 billion of longer-term Treasury securities by the end of the second quarter of 2011.
http://www.newyorkfed.org/markets/opolicy/operating_policy_101103.html
On November 3, 2010, the Federal Open Market Committee (FOMC) decided to expand the Federal Reserve’s holdings of securities in the System Open Market Account (SOMA) to promote a stronger pace of economic recovery and to help ensure that inflation, over time, is at levels consistent with its mandate. In particular, the FOMC directed the Open Market Trading Desk (the Desk) at the Federal Reserve Bank of New York to purchase an additional $600 billion of longer-term Treasury securities by the end of the second quarter of 2011.
http://www.newyorkfed.org/aboutthefed/fedpoint/fed32.html The FOMC delegates responsibility for implementing U.S. monetary policy to the Manager of the System Open Market Account (SOMA) at the Federal Reserve Bank of New York through the Authorization. This Authorization is contained in the minutes of the first FOMC meeting of each year. The SOMA Manager is responsible for the staff of the Trading Desk at the Federal Reserve Bank of New York (“the Desk”). The Desk thus executes open market operations on behalf of the entire Federal Reserve System. The Federal Reserve conducts open market operations with primary dealers—government securities dealers who have an established trading relationship with the Federal Reserve . . . Staff on the Desk start each workday by gathering information about the market's activities from a number of sources. The Fed's traders discuss with the primary dealers how the day might unfold in the securities market and how the dealers' task of financing their securities positions is progressing. Desk staff also talk with the large banks about their reserve needs and the banks' plans for meeting them and with fed funds brokers about activities in that market . . . When the conference call is complete, the Desk conducts any agreed-upon open market operations. The Desk initiates this process by announcing the OMO through an electronic auction system called FedTrade, inviting dealers to submit bids or offers as appropriate.
http://www.newyorkfed.org/aboutthefed/fedpoint/fed32.html
The FOMC delegates responsibility for implementing U.S. monetary policy to the Manager of the System Open Market Account (SOMA) at the Federal Reserve Bank of New York through the Authorization. This Authorization is contained in the minutes of the first FOMC meeting of each year.
The SOMA Manager is responsible for the staff of the Trading Desk at the Federal Reserve Bank of New York (“the Desk”). The Desk thus executes open market operations on behalf of the entire Federal Reserve System.
The Federal Reserve conducts open market operations with primary dealers—government securities dealers who have an established trading relationship with the Federal Reserve . . .
Staff on the Desk start each workday by gathering information about the market's activities from a number of sources. The Fed's traders discuss with the primary dealers how the day might unfold in the securities market and how the dealers' task of financing their securities positions is progressing. Desk staff also talk with the large banks about their reserve needs and the banks' plans for meeting them and with fed funds brokers about activities in that market . . .
When the conference call is complete, the Desk conducts any agreed-upon open market operations. The Desk initiates this process by announcing the OMO through an electronic auction system called FedTrade, inviting dealers to submit bids or offers as appropriate.
http://www.newyorkfed.org/markets/pridealers_current.html List of the Primary Government Securities Dealers Reporting to the Government Securities Dealers Statistics Unit of the Federal Reserve Bank of New York BNP Paribas Securities Corp. Barclays Capital Inc. Cantor Fitzgerald & Co. Citigroup Global Markets Inc. Credit Suisse Securities (USA) LLC Daiwa Capital Markets America Inc. Deutsche Bank Securities Inc. Goldman, Sachs & Co. HSBC Securities (USA) Inc. Jefferies & Company, Inc. J.P. Morgan Securities LLC Merrill Lynch, Pierce, Fenner & Smith Incorporated Mizuho Securities USA Inc. Morgan Stanley & Co. Incorporated Nomura Securities International, Inc. RBC Capital Markets, LLC RBS Securities Inc. UBS Securities LLC.
http://www.newyorkfed.org/markets/pridealers_current.html
List of the Primary Government Securities Dealers Reporting to the Government Securities Dealers Statistics Unit of the Federal Reserve Bank of New York
BNP Paribas Securities Corp. Barclays Capital Inc. Cantor Fitzgerald & Co. Citigroup Global Markets Inc. Credit Suisse Securities (USA) LLC Daiwa Capital Markets America Inc. Deutsche Bank Securities Inc. Goldman, Sachs & Co. HSBC Securities (USA) Inc. Jefferies & Company, Inc. J.P. Morgan Securities LLC Merrill Lynch, Pierce, Fenner & Smith Incorporated Mizuho Securities USA Inc. Morgan Stanley & Co. Incorporated Nomura Securities International, Inc. RBC Capital Markets, LLC RBS Securities Inc. UBS Securities LLC.
The decision to purchase bonds had been in the air for a few weeks. All that remained to be determined was the size.
600 billions is serious money, even for monetary inflation-happy bankers. It would mean the Federal Reserve will become the first holder of US bonds, ahead of China and Japan. It means the US government doesn't think the Chinese and the Japanese will buy US bonds at the pace they were accustomed to: we can only speculate about the reasons.
The results will be the predicted November dollar mini-rally (which is already sending the Tokyo exchange skyrocketing: let them have their little vacation before they crash back to reality) and probably a six months boom in commodities and stocks next year (educated guess: around May-June). This will help drive GDP growth and that's all that matters: who cares if the "real world" will still struggle? And of course price increases of goods such as fuel, flour etc (which are sure to follow) can always be blamed on external causes and as usual will contribute little to the CPI.
In 2007-2008 some of you predicted we were headed for an inflationary depression. Step up and collect your prize.
@ Kakugo: $600 billion is very serious money. It is approximately 7% of Sept. 2010 seasonally unadjusted M2 according to the latest H6 report by the Fed.
Come a long way from those old democrats talking about "dafficits". The government overspent one trillion dollars this year alone.
QE2 was predicted to be around $500 billion. Guess the Fed thought that wasn't enough and practically doubled it. At $500 billion some were projecting a devaluation of the dollar at around 20% (assuming the Fed can actually control it). Is $1 trillion double that or much greater. I think the latter.
In the short term, will buying up of treasuries give a short boost to the dollar?
I understand that in the long term, it will further devalue the dollar and maybe lead us to hyperinflation, but in the short term, will it boost the dollar since all the treasuries will be bought up?
@ limitgov:
I am by no means an expert in the bond market, but if I had to guess, I'd say that the short term effect would be a bit of inflation with the increased money supply, given that banks lend the money out.
Interest rates may come down a little, in order to entice borrowers.
Imports to the US may become more expensive if the dollar loses value to other currencies; on the other hand, US exports will be more affordable on foreign markets.
Also, there are always Treasuries available, whether on the primary or secondary market, you can always get your hands on some if you want to.
Yes, in short term the dollar will be boosted. And that's all that matters. Just look at the immoral cretins running stock exchanges: Tokyo jumped more 2% today. The reason: stocks of companies exporting large volumes of goods to the US (Sony, Honda, Hamamatsu etc) are selling like hot bread. Why? because people believe the dollar will be boosted and hence US imports will increase. I am still to check DAX (Frankfurt stock exchange) but I suspect it will be exactly the same.
Actually a November mini-rally for the dollar had already been predicted a few months ago. With the US currency so low and the Japanese yen so hot, it was bound to happen. Predictions? Let's wait and see what other Central banks will do. In the meantime buy gold and silver regardless of fluctuations. Prices can only go up now.
What US exports? One of the underlying problems is that the US no longer produces the goods it once did. The US seems to have problems producing goods even the US will purchase, so by devaluing the dollar suddenly these foreign countries will desire goods we won't buy or don't produce?
The US went after financial services as it's great export. When they're bankrupt, how much demand will there be for those services?
Most likely what will happen is that the Federal government will be forced to stop borrowing, i.e., not raise the debt limit. This will result in significant cuts in government spending and a change in US bond ratings (possibly even to junk at the rate they're going). I don't think the Fed will really have the control they think they will have, and that could very easily spiral into hyperinflation territory.
The Fed doesn't control the fix, they just control the trigger to the gun.
So how do we explain the fact that the dollar cratered today?
What US exports?
The US does still have an export market: grains (wheat, soy, corn), and capital goods (aircraft, semiconductors, telecomms), and some consumer goods (notably, automobiles). There is competition, but the US is not completely dead in terms of international trade. What kills it are the various workers unions miseducating workers that they are "exceptional" and therefore "deserve" higher wage levels; and then there are the intervening trade policies...
... how much demand will there be for those (financial) services?
The demand for financial services is still pretty high, and those providing it are increasingly not from the US. Asia and the Middle East have been growing in that sector of the global economy. As for the US being the chief provider of financial services, that didn't last long. After the financial sector shifted from London to New York, it wasn't long before the financial hubs in Asia (Hong Kong, Singapore, Mumbai, Dubai) stepped up their influence. Technology advances have allowed for the global financial sector to be a 24-hour operation, and thus no longer centered in any one country.
I agree with you that the US government is going to be forced to cut spending, but that's a trend with all national governments. I think it's a great example to use in educating people that government can only create waste; not jobs, not wealth, just waste. I also agree with you on your belief that the Fed will be surprised when they find that they don't have the amount of control they think they do; and that they will fail in their attempts to induce consumption when the policies of the Federal government have people hesitating about taking any action. On the other hand, I will disagree with you on the bonds ratings only because bonds ratings agencies are tied to the government; and your belief in hyperinflation, I believe that we will see a period of inflation and once this quantitative easing runs its course, that we will experience another period of deflation as the market corrects from the intervention.
The question is: how much are people lending to the Fed? That is how much QE2 should be.
The Federal Reserve is a central bank, i.e. a weird type of financial intermediary. It can be instructive to recast the Fed's operations and policies in that light. Although the Fed has been liberated from many of the ordinary constraints of banking, it still functions along similar principles. Notes issued by the Fed are no longer liabilities (i.e. they can't exchanged for gold), but I think good monetary policy should treat them as such. If you take a $5 bill to the Fed and demand payment, then all you might get in return is five $1 bills. But base money is still like a liability. When banks or individuals save by holding base money, they are de facto lending to the Federal Reserve. Admittedly, this is a peculiar kind of loan, but it is the Federal Reserve's responsibility to invest those savings.
Open market operations are just the means by which the Federal Reserve can coordinate savings and investment, match the market and natural interest rates, and fulfill its role as financial intermediary. The situation is complicated by the absence of any reserves at the Federal Reserve itself, because the principle of adverse clearings that ordinarily would signal banks when to expand or contract is missing. Instead, the Fed must use crude substitutes like interest rates, inflation, or nominal gross domestic product. Given present institutions, I see no alternative but to have the Federal Reserve try to emulate how a private bank might function. In the absence of clear profit and loss signals, some crude alternative must be chosen. I would prefer some level target for nominal income at about 3 percent a year, because I believe this would provide the least bad monetary policy for microeconomic coordination.
Anyway, right now people, and banks, are lending to the Fed by holding its "liabilities". How much are they lending? That is unclear for the reasons explained above, but I think it is at least $1 trillion. Therefore, QE2 should be equal to that. (It could be negative, in which case the Fed should contract!)
The Federal Reserve is a central bank, i.e. a type of financial financial intermediary. It can be instructive to recast the Fed's operations and policies in that light. Although the Fed has been liberated from many of the ordinary constraints of banking, it still functions along similar principles. Notes issued by the Fed are no longer liabilities (i.e. they can't exchanged for gold), but I think good monetary policy should treat them as such. If you take a $5 bill to the Fed and demand payment, then all you might get in return is five $1 bills. But base money is still like a liability. When banks or individuals save by holding base money, they are de facto lending to the Federal Reserve.
No, absolutely not. This is a wild stretch. The Federal Reserve doesn't have real liabilities. Just because base money is not an asset does not necessarily mean that it's really a liability. The FED is unlike all other banks; it does not operate under "similar principles" (which you readily acknowledge later in the thread).
Open market operations are just the means by which the Federal Reserve can coordinate savings and investment, match the market and natural interest rates, and fulfill its role as financial intermediary.
You mean open market operations are the means by which the federal reserve causes discoordination in the loanable funds market by arbitrarily altering the supply of money by decree. The Federal Reserve monopolizes the financial sector which eliminates all competition, therefore eliminating the mechanisms that prevent continuous monetary expansion.
The situation is complicated by the absence of any reserves at the Federal Reserve itself, because the principle of adverse clearings that ordinarily would signal banks when to expand or contract is missing.
Correct. But from this, how do you reach this conclusion:
Given present institutions, I see no alternative but to have the Federal Reserve try to emulate how a private bank might function. In the absence of clear profit and loss signals, some crude alternative must be chosen. I would prefer some level target for nominal income at about 3 percent a year, because I believe this would provide the least bad monetary policy for microeconomic coordination.
? Stabilizing nominal income streams seems to be of little importance when compared to realigning the capital structure. It's important to stabilize expectations in order to prevent "secondary phenomena," but the main priority is to eliminate malinvestment. Similarly, trying to come up with schemes that would increase the efficiency of a centrally planning authority is simply superfluous. There is no middle way; monetary and inter-temporal equilibrium are impossible conditions when we don't have a competitive banking system.
How much are they lending? That is unclear for the reasons explained above, but I think it is at least $1 trillion.
LOL, and how did you come up with this number? And what about the money multiplier? The FED could increase the supply of money if it stopped paying interest on reserves. It's simply trying to keep the bond bubble going (which replaced the housing bubble); that's all.
From other things he posts Modus Tollens seems a monetarist.
Modus Tollens is Lee Kelly.
Even the Monetarists don't support this level of QE. Anna Schwartz warns that it will lead to hyperinflation and totally opposes Ben Bernanke.
Alternatives Considered: So how do we explain the fact that the dollar cratered today?
That could mean the mini-rally (look at exchange charts for Monday-Wednesday) is already over. I am personally cautious: both the Bank of Japan and the Bundesbank will surely be pressured to sell yen and euro and purchase dollars. But like the BoJ's move earlier this year these are just very short-term measures that won't matter in the end.
It's ironic stock exchanges located in exporting countries seem to have literally gone drunk with excitment while the mini-rally was undone in a single day isn't it?
Should I buy Gold with all my college savings before this happens. How severe would the inflation be.
EconNewb: Should I buy Gold with all my college savings before this happens. How severe would the inflation be.
Never put all your eggs in one basket. Education is still one of the best investments you can make.
but by the time I use those savings how much would they be worth because inflation devalues my money if it was held in a bank. If I were to invest in gold wouldn't its price rise significantly if this much money is printed.
First, I am neither a monetarist nor Austrian, because I am not an economist. But I have been more influenced by Austrian economics than monetarism; my views on monetary economics are closer to Hayek than Friedman.
I explicitly stated in the paragraph you quoted that 'notes issued by the Fed are no longer liabilities.' Once upon a time notes issued by the Fed were liabilities, because they were redeemable in gold. If the Fed issued too many notes, then the principle of adverse clearings would force a contraction. When the dollar became a fiat money, the Fed's notes ceased being liabilities. But I think good monetary economics should treat Fed notes like liabilities. I also explicitly stated that 'the Fed has been liberated from many of the ordinary constraints of banking' , i.e. 'the Fed is unlike all other banks', but the Fed still operates along similar principles. The Fed could expand the money supply by purchasing bricks, apples, or cars, but instead its assets consist of various kinds of loans.
I do not believe that mechanisms exist to prevent continuous monetary expansion, at least within a free market for money and banking. In any case, the very same monopoly power to discoordinate the loanable funds market is also the power to coordinate it. The Fed's monopoly ensures that nobody else can satisfy changes in the supply and demand for base money, and so the Fed cannot refrain from intervention. What is the least bad monetary policy? That is the question we have to answer. I happen to think QE2 is an improvement, but not enough. You disagree, and I am sympathetic to such views.
Stabilizing nominal income streams seems to be of little importance when compared to realigning the capital structure. It's important to stabilize expectations in order to prevent "secondary phenomena," but the main priority is to eliminate malinvestment. Similarly, trying to come up with schemes that would increase the efficiency of a centrally planning authority is simply superfluous. There is no middle way; monetary and inter-temporal equilibrium are impossible conditions when we don't have a competitive banking system.
I think stabilising nominal income expectations on a steady growth path (with zero inflation, on average) will provide the best macroeconomic conditions for 'realigning the capital structure'. I advocate this as the least bad monetary environment for microeconomic coordination. In other words, I have Austrian concerns about the misallocation of resources, distortion of relative prices, and unsustainable capital structure in mind.
The money multiplier is very low at the moment, and I do not expect it to rise immediately. The channel through which QE2 will increase nominal income is not through fractional reserve credit expansion. However, eventually the multiplier will begin to pick up, and when that happens the Fed will need to be ready to contract.
I forgot to answer a question: how did I come up with $1 trillion?
I suspect more than $600 billion will be needed to hit my preferred target. I admit, I said $1 trillion partly just rile up Austrians. Truth is, I don't know and neither does the Fed. They should just spend (or buy) whatever it takes to hit their targets. Unfortunately, they won't make an explicit target! But that is another issue altogether.