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David's Macro Blog

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Tag: Federal Reserve

See the 13-page report below for my predictions for 2010 and more:

  • Stock Market
  • Real Estate Market: The next wave of ARM defaults? Is it time to buy yet?
  • Interest Rates: Stay low or heading higher?
  • Currency
  • Precious Metals
  • Commodities
  • Political: Will real reform be passed?
  • The Blame Game
  • Wild Cards
  • What’s the real problem and what are the potential solutions?
  • What would really shock me?

David’s 2010 Predictions

Related Post: 2009 Year in Review

How bad is the current deflation?

It is so bad that every tool the Fed has to fight deflation, as listed by Ben Bernanke in 2002, has been used and still hasn’t stopped massive deflation.  Essentially the current economic and financial conditions where not even conceivable just a few years ago.

From Mish: Bernanke’s Deflation Preventing Scorecard

Bernanke’s Scorecard

Here is Bernanke’s roadmap, and a “point-by-point” list from that speech.

1. Reduce nominal interest rate to zero. Check. That didn’t work…

2. Increase the number of dollars in circulation, or credibly threaten to do so. Check. That didn’t work…

3. Expand the scale of asset purchases or, possibly, expand the menu of assets it buys. Check & check. That didn’t work…

4. Make low-interest-rate loans to banks. Check. That didn’t work…

5. Cooperate with fiscal authorities to inject more money. Check. That didn’t work…

6. Lower rates further out along the Treasury term structure. Check. That didn’t work…

7. Commit to holding the overnight rate at zero for some specified period. Check. That didn’t work…

8. Begin announcing explicit ceilings for yields on longer-maturity Treasury debt (bonds maturing within the next two years); enforce interest-rate ceilings by committing to make unlimited purchases of securities at prices consistent with the targeted yields. Check, and check. That didn’t work…

9. If that proves insufficient, cap yields of Treasury securities at still longer maturities, say three to six years. Check (they’re buying out to 7 years right now.) That didn’t work…

10. Use its existing authority to operate in the markets for agency debt. Check (in fact, they “own” the agency debt market!) That didn’t work…

11. Influence yields on privately issued securities. (Note: the Fed used to be restricted in doing that, but not anymore.) Check. That didn’t work…

12. Offer fixed-term loans to banks at low or zero interest, with a wide range of private assets deemed eligible as collateral (…Well, I’m still waiting for them to accept bellybutton lint & Beanie Babies, but I’m sure my patience will be rewarded. Besides their “mark-to-maturity” offers will be more than enticing!) Anyway… Check. That didn’t work…

13. Buy foreign government debt (and although Ben didn’t specifically mention it, let’s not forget those dollar swaps with foreign nations.) Check. That didn’t work…

Here’s a blog post by Reggie Middleton (one of my favorite bloggers) on BoomBustBlog:
http://boombustblog.com/20090301853/Banking-out-of-Control.html

It is a bit dense but contains a clear description of the problem of an economy that is based on debt, fractional reserve banking, and fiat currency.

Here are my observations:

  • The current financial crisis is NOT a liquidity crisis but a solvency crisis.
  • The crisis is built into the system; i.e. it was bound to happen at some point due to escalating debt relative to savings.
  • The current political leaders are NOT solving the root problems but bailing out their Wall Street friends and donors.

In summary, the system will collapse due to debt that cannot be repaid.

My hope is for serious monetary reform in the U.S. starting with an END to:

  • Debt-based money
  • The Federal Reserve
  • The bubble economy
  • “Financial engineering” (as opposed to real productivity) consuming the “best and brightest” minds

Unfortunately, we have just the opposite system. Until the system changes we are slaves to our monetary masters.

President Abraham Lincoln said it best over 200 years ago:

“The Government should create, issue, and circulate all the currency and credit needed to satisfy the spending power of the Government and the buying power of consumers.”

“The privilege of creating and issuing money is not only the supreme prerogative of Government, but it is the Government’s greatest creative opportunity.”

“By the adoption of these principles, the taxpayers will be saved immense sums of interest. Money will cease to be master and become the servant of humanity.”