0% Interest - What will the Fed do now?

Great Debates
1

This topic is prolly too technical to have a right proper “debate” about it, but it’s still worth discussing on some level just to make sure we the peoples are aware of what’s happening with our glorious central bank.

Not long ago, the auction for four-week T-bills closed at 0 percent. That is, the people buying US debt for one month decided to give us 100 bucks (or whatever), only to receive exactly 100 bucks four weeks later. Not a hundred bucks and a nickel, or a hundred bucks and a penny, but just the exact same amount of cash back again, guaranteed. Other short-term Treasury notes also came in at historic lows. This does represent some measure of confidence in the US government, but more than that, it represents a near total mistrust of everything else in the world related to high finance.

Well, now the Fed has also decided to become a citizen of Free Money Land. They are targeting a Federal Funds Rate of 0 percent (or at least below 0.25 percent). This means that the Fed has slashed interest rates as low as they can go. It is now official: traditional monetary policy has come to an end. This 0% stuff is a serious problem. It sounds nice for borrowers, but it’s a totally icky situation for the economy as a whole. It’s like finding an old photo of a hot chick, and then realizing it’s your mom. The only thing we can do is put it down where we found it and quickly scurry away. Now the Fed must start getting creative.

So far, the Fed’s creativity has generally been limited to loaning out cash and making new money. Printing it, if you will. There’s more than a trillion new bucks out there, hot off the presses (or the modern equivalent, really, but you know what I’m talking about). This hasn’t done a god damn thing. Core inflation is basically zero, and we’re looking at real, honest-to-god deflation if we include the drop in the price of gasoline. In other words, we’re looking at that old picture and getting a hard-on. Things are seriously fucked up.

As that economist dude in my New York Times link states, it’s not possible to print a trillion dollars of high-powered money and not have serious inflation worries after the economy recovers. Once the dam breaks, that money will have to be destroyed again (god knows how). So it doesn’t precisely seem like the best idea in the world to me to just keep making new money until it has an effect, because that highly anticipated effect might just be more than Bernanke & Co. are currently bargaining for.

So what will be done now with our money supply?

Please note: This is not a debate about what should be done. Predicting the future is a bit more entertaining than deciding on the best action because, frankly, much of the “advice” that’s consistency offered comes from people who advocate non-interference in each and every economic situation. Regardless of the quality of that advice given our present circumstances (which is off topic, remember), advocating the same thing all the time is boring. The flaming lefties, thankfully, provide a bit more to chew on, but even so, it’s not clear at all that their ideas are any better. So let’s try to keep this discussion to the mostly useless but still fun activity of peering into our crystal balls.

What will they do now?

  1. Continue expanding the monetary base indefinitely?

  2. Nationalize the banks properly, and force them to start lending money?

  3. Have the Fed actively start loaning money directly to individuals, instead of loaning just to banks?

  4. Have Ben B climb into a helicopter and start dropping Franklins on all major population centers? (Or, somewhat less dramatically, mail every person in America a big fat check?)

Bernanke is a Great Depression expert. He’s not going to just sit there and do nothing. But I don’t have the first clue where we’re headed from here.

Do you?

2

Definitely scenario #1 will play out. Printing money is an irresistible force that will continue until the entire globe loses confidence in the currency. If the world stays convinced of the dollar’s value, then why not keep increasing the money supply?! It’s human nature to continue this until the system breaks. (And last time I checked, Ben Bernanke and the politicians that pressure him are all too human.) We give lip service to the fact that “printing money will lead to currency meltdown” but we will ignore our own rational thinking and just keep doing it. I think we should expect a currency “reset” within this generation if not sooner.

Scenario #2 & #3 is interesting speculation but those “solutions” don’t solve our problem.

Scenario #4 will always have popular support and politicians will vote for it so it appears like they are “doing something”. So you can count on another stimulus check(s) to be in the mail.

The Great Depression lessons of history are obviously worth studying but being an expert on it doesn’t guarantee proper guidance of actions. Back then, we didn’t have a worldwide reserve currency; we do now (the US dollar). And back then, the USA was in better position to control its own destiny; we don’t anymore because of debts owed to foreign countries, reliance in oil imports, declining ownership of domestic assets, etc.

I think this overconfidence in “understanding” the Great Depression will lead to misguided “solutions.” I can’t help but think of France and its over-analysis of WW1 leading to the construction of the Maginot Line. They created a “solution” that was applicable to the past (WW1) instead of the future (WW2). The German blitzkrieg just went around it.

Or as Albert Einstein more succinctly put it, *“You cannot use yesterday’s thinking to solve today’s problems, for it is yesterday’s thinking that created today’s problems.” *

3

I hope that the Fed will look to Japan in the 90’s and improve on their “solutions” for deflation and recession. Link

4

By “printing money” you guys don’t mean literally printing money at the mint, do you?

What do you mean?

-FrL-

5

That’s what it means. Once the interest thing has failed there’s not much else we know how to do. That interest rates are now effectively zero is a sign of the sheer desperation and panic going on behind the scenes.

6

Literally, it means buying Treasury bills from “primary dealers” and wire transferring huge amounts of money into their accounts. As this circulates through the economy it does, eventually, lead to a greater demand for currency which requires the Bureau of Engraving and Printing to fire up the printing presses. Or at least, that happens in a healthy economy. What happens now I couldn’t say.

7

I think the problem up to this point is that the main people they’ve been talking to have problems with lots of debt backed by collateral with low market value. Inflating away that debt until it’s <= the value of the collateral makes perfect sense to them.

The fact that it would destroy anyone who was silly enough to put their money into savings rather than piling on the debt isn’t their concern.

8

Ah… so… for those for whom the most salient present financial fact is a looming student loan then… are… congratulations in order? ;):stuck_out_tongue:

-FrL-

9

Only if you can keep your job through the hyperinflation and your salary gets increased to preserve your current buying power.

It’d be wonderful to pay a 2008 debt with 2010 hyperinflated dollars…but you have to be in a situation to receive those 2010 dollars (in other words, be employed.)

10

I could use some good old fashioned inflation right now. Judging by the economic statistics I’ve heard about savings being virtually non-existent among Americans, most of the rest of you could too.

Eventually inflation HAS to happen if you keep injecting money into the economy. There’s no other way for this to play out. The government will keep dumping money into stimulus packages until the money eventually becomes less valuable. Everyone with a bunch of debt will be happy, and everyone with a bunch of savings will be unhappy. Guaranteed there’s more of the former than the latter.

11

1) Continue expanding the monetary base indefinitely?
Absolutely. The Fed will do everything possible to prevent deflation. Expanding the monetary base is the only reasonable way (we’re not foolish enough to try price controls, right?). But this leads to the real question: how, specifically?

2) Nationalize the banks properly, and force them to start lending money?
I think the Fed will avoid this, although it may be forced to by default via the FDIC. They may try something like mandating capital maximums to prevent banks from hoarding too much.

3) Have the Fed actively start loaning money directly to individuals, instead of loaning just to banks?
Definitely not. The Fed does not have the infrastructure to do this. The most they will do is give large incentives to banks to lend.

4) Have Ben B climb into a helicopter and start dropping Franklins on all major population centers? (Or, somewhat less dramatically, mail every person in America a big fat check?)
“As God is my witness, I thought Franklins could fly!!!”
Sorry, I can’t help but visualize this. :slight_smile:
I think this is one of the better ways to stimulate the economy. But it needs to be done on a larger scale; the last check was too small and to one-off to make much of an impact. The best way to do this is to make these payments “permanent”. Sending a person $500 once (with no expectation for more) and sending them $100 a month (for the next two to three years) have very different effects.

But there is a serious problem with all this–it was easy money that got us into this mess in the first place. While we might need it again to get us out, if easy money stays around too long, it’ll sow the seeds of the next bust. So much for the goal of moderating the boom-bust cycle. We may need to face the fact that strong economic cycles are a necessary part of the world. I think we may be in for a half century of severe economic cycles, comparable to the post Civil War period, ending in the Great Depression.

12

I think the next step is that they would typical start buying up t-bills. This increases the price of them and diminishes the return, so that they aren’t as attractive for banks to hold. Banks, as a result, start looking else where for better return on their money, which means lending at market rates to each other and consumers.

13

The good people in the financial institutions were given billions to break the lending block. They decided not to. Giving them more will not help. I suggest they use the money to make Fanny and Freddy banks . They could actually regulate . The fed has tried to thaw the lending and banks have ignored them.

14

IANA Economist–all’s I know is what I read in the news. However…

Re: #1–The Master weighs in.

I’d be curious to know if Cecil stands by his answer or if he has an update considering all that’s going on.

What say you, Great One?

15

I guess you missed this one …

Source: Bloomberg - 09 December 2008

16

Not to hijack, but why the hell would anyone do this? Why would you not just put your money under the mattress rather than take a guaranteed loss?

17

I was just reading about the new venture capitalism idea. It would take about 20 mill to set up a bank. Then the government would practically give you money to loan. Start lending it out wisely and grow. Once the big banks ,who learn very slowly, get the idea,they will buy the banks up . The venture guys will make a ton.

18

Read the first comment in this thead and you’ll have your answer:
http://www.reddit.com/r/business/comments/7ifde/can_someone_please_explain_why_any_investor_would

He mostly copied the text from a poster on this site but the ads look sorta NSFW to me so you may be better just going to the plagiarized version above.
http://www.btls.com/joomla/forum/viewtopic.php?t=4556

If you have any futher questions, let us know!

19

I’m gonna camp outside the door of the Federal Reserve next week. That way when they lower the rate to -0.5%, I can be first in line to get a loan. I think I’ll take out a hundred billion, and pay it off the next day. That should net me a cool million three, which should be enough for me.

No sense being greedy about it, after all.

20

I kind of figured it was something like that, but that means that T-Bills are ONLY being sold to people with huge amounts of money, right? People with amounts small enough to break up into several FDIC-protected deposits are doing just that.

Isn’t this a phenomenally bad thing? This means the only people buying our debt are basically foreign governments and giant corporations. And the only reason they would be doing this at all is to prop up a house of cards that is on the verge of failing completely and will take them with it when it does. Methinks we live in interesting times.