More of the same...The Fed drained another $22 billion in O/N RRP and CP quality spreads hit a new high. Volume on the NYSE is low for the third day in a row as investors (including GE who cancelled its stock buyback) lose interest.
Jack Welch was on Bloomberg saying that the government "bailout" is a mis-nomer. What's really happening is that the goavernment stands to get toxic paper at rock-bottom prices. They may then be able to sell it at a profit to traders of distressed securities. Is this a coup for the US Treasury?
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Either way it's phrased, this will involve increasing the money supply further. If the $700 Billion is added can we expect significant retracement in the euro / dollar pair? Back up to say 1.5300 , or is there some other dynamic that could prevent this? For example could this give the ECB's Trichet "room" lower rates, and keep the pair is a range?
By "some other dynamic" I mean, am I missing something obvious?
kumbu -- just adding money into the economy does not mean it's inflationary. The money has to be lent. That's the goal of course, but I bet the money is actually needed to pay claims. We did just acquire 3 insurance companies didn't we? $700B isn't even close to what's needed when those CDSs start filing. Massive unrelenting deflation coming your way.
Anonymous -- I respectfully disagree with your assertion "just adding money into the economy does not mean it's inflationary."
Here is my understanding. Under fractional reserve banking funds are nothing more than an accounting equation. The gold reserve held by the Fed has not grown. However their 'accounts receivable' have grown and 'cash on hand' have decreased. Where did the 'cash' come from? How could this not constitute a greater supply of cash relative to gold? Therefore I believe the $700B bailout is purely inflationary. As an aside, I agree $700B isn't even close to what is needed.
The threat of deflation last came when Greenspan was debating paying off 10 year treasuries early, not floating more 10 year treasuries.
I don't understand your 'deflation' logic. What am I missing? Deborah, what is your take?
All that and I missed the original question; "is this a coup for the US Treasury?"
To answer that question, can we look to history? In my mind, the closest facsimile of what Welch describes was the RTC or Resolution Trust Corporation.
So, was there ever an analysis done on final cost/benefit of RTC? The answer might lie there.
My point is that if the amount of money injected isn't enough to encourage lending then the resulting solution is deflationary -- and not much of a solution.
Anybody care to comment on the Fed's -26B on 9/26.... What just happened? http://www.bullandbearwise.com/FOMOChart.asp
What a great discussion... I'm impressed that everyone is so polite despite the panic in the markets!
It's true that adding cash to the system doesn't necessarily mean that people will borrow it and use it. The yield curve often assumes a "hockey stick" shape where it is flat from 3 mo. to 2 yrs. while the cash sits on the sidelines. Inflation soon follows when banks start lending again.
Thanks for your insights,
Deborah
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