Fed Creates $1 Trillion 'Out of Thin Air"

[TraneWreck]

There is only one way out of this, don’t let anyone tell you otherwise, because they are wrong. We have to begin immediately cutting government spending and begin paying down government debt. Stop the printing of money and begin slowly reducing the amount of “bogus” money in the system in order to help bring stability back. Stop intervening so heavily in the market and allow bad decisions to catch up with those who made them. There are plenty of people willing and ready to pick up the ball where others have dropped it, and by encouraging these poor behaviors by saving the people that made bad decisions, the ability to continue on with stronger, smarter competitors in the market is diminished tremendously.

This was the argument made in 1936 that caused a severe relapse in the Depression after FDR's spending had begun to bring the economy back.

Every credible economist and Depression historian I've read identifies your plan as the exact worst thing we could do.

 

[Puppycow]

This was the argument made in 1936 that caused a severe relapse in the Depression after FDR's spending had begun to bring the economy back.

Every credible economist and Depression historian I've read identifies your plan as the exact worst thing we could do.

I agree with you too. And so does Ben Bernanke.

 

[lomiller]

Our current economic problems are not caused by the same problem. It's too much debt that is the problem right now.

Then why is the downturn global? If debt were the issue then only the countries in debt would be facing a downturn, but that isn’t the case.

Printing more money to get people to spend again is only going to create more debt.

Printing money is an essential step in de-leveraging the US financial system. As they de-leverage banks need larger reserves to make the same loans and therefore must horde money. This removes that currency from circulation, and could cause defilation unless new money is printed. Just look at what’s happened to the US dollar since the crisis started, it shot up, not down.

 

[hamelekim]

That is not at all what's going on with the economy right now.

The driving issue of this economic collapse was irresponsible leveraging of sub-prime mortgages, deregulation that allowed insanely risky behavior to become acceptible, and outright fraud as in Maddoff.

If you read Krugman and other economists who studied the Great Depression, they are all recommending massive stimulus. I agree with this sentiment. FDR's spending programs started to turn the situation around until he became fiscally conservative after his reelection in 1936.

As I said earlier, the Geitner plan just coveres the collective asses of the people who's incompetence and fraud got us in this mess. That being said, we have to invest in massive stimulus to turn the boat around.

The over leveraging is the creation of debt. It's money owed to someone else. Too much debt and not enough money to pay that debt.

As for whether or not we need massive stimulus. I guess we will find out in the next year or so if that was the solution.

 

[hamelekim]

Then why is the downturn global? If debt were the issue then only the countries in debt would be facing a downturn, but that isn’t the case.

Because almost all banks around the world where involved in these massive bets that failed.

It's more complex than that, and I still think that personal debt has to play a part in it. We have had negative savings or close to zero in the west for a few years now. People went into debt and now they don't have the money to continue spending without getting further over their heads in debt.

Printing money is an essential step in de-leveraging the US financial system. As they de-leverage banks need larger reserves to make the same loans and therefore must horde money. This removes that currency from circulation, and could cause defilation unless new money is printed. Just look at what’s happened to the US dollar since the crisis started, it shot up, not down.

The banks don't have any money though, or very little if they do. They almost all made bets they couldn't make good on.

My understand is that the banks are hording money because they don't want to lend it out because it would be too risky. They also want to use it to buy up other bad banks and companies.

They should be lending it but they don't know how the other banks are doing so they don't want to lend money to anyone at this point.

Also, don't you think that inflation is a problem when printing all this money? I know they say that there is deflation, but that is only in specific areas. I know that gas and some other basic consumer goods like food have been going up in price, not down. Printing more money would only make these prices increase further, would they not?

Also, didn't the dollar go up because people thought it was a safe haven? It wasn't anything to do with the state of the US economy but a fear of instability.

The dollar had a huge drop the other day because of the plan to print more money.

 

[mhaze]

Then why is the downturn global? If debt were the issue then only the countries in debt would be facing a downturn, but that isn’t the case.



Printing money is an essential step in de-leveraging the US financial system. As they de-leverage banks need larger reserves to make the same loans and therefore must horde money. This removes that currency from circulation, and could cause defilation unless new money is printed. Just look at what’s happened to the US dollar since the crisis started, it shot up, not down.

This is very confused thinking. Causes and effectfs are pulled out of thin air to form logical constructs which are wrong.

Can the FED do high interest rates to suppress inflation? Not if the inflation is due to it's having to pay that very interest rate on its obligations, and not if theo money it prints funds government programs.

They are struggling now to keep rates low as long as possible.

 

[Puppycow]

This is very confused thinking. Causes and effectfs are pulled out of thin air to form logical constructs which are wrong.

Can the FED do high interest rates to suppress inflation? Not if the inflation is due to it's having to pay that very interest rate on its obligations, and not if theo money it prints funds government programs.

They are struggling now to keep rates low as long as possible.

Actually, I think he's got it right and your logical construct is mistaken. Inflation is caused by too much money chasing too few goods, not having to pay interest.

It's important to understand that the absolute number is meaningless, whether it's $100 or $100 trillion. It's the ratio of debt to GDP that matters. The US still has a lower debt-to-GDP ratio than many other countries.

http://en.wikipedia.org/wiki/List_of_countries_by_public_debt

 

[Piggy]

Exactly.

The argument of many Economists who follow the Austrian school of economics argue exactly this.

That the bailouts are only making the problem worse and that it will only extend the painful period of economic troubles.

Better to just clear out the system asap and get on with the business of making money.

It's going to hurt, sure, but then we never should have allowed businesses to become "too big to fail". It's a failure of government to police the economy and we have seen the result of that.

No.

The aftermath of Lehman was enough to scare the living daylights out of everyone and put paid to that notion.

The credit freeze isn't something that snuck up on us slowly. It was (literally) an overnight reaction to Lehman.

The resulting chain reaction has already pushed up the unemployment rate, default rate, and business closings.

If we let the big boys fail, I don't know of any scenario that avoids global depression. It's like Joshua playing Global Thermonuclear War -- all scenarios lead to "lose".

 

[Piggy]

Many Austrian economists argue that you will get the same thing by spending all of this money, but it will last longer.

Better to have short term pain and get it over with, than have the same thing long and drawn out.

Global depression is not "short term pain".

Granted, that does not make the risk of future inflation go away. It's real, and it's serious.

I've heard folks criticize Obama for spending so much money, then turning around and talking about keeping debt under control. But if you're going to do one, you have to do the other.

I don't know if their strategies will succeed, but right now, borrowing and printing money appears to be necessary.

When your house is on fire, you don't tell the firemen to stay away because you're worried about water damage.

The trick now is to find the "sweet spot" -- how much can we afford to go into the hole now without causing runaway inflation later, and how much pain will people tolerate right now in order to keep down the debt and inflation.

Unfortunately, the current situation is widely misunderstood, and on top of that folks seem to want it both ways -- let's somehow get the economy going without spending any borrowed money or printing new money.

 

[Piggy]

The social and economic environment was different back then. Our current economic problems are not caused by the same problem. It's too much debt that is the problem right now.

Printing more money to get people to spend again is only going to create more debt.

We aren't going back to the way things were before all of this happened. People can't go back to that and they won't.

No, too much debt is not the problem right now.

Too much debt was the problem 2 years ago. Now that situation has blown up.

The problem right now is getting the core of the financial system working again -- unfreezing the credit market, untangling the default swap mess, and so forth.

Until that's done, it's hard to see how we're going to be able to address unemployment, get the trillions of dollars in sidelined money back into the economy, etc.

 

[mhaze]

Actually, I think he's got it right and your logical construct is mistaken. Inflation is caused by too much money chasing too few goods, not having to pay interest.

It's important to understand that the absolute number is meaningless, whether it's $100 or $100 trillion. It's the ratio of debt to GDP that matters. The US still has a lower debt-to-GDP ratio than many other countries.

http://en.wikipedia.org/wiki/List_of_countries_by_public_debt

You misunderstand the distinction I make which is relevant to current circumstances. Simply stated, if the expenses of government grows unrestrained and receipts do not cover the expenses, then money is printed to pay those bills. This causes inflation quite obviously and in fact is the cause of major inflations and hyperinflations. As to the relationship of interest to the equation, it should be obvious what would happen to our servicing $11T in debt if interest rate goes to 8%.

If not let's go into that. And by the way, you cannot assert that a ratio - of debt to GDP is relevant, instead of the numerical number, without simultaneously acknowledging the relevance of the other ratio, "Interest" which relates the time value of money.

So in summary, I think that you and lomiller seem to be confusing the classical paradimn of inflation and recession as controlled by FED money supply with the specifics of the current actual problem.

 

[JihadJane]

"If the American people ever allow private banks to control the issue of their money, first by inflation and then by deflation, the banks and corporations that will grow up around them, will deprive the people of their property until their children will wake up homeless on the continent their fathers conquered."

- Thomas Jefferson

 

[TraneWreck]

The over leveraging is the creation of debt. It's money owed to someone else. Too much debt and not enough money to pay that debt.

As for whether or not we need massive stimulus. I guess we will find out in the next year or so if that was the solution.

Again, that leveraging was only part of the issue. The real problem is not the debt itself, but the fact that it was leveraged so many times that the debt has no relation to the initial value, be it a mortgage or other financial instrument.

Cutting goverment spending in this scenario will do nothing to deal with the major issues. There are only two real options with regard to these banks and companies that engaged in this nonsense: 1) let them fail 2) somehow pay off those obligations.

Letting them fail would destroy business in a way that I don't think anyone is prepared for. Take just AIG. They insure so many aspect of modern business, from the materials GM uses to build their cars, to construction equipment, to basically every aspect of our lives. Because of their size they're able to insure business transactions that no one else can. Thus, if they are allowed to go bankrupt, all of those activities will not be insured. Without insurance a great many deals will be stopped, businesses will have further difficulty getting loans, and on down the line. Most people have correctly judged that this would be terrible.

So the only remaining option is to bail them out. Again, my problem is not with the concept of a governmnet bailing out a private company, it's with the fact that you're giving the same corrupt and incompetent figures money to essentially pay off gambling debts. I think that money should go to more responsible companies so they can take over AIG's obligations.

Furthermore, the failure of this stimulus plan will not show the concept of stimulus itself to be failure, it will merely show that it was a bad idea to bail out fraud without consequence.

 

[Piggy]

"If the American people ever allow private banks to control the issue of their money, first by inflation and then by deflation, the banks and corporations that will grow up around them, will deprive the people of their property until their children will wake up homeless on the continent their fathers conquered."

- Thomas Jefferson

There's no record of Jefferson every saying or writing that, and no reason to believe that he did.

And in any case, the issue at hand is not allowing private banks to control the issue of money.

 

[lomiller]

It's important to understand that the absolute number is meaningless, whether it's $100 or $100 trillion. It's the ratio of debt to GDP that matters. The US still has a lower debt-to-GDP ratio than many other countries.

http://en.wikipedia.org/wiki/List_of_countries_by_public_debt

IMO it would have been better to sort by the OECD numbers as it’s more up to date then the CIA factbook numbers. The later doesn’t include 2008, which changes the US ranking quite a bit.

 

[lomiller]

Simply stated, if the expenses of government grows unrestrained and receipts do not cover the expenses, then money is printed to pay those bills.

Wrong. The US borrows to cover it’s debts, this in itself does not create money. The Fed chooses to buy or sell this government debt, when it buys it now money is created, when it sells it money is taken out of the system.

Because the Fed is an arms length body it’s choice to buy or sell US debt (thus increase the money supply) is based almost entirely on it’s inflation target which is normally 2%. It will, however pump as much money into the US economy as it can and still keep inflation near that target in order to promote economic growth.

 

[gdnp]

There's no record of Jefferson every saying or writing that, and no reason to believe that he did.

And in any case, the issue at hand is not allowing private banks to control the issue of money.

It would be an unusual statement for someone who died long before the continent had been conquered.

 

[charles brough]

Many Austrian economists argue that you will get the same thing by spending all of this money, but it will last longer.

Better to have short term pain and get it over with, than have the same thing long and drawn out.

Just how do you think that the government would get enough tax money out of a constantly deflating economy to pay interest on the huge national debt we built up and even pay interest on the huge balance of payments debt we have? We already pay heavy taxes and who would vote for large tax increases as wealth and income continues to slide?

As I said in the last paragraph, the only alternative to bankrupty is inflating. Saying it is better to let the economy collapse is like saying, "if Iran gives us any more trouble, drop a few atomic bombs on them." It is not a viable solution and is not going to happen.

 

[charles brough]

Wrong. The US borrows to cover it’s debts, this in itself does not create money. The Fed chooses to buy or sell this government debt, when it buys it now money is created, when it sells it money is taken out of the system.

Because the Fed is an arms length body it’s choice to buy or sell US debt (thus increase the money supply) is based almost entirely on it’s inflation target which is normally 2%. It will, however pump as much money into the US economy as it can and still keep inflation near that target in order to promote economic growth.

I think you are in error there. It might be that the Treasury buys back Dept. debt it has already delivered to the Fed. Where do the funds come from with which to do that? Out of thin air.

http://www.chrismartenson.com/crashcourse/chapter-8-fed-money-creation

 

[lomiller]

hamelekim, I think you are having trouble differentiating between debt and leverage. Because there is always a borrower and a lender net debt is always zero. This means individuals companies and countries can own more then they can afford but there isn’t really such a thing as to much debt across the broader economy. This isn’t to say there won’t be repercussions for owing money, but it isn’t what’s caused the current crisis.

What the current issue is isn’t debt but leverage. US banks have been keeping increasingly smaller reserves of cash relative to the loans they were making in the belief that their loans were going towards assets that could be sold of if the borrower defaulted. They also spread what risk there was around so that even if they couldn’t sell the asset, they only took a steady predictable hit.

Since there was “no risk” in lending someone they believed they could assert more leverage in a effort to keep more of their money working and make higher profits. It also allowed them to lower lending standards because they assumed there was no risk even if the borrowers couldn’t pay the money back. What they didn’t count on was that the lax lending policies driving up housing prices and creating a bubble that popped when enough borrowers went into default to drive down housing prices.

In a declining housing market, the assumption that they could always get their money back by selling the assets of people who defaulted is no longer valid. Because these loans were bundled into securities, however no one knows which loans are to people who will pay it back, and which were simply given out on the assumption they could sell the house if the borrower defaulted. This means the “AAA asset” they are holding as their reserve cannot have it’s real value assessed, and these are basically being given values of pennies on the dollar.

If banks are going to accumulate enough cash and safe assets to get down to more traditional conservative 10:1 leverage without the economy taking a serious hit there needs to be an overall increase in the money supply. Until they are back in the “safe” range they will continue to lend less and accumulate more cash, both of which means there is less cash actually in circulation.