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Economy
Fed Virtually Funding the Entire US Deficit
2012-09-27
The latest round of extraordinary Federal Reserve stimulus is risky and leaves little room to maneuver should another crisis hit, economist Lawrence Lindsey told CNBC’s “Squawk Box” on Wednesday.

Lindsey said that with the Fed purchasing at least $40 billion a month in mortgage debt through QE3, “they are buying the entire deficit.”
They're also buying Treasury securities when no one will at auction. They're buying a LOT using made-up money. At some point they can't continue.
“I have no problem doing extraordinary things in extraordinary times,” said Lindsey, a former White House economic advisor under former president George W. Bush who now runs his own consulting firm.

Lindsay said he agreed with the Fed’s first two rounds of quantitative easing. Now, with the economy now growing closer to its trend rate, “doing something that’s really out of the ordinary is risking things.”

He added, “If this becomes the new ordinary, it’s hard to imagine the Fed’s maneuvering room” should another crisis hit."

The central bank's recently announced bid to stimulate the economy has also taken the pressure off politicians to deal with the U.S. fiscal cliff, Lindsay argued, which could result in destabilizing tax hikes and spending cuts automatically taking effect early next year.

“The Fed, maybe because it can't do otherwise, has told the Congress: 'We're going to buy your bonds no matter what,'” Lindsey said. “I think that's keeping the pressure off the president, off the Congress.”
That's right. If they didn't buy the bonds, the interest rates would have to go up significantly to entice the market to buy them. Imagine what that would do to the deficit each year. We'd look like Spain inside twelve months.
The effective of QE3 on interest rates may also keep Congress from reining in borrowing.

“If the (Fed) chairman’s estimates of the effectiveness of QE3 on interest rates come true, we’re going to be down to an average cost of borrowing for the government of 0.6 of a percentage point,” Lindsey said. “Why would any Congress not borrow and spend if they could borrow at 60 basis points?”
Because at some point they can't continue...
Posted by:Steve White

#25  canalzone ... that's not the worst idea that you've had. here's the thing - just offer to be their security gaurd. they're gonna need one. then fence the entire area off with barbed wire. :-)
Posted by: Raider   2012-09-27 23:35  

#24  Hello local S. Maryland Amish community...I respectfully request permission to enlist in your apprentice program...
Posted by: canalzone   2012-09-27 22:06  

#23  Ebbang - my Dad had the same car - sweet heavy ride. Good power. Thanks for the memories :-)
Posted by: Frank G   2012-09-27 21:35  

#22  BP, In simpler terms, "Sooner or later they run out of other peoples' money." (Your own PM Thatcher, if I recall correctly.)
Posted by: Glenmore   2012-09-27 20:18  

#21  If you understand the relationship between fractional reserves banking, reserve ratios (unlent funds) and systematic credit volume. Yuo can begin to understand the relationship between government intervention in the economy, taxes on incomes and wealth creation.
You should also now be able to see that Debt increases are used by politicians (of all stripes) to cover over the economic damage they do by taxing work.
At a certain point the interest payments get bigger than the real net wealth created in the economy and the potemkin economy implodes.
Posted by: Bright Pebbles   2012-09-27 19:38  

#20  Today's yield curve shows that inflation expectations in the bond market are very low (30 year T bond is well below 3%).
lord garth, that's the purpose of the exercise.
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.
It's a form of reverse crowding out.In traditional crowding out theory, issuing of state debt crowd out private investment (shrinking the volume of funds available and driving up the cost of borrowing). By reducing the current and projected amount of Treasury securities in circulation, QE aims to crowd in private sector investment, which will include investment in commodity derivatives and physical stocks.
Traditionally treasuries have been the vehicle of choice for fund that need safe investments, such as retirement funds. By reducing the returns on these investments, they hope to shove these funds into more riskier areas such as stocks and commodities. A good explanation here.
Posted by: tipper   2012-09-27 18:13  

#19  If you do not believe compounding matters, the rate of inflation over the past 50 (1962) years has risen a staggering 662%. That is over 13% per year. What may happen in the future is very frightening.

In 1969 my dad bought a Pontiac Catalina for approximately $3000. It was a nice, big, roomy, comfortable, fast and powerful car. I got it up over 100 mph one time and my passengers couldn't feel it. With power brakes and power steering it could stop on a dime and turn on one too. It had eight cylinders and, I dunno, maybe it was a 389 cubic inch displacement. They didn't measure it in liters in those days. Now, I know they don't make Pontiacs anymore but imagine how much it would cost to buy a comparable car today and it might give you an idea of the cumulative, or compounded, effect of inflation. Just don't even think about paying for the gas.

As for JosephMendiola, I've been reading his rants long enough to have a pretty good idea what he's on about today. It isn't good.
Posted by: Ebbang Uluque6305   2012-09-27 17:24  

#18  PhilB and Bright Pebbles

The plurality of opinions on why inflation has remained tame is, in money economics terms the velocity of and demand for money has decreased. In fiscal economics terms the high unemployment rate is constraining labor cost and also reducing demand. Today's yield curve shows that inflation expectations in the bond market are very low (30 year T bond is well below 3%).
Posted by: lord garth   2012-09-27 15:01  

#17  The Fed may soon have to fund the EU socialists beggars as well.
Ambrose Evans-Pritchard's Contrition
Posted by: tipper   2012-09-27 14:52  

#16  fair comments ... but I think you'd agree that the Govt's policies are the standard "cures" for addressing a normal business recession cycle. I would argue - as do many - that we are caught up in a much bigger process that represents a major shift of the world economies. The problem is that western countries are resisting this change, or trying to make it happen "on their own terms". Impossible. They have resisted change now to the point where a complete collapse of the banking and financial system seems like a high probability.
Posted by: Raider   2012-09-27 14:24  

#15  Deficit spending was the only way out of this situaton, but the method was politically selected, resulting in evaporating a margin.

Keynes made the mistake of allowing deficit spending by the state to be done by government spending in addition to tax reduction: both pumped money into the economy while increasing deficit spending, but tax reduction had the economic advantange of putting money into the pockets of people productive enough to have a high enough income to tax. In addition, Keynes worried about overheating an economy, leading to the creation of bubbles, so he prescribed paying down those deficits during good times as a brake. Krugman claims to be a Keynesian, but only preaches half of what keynes taught because his audience doesn't like that part of the message.

The reputation of Keynes came from John Kennedy's use of his theories, but everyone ignores the fact that Kennedy selected the tax cut method instead of the public spending method. Everyone believes it was World War II, and thus government spending, that pulled the economy out of the Great Depression, but it actually was the suspension of New Deal era regulations on businesses that stimulated the economy.

Time for "recoveries" have been slowly increasing, and people believe its the complexity of the economy that is causing the increase, but regulations affecting business decisions have also been increasing as well.
Posted by: Ptah   2012-09-27 12:25  

#14  This is the same problem that caused the 2008 crash, but on a system wide scale. Some people bought the wrong paper, which will soon be worthless. Godel's Theorem says the system cannot bail itself out...
Posted by: M. Murcek   2012-09-27 11:49  

#13  Creating and funding at the same time.
Posted by: JohnQC   2012-09-27 10:27  

#12  Appears to be a State and Muicipal bailout.... by another name. When bond ratings slip or fall below Investment Grade, or there are limited public investment dollars available, the Fed may be the only buyer available. The fact that the Democratic Party is the Party of urban America may have some play in this as well. Eventually, someone will have to pick up the tab. I suspect we all know who that will be.
Posted by: Besoeker   2012-09-27 09:29  

#11  Who would have ever thought that the entire economy of America would come to this - a pathetic end where the Fed is buying all of our bonds. As you drive around, or take a train ... look at all the buildings, all the farm fields, all the industries that we have in America. How did Wall St and the Gov't manage to bankrupt such an enormous system? It's beyond comprehension. We're not talking about a minor management scandal ... it's a debacle beyond anything that our country has seen before.
Posted by: Raider   2012-09-27 09:09  

#10  My Econ transcripts are...hm, unreleasable. Septic systems, I understand. Thanks 2x4.
Posted by: Besoeker   2012-09-27 08:52  

#9  Beso, 29th day paradigm. They usually use lily pond or some such in their examples, but I use septic tank with a fan on top -- it has a more acute, eh, character.

Most people extrapolate in linear progression, while in real world, given that there are numerous inputs that may not be apparent on the surface, a geometric progression is more common.

The brown organic matter fills the tank, twice the previous day volume, until full at the event horizon of 30 days. Teh event horizon being the brown organic matter hitting the fan blades.

On the 28th day, the tank would be merely 1/4 full of shite. People would not suspect anything. On the 29th, it would be half full and some light bulbs would turn on and call shitsucker services at 6pm to be greeted by an answering machine, but most of the people would still sleep soundly.

We are now at 26th/27th day, I reckon.
Posted by: twobyfour   2012-09-27 08:31  

#8  If you do not believe compounding matters, the rate of inflation over the past 50 (1962) years has risen a staggering 662%. That is over 13% per year. What may happen in the future is very frightening.

Calculator
Posted by: Besoeker   2012-09-27 07:44  

#7  >There is a very interesting tale to be told as to why inflation hasn't taken off yet.

There was only credit driven inflation via shadow-banking, now the shadow banking credit pool is vaporising the credit driven inflation is going.
Posted by: Bright Pebbles   2012-09-27 07:23  

#6  Just before this talk of a gold standard George Soros invested big time. Obama has protected these people for some time now. They are getting inside information to make such large moves.
Posted by: Dale   2012-09-27 07:13  

#5  The arguments regarding gold as the interntional standard yet today, are virtually endless. One picture however, is worth a thousand words.


Klik
Posted by: Besoeker   2012-09-27 06:31  

#4  Printing money to pay debts...where have I seen that before?

Oh yeah, Weimar Republic. It worked out so well for them, too.
Posted by: gromky   2012-09-27 05:15  

#3  There is a very interesting tale to be told as to why inflation hasn't taken off yet. With the emphasis on the 'yet'.
Posted by: phil_b   2012-09-27 01:26  

#2  Looks like someone rly reely really Really REALLY R-E-A-L-L-Y - spelled R-I-L-L-Y - REALLY wants NAU come 2015 wid a mobidly weak-n-getting weaker US Econ + by extens US Superpower???

Get ready to be the UK + its littoral Coast Guard fka ROYAL NAVY [incl.RAF] - D *** NG IT, WE CAN'T LAND MARINES OVERSEAS ANYMORE, BUT BY GOD WE HAVE FOUR TRIDENT SUBS, SO THERE!

I'm sure Russia + China + even Iran? will be glad to defend us from the wily invasion-happy North Koreans - the question is what will they demand in exchange???
Posted by: JosephMendiola   2012-09-27 00:49  

#1  Just wait until the financial wave from the EU breaking up hits. We are already taking on water and it will capsize us and sink us.
Posted by: DarthVader   2012-09-27 00:19  

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