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Thursday, December 18, 2008

The decline and fall of the American Empire

The financial trauma and recession has the US flat-lining at this point. The Treasury and the Fed are chugging down pills and liquids and everything in the monetary and fiscal medicine cabinet to fix it. The US created a lot of dollar value out of not a lot of real value, very quickly - now they are panicking over how to cover it. Congress is deeply unimpressed. They are at the beginning of a series of crash diets to try to get down-sized and back in some sort of respectable shape. How painful will it be?

NY Times reporting:
The central bank cut its target for the overnight federal funds rate to a range of zero to 0.25 percent and brought the United States to the zero-rate policies that Japan used for years in its own fight against deflation.

Though important as a historic milestone, the move to an interest rate of zero from 1 percent is largely symbolic. The funds rate, which affects what banks charge for lending their reserves to each other, had already fallen to nearly zero in recent days because banks have been so reluctant to do business.

Of much greater practical importance, the Fed bluntly announced that it would print as much money as necessary to revive the frozen credit markets and fight what is shaping up as the nation’s worst economic downturn since World War II.
the dollar dropped sharply against the euro and other major currencies for the second consecutive day — a sign that currency markets were nervous about a flood of newly printed dollars. Some analysts predict that the Treasury will have to sell $2 trillion worth of new securities over the next year to finance its existing budget deficit, a new stimulus program and to refinance about $600 billion worth of maturing government debt.

The US economy is very sick. It was bloated for many years, now it has popped and turned septic. The federal government has decided to take on all the pus from the private sector and that will make the federal government sick as well.

All of the tools involve borrowing by the Fed, which amounts to printing money in vast new quantities, a process the Fed has already started. Since September, the Fed’s balance sheet has ballooned from about $900 billion to more than $2 trillion as it has created money and lent it out. As soon as the Fed completes its plans to buy mortgage-backed debt and consumer debt, the balance sheet will be up to about $3 trillion.

“At some point, and without knowing the timing, the Fed is going to have to destroy all that money it is creating,” said Alan Blinder, a professor of economics at Princeton and a former vice chairman of the Federal Reserve.

“Right now, the crisis is created by the huge demand by banks for hoarding cash. The Fed is providing cash, and the banks want to hoard it. When things start returning to normal, the banks will want to start lending it out. If that much money is left in the monetary base, it would be extremely inflationary.”

That's a big reason why the greenback is so over-valued.

The Fed says:

Since the Committee's last meeting, labor market conditions have deteriorated, and the available data indicate that consumer spending, business investment, and industrial production have declined. Financial markets remain quite strained and credit conditions tight. Overall, the outlook for economic activity has weakened further.

Meanwhile, inflationary pressures have diminished appreciably. In light of the declines in the prices of energy and other commodities and the weaker prospects for economic activity, the Committee expects inflation to moderate further in coming quarters.

The Federal Reserve will employ all available tools to promote the resumption of sustainable economic growth and to preserve price stability. In particular, the Committee anticipates that weak economic conditions are likely to warrant exceptionally low levels of the federal funds rate for some time.

It's all bad news and it sounds like life support is the answer. It sounds like hibernation, like depression.


At 18/12/08 11:15 am, Anonymous Aj said...

If New Zealand avoids a deep recession over the next few years, two things will be responsible. Luck, and Michael Cullen.

At 18/12/08 6:27 pm, Anonymous Anonymous said...

Anyone who thinks Michael Cullen has done any good for NZ's economy must be an absolute spastic.

At 18/12/08 9:39 pm, Anonymous Aj said...

Anyone who thinks he hasn't is an economic illiterate.

At 19/12/08 10:39 am, Anonymous Anonymous said...

In the cold hard light of day now it seemed that Dr Cullen was correct in being tight fisted with the surpluses,because if he loosened the reins over the last 9 years we would really be in the shit as a nation in these troubled times.

At 19/12/08 6:34 pm, Anonymous Anonymous said...

No the truth is Cullen wasted billions simply because he is idealogically opposed to tax cuts.

There is no way someone as self absorbed as him should be in control of an economy.


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