The Fed is printing more money, 600 billion dollars

[MadHound]

(11-04) 04:00 PDT Washington - --

The Federal Reserve announced a bold plan Wednesday to try to invigorate the economy by buying $600 billion more in Treasury bonds.

The Fed said it would buy about $75 billion a month in long-term government bonds through the middle of 2011 to further drive down interest rates on mortgages and other debt. This is in addition to an expected $250 billion to $300 billion in Fed purchases over the same period from reinvesting proceeds from its hmortgage portfolio.

<http://www.sfgate.com/cgi-bin/article.cgi?f=/c/a/2010/11/03/BU871G6G5P.DTL#ixzz14KHWiZvN>

This is insanity. We don't have to worry about deflation, over the past year inflation has risen by 1.1% and is continuing on that path. What this is about is weakening the dollar in order to engage in an Asian trade war, and also to make our debt easier to pay off. All well and good, but the downside of this is not fun to contemplate. A weakened dollar, especially since it has already been damaged over the past ten years, is going to lead more and more countries away from the dollar as their reserve currency. Goodbye petro-dollars, goodbye easy cash. Second, and more scary, is that this kind of money printing can turn on a dime and become hyperinflation. This is simply the latest installment of the Fed letting the presses roll, with this bringing the total up to well over two trillion dollars and rising.

The fed is playing with fire here, and sadly I think we're going to get burned.

[Kurt_and_Hunter]

1. The Fed is right. But unfortunately this will not spark inflation...

...but at least they are making an effort to spark inflation using the tools at their disposal.

Unless we can create inflation this economy will never recovery. Period. Economic fact.

Inflation "concern" is one of the most dangerous threats we face today.

There is a reason that inflation concern is primarily a Right Wing thing. It's is counter-factual and against the interests of the people.

[MadHound]

6. What, a 1.1% rise in inflation isn't enough for you?

Sorry, but deflation is no longer a problem. And frankly I doubt that this is being done to combat deflation, but rather to engage in a back door trade war with Asia and to make our national debt easier to pay off.

The risks of this strategy are huge. If the dollar continues weakening it will become simply another currency, not the world reserve currency it is now. Several countries were already shedding dollars before this announcement, how many more will be shedding them now? If we get knocked out of the position of being the world's reserve currency, we're screwed, we'll be in a hole so deep and so long that Japan during the nineties will look like up to us.

Furthermore, in eight months there will be over two trillion dollars floating around out there, two trillion that was simply run off the presses. That kind of cash can lead an economy to turn on a dime, from mild inflation to hyperinflation. It has happened before, it can happen here.

This is not a good thing, and sadly I think that we're all going to pay a huge price for it.

[Kurt_and_Hunter]

10. Sorry, you have no idea what you are talking about.

At any inflation rate under 2% our economy is actually contracting.

The Fed *minimum* target for inflation is 2% and they are not able to hit it no matter how much money they print.

So yeah, a 1.1% rise in inflation isn't enough for me.

[MadHound]

16. So doubling our money supply in two years is a good thing?

Sorry, but I don't buy that we should turn on the presses to solve this "problem". It isn't about being counter intuitive, it is about common sense. That and examining history. Several other countries have tried inflating their way out of economic troubles and have gotten burned, badly. Do we want to be the next example?

[Yavin4]

18. Comparisons with Other Nations Are Inapt

The U.S. economy is not like Mexico's or Zimbabwe's. Also, without the monetary policy from the past two years, we would have had been a full fledge depression. Your job, your home, and everything that you own would have been lost.

[Yavin4]

17. A 1.1% Inflation With The Context Being Almost 0% Shor Term Rates Is Evidence of Deflation

Given the almost 0% Fed short term rates, a 1.1% inflation rate is contraction. The entire inflation rate is based on food and energy prices which are always volatile. Thus, prices for all other goods and services are falling.

[HopeHoops]

2. Any chance they could throw some of that my way?

:shrug:

[notesdev]

7. Are you a bank?

No? Then all you get is the bill.

Congrats! Your share is approximately $2,000, to be exacted from you in the form of higher prices for food and gasoline.

[HopeHoops]

8. Well it would STILL be nice to have them throw a wad of cash at me.

I mean, since they're going to all of the trouble to print it and everything.

[notesdev]

12. Wouldn't it, though?

Sorry to tell you but the Federal Reserve is (literally, not metaphorically) owned by the big banks and works for them, not you.

The only role you have in the economy, according to their point of view, is to pay for their initiatives, and to consume, consume, consume. Until you're broke and homeless at which point you drop out of their equations.

[HopeHoops]

23. SHIT! I KNEW it was a communist conspiracy. BecKKK was right. We're fucked.

Actually, that's the only point I will concede on where BecKKK was right - we are fucked.

[IndyPragmatist]

3. Japan will counter....

Its being reported that Japan will counter with a similar monetary policy. Which likely means China will also. You are right, we are poking a trade war with a stick right now, hoping it doesnt explode. And Bernanke's comments about where he thinks inflation will level off at seem misguided.

Think about it, if we are pushing the burden of trade onto other nations, which we are dependent upon for much of our goods, it will just force them to raise prices to counteract the loss in exporting. He doesn't seem to factor in the inevitable response by industrial nations that are affected by this.

Not a good plan, IMO.

[BeyondGeography]

4. Bring back higher interest rates that reward savers and make the stockjobbers earn their money again

Fuck you, Ben.

[The Northerner]

26. +1

[Imperialism Inc.]

5. I think concern about hyperinflation is way overblown.

The only way that is going to happen is if the economy really heats up and that is a good thing at this point. Since the dollar is overvalued the dollar falling is also a good thing. It makes imports more expensive and encourages domestic production. That said I think the biggest problem is that it probably won't do much. Fiscal policy is what is needed but there isn't going to be much of that with the new Congress. The Fed is doing this because it is the only tool we have (due to politics).

[MadHound]

14. If you look at our M0 money supply charts,

You'll find that we've doubled the money supply in two years. That doesn't worry you?

As far as encouraging domestic production, umm, what domestic production. We are no longer a manufacturing society, by a consumer and service based society. This will make our imports, like gas, electronics, etc much more expensive, and we have no domestic equivalents that will get the benefit.

[Imperialism Inc.]

21. We've been hearing this hyperinflation mantra for 2 years now.

So, where is the inflation? If you've been wrong for 2 years straight (or at least the people raising your concerns... I have no idea if you personally have been saying it) I think you should start to wonder if maybe there is something you are missing. The problem is that we are in a Keynesian liquidity trap, also known as being up against the zero lower bound of interest rates. This means ordinary measure of managing interest rates aren't available.

As pointed out above some inflation is healthy and necessary in an economy. When, like now, deflation is the main worry banks don't lend. They can make more by just sitting on their money as it will be worth more later. In other words the currency appreciates (becomes stronger). This is bad and can led to a deflationary spiral like happened in the great depression.

Now of course there are risks and I'm not thrilled that we are having to this. However for hyperinflation to occur the economy would have to heat up really really fast. So fast that the Fed doesn't have time to pull back. I see no real chance of this happening at this point.

[Imperialism Inc.]

25. Some links.

This all from Krugman as he has expended the most effort and done the best job of explaining liquidity trap conditions. You should also look at an M2 chart as it matches the prediction in Krugman's point #1.

The Moral Equivalent of Stagflation
Liquidity-trap theorists — yes, with me playing a large and early role — told you what would happen if the economy suffered a sufficiently severe negative shock, one that pushed us up against the zero lower bound. We predicted, specifically, that:

1. Increases in the monetary base would fail to increase broad monetary aggregates, let alone boost the economy
2. Despite large monetary base expansion, the economy would slide toward deflation, not inflation
3. Despite large budget deficits, interest rates would stay low, because short-term rates would stay pinned at zero

...

But here’s the thing: I see no signs of a rethink among most players. The slide toward deflation despite huge increases in the monetary base hasn’t shaken either the paleomonetarists who still predict hyperinflation or the it’s-all-the-Fed’s-fault crowd. The failure of interest rates to soar hasn’t shaken the deficit hawks.

How The Other Half Thinks
So, how has it turned out? The 10-year bond rate is about 2.5 percent, lower than it was when Ferguson made that prediction. Inflation keeps falling. The attacks on Keynesianism now come down to “but unemployment has stayed high!” which proves nothing — especially because if you took a Keynesian view seriously, it suggested even given what we knew in early 2009 that the stimulus was much too small to restore full employment.

Why Inflation Targets Need To Be High

[TexasObserver]

9. Yes, and it is a great idea.

I don't care where the money comes from - whether it is a stim package the congress passes or the Fed spending money, it accomplishes similar goals.

We need the dollar weaker. It helps exports and hurts imports. It helps in debt repayment with countries like China and Japan. It helps with trade negotiations with same.

There is no chance this is going to cause inflation, muchless hyper inflation.

[siligut]

11. Quantitative Easing

What Does Quantitative Easing Mean?
A government monetary policy occasionally used to increase the money supply by buying government securities or other securities from the market. Quantitative easing increases the money supply by flooding financial institutions with capital in an effort to promote increased lending and liquidity. Investopedia explains Quantitative Easing
Central banks tend to use quantitative easing when interest rates have already been lowered to near 0% levels and have failed to produce the desired effect. The major risk of quantitative easing is that although more money is floating around, there is still a fixed amount of goods for sale. This will eventually lead to higher prices or inflation.

http://www.investopedia.com/terms/q/quantitative-easing.asp

Bold is my addition.

[Kurt_and_Hunter]

13. That is the policy goal, not a risk.

We are *trying* to create inflation. Desperately. And we are failing.

In a deflation-risk environment inflation is not a risk, it is the antidote to the risk being avoided

[Yavin4]

19. Paul Krugman Agrees With Your

Deflation is the bigger worry over inflation.

[lonestarnot]

15. All of which is going straight to the banks. Hyperinflation on it's way.

Maybe this will motivate dems.

[Kceres]

20. It will bite us in the ass within four years. nt

[JCMach1]

22. It's about jobs and American exports...

[The2ndWheel]

24. It's all sort of comical really

All these numbers either mean something, or they don't.

If they don't, then there is no reason to stop at $600 billion. Add a zero here, add another zero there, it doesn't matter, because it's all about confidence. Just give every adult a few million dollars, and that will stimulate the economy, because the numbers don't matter.

If they do matter, then they will have to be dealt with at some point. But in bad times you can't deal with them, and when times get good again, everybody takes a break(in terms of regulation), and then we find ourselves back in the bad times again, because who is going to stop the good times when they're rolling and be re-elected?

Then there is always the fact that the economy exists within the environment, which contributes to the situation we find ourselves in, because when we hit limits, we don't want to deal with them. So we end up printing money, which isn't really printing money, more like expanding credit on a computer screen, which is that much less tangible than actual dollar bills. But we live within that physical environment, which has limits, but the human imagination doesn't, which is how we can print money/expand credit/add zeros, and think we're growing the economy.

Something has to be real. Something will be a limiting factor. We won't know it until we hit it, since we won't voluntarily choose it.