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The Fed has no way of ‘pumping money into the economy’ = they only alter interest rates.

Except by making loans they don’t plan on collecting (the swap line advances to CB’s?)

Which is functionally equivalent to fiscal spending which does add income and financial assets to the economy.

>   
>   Rodger wrote:
>   
>   You and I were talking about a 0% fed funds rate. Almost there, now. Last I
>   heard, down to .25%. It will have no benefit. Wait, correction on that. There
>   will be one benefit. It gets us almost to the point where the Fed will stop
>   focusing on useless interest rate cuts, and start pumping money into the
>   economy. I hope.
>   
>   Rodger
>   


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8 Responses

  1. Glad to have you back.

    Did you see the Bloomberg article about $600BN as a low estimate of spending from the Obama people?

    Also, spot on about this “easing”. Clearly, it is not working, so at some point they will be forced to resort to other measures.

    I’ve been thinking that once they do the correct stimulus, which will start probably April 2009, the climb out of recession is going to be extremely fast, due to the JIT manufacturing processes that have been implemented in the last 20 years. My father is in the steel business, and says that steel clients typically do not have more than a few hours worth of inventory on the ground at any point.

    However, we are losing about 600K jobs per month at this point, so that means we are looking at about 3M more jobs lost until the stimulus begins.

    I still have hope Obama is going to suspend payroll taxes Jan 20th…

  2. thanks!

    yes, looks like it could be $1t but over two years, which should be enough for an obamaboom.

    never was anything the fed could do, except not make it worse, which they managed to do

  3. “Treasury Benefits From ‘Massive Paranoia’ as Bailout Cost Falls

    While the total amount of U.S. government debt outstanding rose to $10.7 trillion in November from $9.15 trillion a year earlier, the amount of interest paid in the last two months fell by $10 billion, according to the Treasury Department.”

    Warren
    I read this today and was reminded about what you once said about Japan; that since they are net debtors, the savings from low interest rates accrues to the govt sector, while grannie in Sarasota takes it on the chin, thus, on balance, it could be a negative for agg demand. Did I get this correct?

    Knapp

  4. yes, exactly!

    govt is a net payer of interest, non govt sectors net receivers.

    the real ‘benefit’ is that with a shift in ‘savings desires’ a given volume of federal spending can be ‘supported’ by lower taxes.

    In other words, the ‘inflation neutral’ deficit can be a lot larger, all else equal, etc.

    In other words, the deficit is currently too small to support ouput and employment.

  5. The Fed has no way of ‘pumping money into the economy’ = they only alter interest rates.

    Except by making loans they don’t plan on collecting (the swap line advances to CB’s?)

    Which is functionally equivalent to fiscal spending which does add income and financial assets to the economy.

    * * * * * * * * * * * * * * * * * *

    So…outright buying of “large quantities of agency debt and mortgage-backed securities” as the FOMC statement reads is also functionally equivalent to fiscal spending…..yes?

  6. No, they can only set price. With the swap lines fed has no control over the banks that borrow us$, they don’t fall under the us regulatory regime and thus could decide not to repay, theoretically, which would add income and financial assets to their economy. The agency and mtg backed debt purchases suggested in the fomc statement will be from domestic banks regulated by the fed/occ/fdic etc.

  7. right, the purchase of financial assets such as agency debt is an exchange of financial assets and doesn’t add to demand

    with the swap lines the fed thinks it’s exchanging financial assets as it lends $ to cb’s and takes their promise to pay it back (via the foreign cb’s promise to let the fed sell their currency to get it’s dollars back if necessary)

    If the foreign cb’s don’t (ever) pay the $ back then it was a ‘gift’ from the fed and therefore a fiscal transfer, as the ‘financial asset’ the fed received- the cb’s promise to pay- would be worthless.

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