El Pato writes:
First?
El Pato | 03.18.08 - 12:08 am | #

Fed writes:
So, these articles which imply that the Fed is running out of money for bailouts, loans, ect... have been popping up all over the internet today.
Fed | 03.18.08 - 12:11 am | #

Yossarian writes:
Oooh... for Econ Ubernerds? I'm there.

And yes, we're getting very, very close to a liquidity trap ... should be interesting to see what happens when the Fed is out of bullets in a week or so.

They'll keep trying, no doubt. But the big effects I think will largely be in the foreign exchange market.
Yossarian | 03.18.08 - 12:13 am | #

Interesting Times writes:
Sterilization sounds like something you'd do after visiting an erotic dancer club.

This is the financial markets. You cannot play Houdini and hide securities.

They are worth what the market will bare.
Interesting Times | Homepage | 03.18.08 - 12:15 am | #

ac writes:

The Fed isn't constrained by their balance sheet; they can just keep on lending.

But they have to find somebody to lend to, presumably the government and distressed financial institutions. This didn't seem to cause too much inflation in Japan. I think the key is getting consumers to borrow, and I'm not sure that's going to be so easy at this point.

Best to just monetize trillions of dollars in new treasuries and use the funds to have the IRS return all the taxes it's collected from consumers in the past 20 years in the form of retroactive tax rebate checks.

Then burn all the newly issued treasuries.

Not likely anybody will notice for at least a couple of decades or so.

ac | 03.18.08 - 12:22 am | #

dryfly writes:
CR,

If we are really in a deflationary environment do they even care if their intervention is 'sterilized'... hell if the opposite of 'sterilize' is 'contaminate' then the fed will be looking for the monetary equivalent of Typhoid Mary not Louis Pasteur. In which case Ben might by their man...

That assumes we are in & they fear a deflation more than an inflation.

dryfly | 03.18.08 - 12:24 am | #

infiniti writes:
Running out of ammo????

hahahahahahahahahaha
infiniti | 03.18.08 - 12:25 am | #

BK writes:
And how does "sterilization" differ from money laundering?
BK | 03.18.08 - 12:26 am | #

howard writes:
lord knows bernanke is stuck in a horrible situation not of his own making, but i can't help but wonder whether, in his eagerness to show the lessons he's learned, if he isn't getting a little carried away a little quickly....
howard | 03.18.08 - 12:26 am | #

dryfly writes:
This didn't seem to cause too much inflation in Japan. I think the key is getting consumers to borrow, and I'm not sure that's going to be so easy at this point.

The Japanese saved all through their pump priming because they don't have anything like a safty net (nothing like our SS... more like 401Ks - they have to save).

We have safety nets so don't save - you can argue the validity of that assumption but people do assume it.

Until there is evidence of massive sea change in US consumer psychology my guess is if cheap lending is made available people will borrow - if nothing else but to revolve out of expensive debt into ever cheaper debt.

We are NOT Japan.

dryfly | 03.18.08 - 12:29 am | #

sequoia512 writes:
You mean premature liquidity ejaculation?
sequoia512 | 03.18.08 - 12:29 am | #

ac writes:

Running out of ammo????

hahahahahahahahahaha

Seriously I don't know what people are thinking.

I look outside and I still see plenty of trees.

What part of "fiat currency" don't people understand?

ac | 03.18.08 - 12:30 am | #

CowTools writes:
If kudlow says to stop cutting rates, I do too!
CowTools | 03.18.08 - 12:31 am | #

Barley writes:
The next tool is to prop currency...buying USDs..it is a long weekend coming up - dont ya know

Strange how other stocks markets gyrate and the Dow remains in a broader range
Barley | 03.18.08 - 12:34 am | #

barely writes:
[And how does "sterilization" differ from money laundering?]

Depends if there's actually a haircut at the window (USG pawn shop). If there's a substantial haircut it's exactly the same thing. Without the haircut it's a bonanza for those visiting the window, for as long as the punch bowl still has someone with a grin and a grey beard filling it up.
barely | 03.18.08 - 12:34 am | #

probert writes:
Stupid question: is the photo of the fake $2 bill taped on the bear door real , or is it a montage?
probert | 03.18.08 - 12:34 am | #

ac writes:

Until there is evidence of massive sea change in US consumer psychology my guess is if cheap lending is made available people will borrow - if nothing else but to revolve out of expensive debt into ever cheaper debt.

We are NOT Japan.

But what's the mechanism now? Remember consumers were gorging on massive mortgage loans at an extraordinary rate. In retrospect I think it's surprising how little inflation that caused.

It's going to be hard to top that without doing something really crazy. I'm inclined to think we might try something really crazy, however I think this would send real wealth fleeing the country.

I think having more foreign outlets for investment makes it harder for the US to inflate. But not impossible, especially if there's international coordination.

ac | 03.18.08 - 12:36 am | #

probert writes:
Truth about Lehman-DBS

http://www.marketwatch.com/news/...1179AABA5C0A% 7D

SINGAPORE (MarketWatch) -- DBS Group Holdings Ltd. (D05.SG) sent an email to traders Monday to reverse earlier instructions not to enter new transactions with Lehman Brothers Holdings Inc., a person familiar with the matter said.
"There was an email sent out after the first advising traders to review new transactions (with Lehman Brothers) case by case," the person told Dow Jones Newswires.
probert | 03.18.08 - 12:37 am | #

YLSP writes:
Wait, I thought the $2 bill was real? Or at least it was at some point... don't know if they still print $2 bills. Don't tell me this is the Easter Bunny all over again...
YLSP | 03.18.08 - 12:39 am | #

Dean writes:
I look outside and I still see plenty of trees.

What part of "fiat currency" don't people understand?

How about cotton? Money is made out of cotton too. Is so, maybe the intrinsic value of the dollar has increased?
Dean | 03.18.08 - 12:39 am | #

DEFLATION---HOWSWEETITIS writes:
While the FED is NOT constrained by its balance sheet, the inflationary aspects to any further interventions is readily apparent.

In a world of global wage arbitrage, where U.S wages remain depressed, inflating everything but wages ends up eroding the American middle class. Welcome to the beginning of 20 year U.S recession.
DEFLATION---HOWSWEETITIS | 03.18.08 - 12:40 am | #

probert writes:
Supporting Lehman vs. revenge on Bear

http://www.telegraph.co.uk/ money...cnlehman118.xml

Wall street's leading investment banks have rallied around ailing rival Lehman Brothers after the Federal Reserve Bank of New York urged them to support the institution in order to try and preserve financial stability.

It is understood the New York Fed contacted key executives at a number of leading banks, including Goldman Sachs, Citigroup and Morgan Stanley, to discuss Lehman's situation over the weekend.

One American banker said: "[We heard] from the top, 'Do not encourage calls to Lehman clients. We want to run that up the flagpole. We don't want another run on a bank.' "

According to a source close to one of the banks, the Wall Street club remains very supportive of Lehman and is wary of doing something that might harm the bank's financial position.

probert | 03.18.08 - 12:40 am | #

awgee writes:
Sterilization? Don't ask where and how the fed came to acquire the treasuries? Non-inflationary? What a joke?
awgee | 03.18.08 - 12:41 am | #

Barley writes:
I watched the China news conference. I suspect Tibet to be overrun w/ military in two days...

There is probably now a price on the head of the Dali Lama...
Barley | 03.18.08 - 12:41 am | #

dryfly writes:
But what's the mechanism now? Remember consumers were gorging on massive mortgage loans at an extraordinary rate. In retrospect I think it's surprising how little inflation that caused.

Not really - it was sterilized IN REVERSE... the money left America through WalMart back to Chinese mfgrs & the PBoC who then loaned it back to debt slaves here so they could mine more equity. It was one of those classic Ponzi schemes that worked grat until it didn't.

Now we got both - monetary inflationary pressure & asset deflationary pressure & we won't know th enet result (inflation or deflation) until the 'accounts all settle' and the CBs have stopped or slowed their interventions & sterilizations.

And we haven't even seem the fiscal cards played yet - uffda!

I don't think its going to be a pretty picture when its over.

dryfly | 03.18.08 - 12:43 am | #

dryfly writes:
How about cotton? Money is made out of cotton too. Is so, maybe the intrinsic value of the dollar has increased?
Dean | 03.18.08 - 12:39 am | #

Money is made out of electrons... you don't need ANY trees or cotton to create fiat.

dryfly | 03.18.08 - 12:44 am | #

Justin writes:
How is it not inflationary when the fed is lending out good securities in return for devalued rubbish?

Money supply before the repo operation: $6000 billion (including impaired assets)

Money supply after the repo operation:
$6200 billion (impaired assets now rejuvenated)

Nett inflation in money supply: +$200 billion

If it wasn't inflationary (in the sense of creating more usable money), there would be no point in doing it!
Justin | 03.18.08 - 12:45 am | #

republicans are traitors writes:
What money supply? The unelected officials at the federal reserve did away with the best measure of the money supply, the M3, a couple years ago. No money supply, no inflation. WOW it's like magic.
republicans are traitors | 03.18.08 - 12:45 am | #

nades writes:
I look outside and I still see plenty of trees.

What part of "fiat currency" don't people understand?

Ha hahahahhaha... so very true.... After all what's a dollar really worth....
nades | 03.18.08 - 12:46 am | #

YLSP writes:
Can we pay the Chinese back in Joint Strike Fighters or Aircraft Carriers? Do you think they'll "settle the debt" by forcing us to disarm and having the UN send weapons inspectors here to make sure we stop all weapons development? I don't know what the end-game is, but I fear it goes way beyond all the havoc wrecked on balance sheets, American citizens wallets, governments, house values, etc.
YLSP | 03.18.08 - 12:46 am | #

Worried writes:
The value of money is not tied to anything. The fed can buy all the banks and still have more of this thing called money.

The fed has no constraints and can publish any data it wants. There is no way of knowing what the Fed does.
Worried | Homepage | 03.18.08 - 12:47 am | #

Fair Economist writes:
The don't dare monetarize on a scale adequate to do rescues. M1 is only about 800 billion. A 200 billion intervention like TSLF done by monetarization would bump up prices by 25% - probably 12% extra inflation for 2 years - and destroy the banking system they're trying to save. One Bear Stearns rescue would soak up the money supply expansion for a year.

However, the government could just give them Treasuries. I don't think that would increase the money supply. I think that works out, assuming systems like the TSLF, roughly equivalent to the Feds guaranteeing private bonds temporarily for a fee - kind of an uber-GSE without the oversight.

I will say Bernanke has proved resourceful so far and I expect he would find a way to intervene even after he runs out of treasuries. Although, the fancier the tricks, the greater the risk to the Fed.
Fair Economist | 03.18.08 - 12:48 am | #

YLSP writes:
Justin,
I think the argument is that because the rubbish was thought to be worth $600 Billion... and by paying only $200 B you've devalued other rubbish?
YLSP | 03.18.08 - 12:48 am | #

DEFLATION---HOWSWEETITIS writes:
dryfly--- We do NOT have monetary inflationary pressure. Money supply growth is non-existent. Bank capital is going bye-bye, which ensures a reduction in credit expansion. Actually, the monetary environment is deflationary, with a selected price rise in commodities. If the FED expands its balance sheet, though above the $800 billion mark, then inflation would rear its head GLOBALLY. The U.S would be exporting inflation.

I still believe the U.S economy avoids inflation because of global wage arbitrage. That's why its funny to hear people say nominal house prices appear to have limited downside if the FED chooses to inflates. Its the opposite. The FED can't force employers to increase your paycheck. With slack in the labor market and further job cuts on the way, I see any excess monetary easing feeding into commodities rather than U.S wages. At the end of the day, the road leads to deflation.
DEFLATION---HOWSWEETITIS | 03.18.08 - 12:48 am | #

nades writes:
Worried you're scaring the sh*t out of me...
nades | 03.18.08 - 12:48 am | #

cd writes:
Any thoughts on PPI and housing starts? If PPI is bad do we get a .50 cut only..
cd | 03.18.08 - 12:49 am | #

ac writes:

How about cotton? Money is made out of cotton too. Is so, maybe the intrinsic value of the dollar has increased?

Oh, no they took care of that like they did with the coins. No more cotton in dollars and severe penalties for boiling down older dollars to make them into underwear.

ac | 03.18.08 - 12:49 am | #

Hank writes:
> intervention that does not increase
> the money supply, like exchanging
> treasuries for mortgage backed
> securities

OK, serious question from naive reader:

Assume they exchange $2 of treasuries for a piece of paper claimed to be a $2 valued mortgage-backed security, that originally sold for $20, and that when eventually understood is worth $0.20.

What changed about the money supply when the bubble leaked out of the mortgage paper?

Was the $20 part of the money supply, when someone bought or sold the paper for that much?

Assuming it went away as vapor, can the government now print $19.80 in fresh paper and zinc money, and say the money supply came out even, sterile, unaltered?
Hank | 03.18.08 - 12:50 am | #

nades writes:
what about burning them for warmth....
nades | 03.18.08 - 12:50 am | #

bruiser writes:
I look outside and I still see plenty of trees.

What part of "fiat currency" don't people understand?

It worked for Robert Mugabe, right?
bruiser | 03.18.08 - 12:51 am | #

rootless cosmopolitan writes:
"Money is made out of electrons... you don't need ANY trees or cotton to create fiat."

Then we only will have to wait until Mr. Fed is running out of electrons.
rootless cosmopolitan | 03.18.08 - 12:52 am | #

dryfly writes:
If the FED expands its balance sheet, though above the $800 billion mark, then inflation would rear its head GLOBALLY. The U.S would be exporting inflation.

They would be perfectly happy with that.

And what is the rest of the world going to do about it - attack us?

And if those bank loaned bank reserves are forgiven by the fed - are they still loaned? Or even just turned into revolving debt in perpetuity?

No denies there is deflationary pressure but the feds response has been very inflationary AND commodities are the tip of the iceburg - there is a lot of money in those 'sterilization accounts' world wide waiting to bust loose.

Inflation is like water eroding a giant mountain (money supply growth)- it takes time but it always wins.

dryfly | 03.18.08 - 12:55 am | #

Geoff writes:
Uh, they really did print $2 bills a while back, but not for some time now. The last run was in the 70s I think, perhaps early 80s. I recall collecting them as a kid thinking "how queer and useless is this". Guess I wasnt the only one. Dont ever recall why they started printing them up again then, but it was a short lived revival and I think people didnt like using them.

But I suspect the one on the Bear Stears window was real (assuming it wasn't photoshopped.)
Geoff | 03.18.08 - 12:56 am | #

tj & the bear writes:
Joseph Lewis Wants to Block Bear Stearns Sale, Telegraph Says
tj & the bear | 03.18.08 - 12:56 am | #

dryfly writes:
It worked for Robert Mugabe, right?
bruiser | 03.18.08 - 12:51 am | #

Is Mugabe likely to die in his bed, still in power? Probably - if so it worked for him.

dryfly | 03.18.08 - 12:57 am | #

Geoff writes:
Yeh, losing a billion tends to get one a little pissy, even if that persons got two of em.
Geoff | 03.18.08 - 12:57 am | #

dryfly writes:
tj & the bear writes:
Joseph Lewis Wants to Block Bear Stearns Sale, Telegraph Says
tj & the bear | 03.18.08 - 12:56 am | #

Is Lewis making a counter offer? Does he have his own personal fed?

dryfly | 03.18.08 - 12:58 am | #

tj & the bear writes:
Here's the Telegraph link:

Billionaire Lewis moves to block JP Morgan

tj & the bear | 03.18.08 - 12:59 am | #

Fair Economist writes:
Neither treasuries nor MBS are considered "money" by the standard definitions.
Fair Economist | 03.18.08 - 12:59 am | #

Dean writes:
"Money is made out of electrons... you don't need ANY trees or cotton to create fiat.

Electrons...and faith.
Dean | 03.18.08 - 1:00 am | #

Sniglet writes:
So, does this mean the markets aren't going to just rally in jubilation with a nice 100 basis point Fed rate cut on Tuesday? Are investors going to be worried that this means the Fed is about out of arrows, or will they feel all warm and fuzzy with the thought that the Fed has their backs?
Sniglet | 03.18.08 - 1:00 am | #

cd writes:
we just exported our bubble to China.

http://www.bloomberg.com/apps/ne...hmmc& refer=home
cd | 03.18.08 - 1:00 am | #

dryfly writes:
Electrons...and faith.
Dean | 03.18.08 - 1:00 am | #

LOL! Ya that too...

dryfly | 03.18.08 - 1:02 am | #

tj & the bear writes:
IMHO, Ben's already out of ammunition.

When you're business model is screwed and your assets are hosed, what good is a really generous pawnbroker? Just delaying the inevitable.

tj & the bear | 03.18.08 - 1:02 am | #

YLSP writes:
The markets will rally with a 100 point cut because they've seen that they got what they wanted. It's kind've like raising a toddler.

Dad: Please stay within 3 feet of me.
Toddler: Okay daddy (toddler goes to 4 feet)
Dad: I told you to stay within 3 feet... don't go any further!
Toddler: Okay daddy (toddler goes to 8 feet!)
Dad: Darn it! Stay within 15 feet.
Toddler: Okay... (toddler goes to 30 feet).

Eventually this toddler is going to get kidnapped, hit by a car, or some other responsible parent is going to pick them up and bring them back and give an earful to the dad and maybe call the cops.
YLSP | 03.18.08 - 1:06 am | #

ac writes:

Money is made out of electrons... you don't need ANY trees or cotton to create fiat.

I failed to mention that these trees were quercus robur magnus electro maximus.

Figured that was obvious.

Where do you think electrons come from anyhow?

ac | 03.18.08 - 1:06 am | #

Keep It Simple, I'm Stupid writes:
Hey, dryfly. Have you recovered from 13 periods of hockey in three days yet?
Keep It Simple, I'm Stupid | Homepage | 03.18.08 - 1:07 am | #

Shylock writes:
Sterilization means intervention that does not increase the money supply, like exchanging treasuries for mortgage backed securities (MBS).

Sterile? I imagine it seems pretty dirty if you're the one stuck with the near worthless MBS. Lingo is just another brick in the facade of authority, every academic masters it.
Shylock | 03.18.08 - 1:08 am | #

Dean writes:
Is Bernanke Running out of Ammunition?


At least he's not running out of credibility!
Dean | 03.18.08 - 1:09 am | #

dryfly writes:
what good is a really generous pawnbroker?

Generous pawn broker is a terrible analogy - a better one is generous cashier at the company store... we & the banks being employees of the company living in the company's town.

Until folks understand that they don't realize how long the fed can keep this game going - it will only break down once the dollar breaks. Even with the recent 'correction' we are not yet close to dollar free fall.

That isn't to say they can't push us over that cliff - we just aren't there yet.

dryfly | 03.18.08 - 1:09 am | #

Keep It Simple, I'm Stupid writes:
1) Is Lewis still a billionaire?

2) What happens to the market sif JP Morgan just said, "Okay. Have it your way. We withdraw our offer."
Keep It Simple, I'm Stupid | Homepage | 03.18.08 - 1:10 am | #

REBear writes:
Heli Ben and Hank must be training LEH executives on what not to say during the conference call.
REBear | 03.18.08 - 1:11 am | #

YLSP writes:
... it would be a heckuva time if the Supreme Court ruled that there is no individual right to own a gun.
YLSP | 03.18.08 - 1:11 am | #

Homer writes:
"Uh, they really did print $2 bills a while back, but not for some time now. [etc.]"

i don't know why this is so widely believed. The $2 is currently in circulation and was never removed from circulation. It's true that they don't do new printings as often as the other denominations (last printing was in 2003) but that's just because it isn't in as much demand as the other denominations. Current policy is that they will print more when necessary, but there are currently over $1.5 billion worth of $2 bills in circulation, so I guess we don't need more right now.

For more information see the following link to the U.S. Treasury web site:

http://www.ustreas.gov/ education...ations.shtml#q5
Homer | 03.18.08 - 1:11 am | #

Ken writes:
OT on the $2 bill, but I've always loved this story from The Woz (of Apple fame).

You can purchase $1, $2, and now $5 bills from the Bureau of Printing and Engraving on sheets. The sheets come in sizes of 4, 16, and 32 bills each. I buy such sheets of $2 bills. I carry large sheets, folded in my pocket, and sometimes pull out scissors and cut a few off to pay for something in a store. It's just for comedy, as the $2 bills cost nearly $3 each when purchased on sheets. They cost even more at coin stores.

I take the sheets of 4 bills and have a printer, located through friends, gum them into pads, like stationery pads. The printer then perforates them between the bills, so that I can tear a bill or two away.
Ken | Homepage | 03.18.08 - 1:11 am | #

dryfly writes:
Keep It Simple, I'm Stupid writes:
Hey, dryfly. Have you recovered from 13 periods of hockey in three days yet?
Keep It Simple, I'm Stupid | Homepage | 03.18.08 - 1:07 am | #

That and my son has been swimming at the state meets - first high school two weeks ago and then 'club state' last weekend - I'm exhausted.

Wonder why I haven't been around?

dryfly | 03.18.08 - 1:11 am | #

Worried writes:
"Neither treasuries nor MBS are considered "money" by the standard definitions."

That is part of the problem. Electronic trading of paper 'instruments' has meant that more or less anything in a computer system can be instantly traded as if it were cash.

Company debt was traded like cash - that crashed when it became apparent subprime was inside that too

Auction rate securities were traded like cash cos at each auction you could get rid of it as if it were cash dispite the 30 year maturity dates - until you were stuck with them for 30 years!

And so forth

These definitions are all part of the reason we are in this mess.

Nobody knows any more what something is worth. But then again my girlfriend has an orgasm more or less when i bought her an engagement ring with gold and diamonds in it.

I need a big house for my massive ego.

Some things have value.

Treasuries have no value until you buy something valuable to you with them
Worried | Homepage | 03.18.08 - 1:11 am | #

stinky writes:
"The U.S. currency has lost 15 percent against the euro and 17 percent versus the yen in the past year as the worst housing slump since 1991 forced the Fed to cut its benchmark rate 2.25 percentage points."

and what, the major indices (US) are down 15-20%?
stinky | 03.18.08 - 1:13 am | #

andrew writes:
kinda OT for this thread, but interesting:

"LA Hooverville": http://www.youtube.com/watch?v=C...h? v=CnnOOo6tRs8
andrew | 03.18.08 - 1:14 am | #

homedad43 writes:
It's a question of perspective to an extent.

Heard one of the CNBC commentators today state that the Fed was using its "massive" balance sheet to backstop the markets (and he even used "global" somewhere in there); made me stop and look at the TV thinking, he's got to be nuts.
homedad43 | 03.18.08 - 1:14 am | #

DEFLATION---HOWSWEETITIS writes:
Dryfly--- the median U.S wage has gone nowhere in the last five years. So inflate away, what good does it do for the country, and for that matter, the middle class?

Printing money feeds into the commodity market, which just accelerates the transfer of USD overseas.

There is no way out. If you earn the same amount in 2012 as did this year, yet you pay five times more for wheat bread, milk, gasoline, tuition, etc. etc. how will you be better off?

Deflation is coming, look no further than the U.S bond market. We are going to zero on the Fed Funds rate and to 1.5% on the 10yr U.S Treasury yield.
DEFLATION---HOWSWEETITIS | 03.18.08 - 1:15 am | #

tj & the bear writes:
I still think a generous pawn broker is apt; it is a collateral lender of last resort, is it not?

Still, if we take your "company store" analogy, it's the only one that operates at the discretion of (there's that word again) generous foreigners.

tj & the bear | 03.18.08 - 1:16 am | #

homedad43 writes:
Wall street's leading investment banks have rallied around ailing rival Lehman Brothers after the Federal Reserve Bank of New York urged them to support the institution in order to try and preserve financial stability.

And now we get the NYFed Men's Glee Club singing "Kum - bah - yah".

Moving, just moving.
homedad43 | 03.18.08 - 1:18 am | #

tj & the bear writes:
YLSP,

The court would be likely to affirm the right, especially given the current makeup. You really don't want to contemplate the alternative.

tj & the bear | 03.18.08 - 1:18 am | #

RThomas writes:
All right, so if further intervention is necessary beyond the Feds balance sheet limitations, the Fed can 1) borrow more money or 2) allow inflation to exceed the guidlines it has established based on law. I don't think the Fed can do either without the approval of Congress. BB is reaching his limits. He is praying there are no more large bailouts needed.

Also, for those of us who tend to conspiracies, the PPT, which appeared to be active today, particularly after Paulsons public announcement, is probably also near its limit (the liquid resourses of the PPT members).

So from this point any additional panics will be even more interesting.
RThomas | 03.18.08 - 1:21 am | #

dryfly writes:
Dryfly--- the median U.S wage has gone nowhere in the last five years. So inflate away, what good does it do for the country, and for that matter, the middle class?

Doesn't matter from an inflation/deflation perspective. Inflation is money supply growth - deflation is money supply decline... wages and prices are nothing more than symptoms. The fact that middle class wages have increased slowly doesn't say anything about the increase or decline of money supply.

dryfly | 03.18.08 - 1:22 am | #

EconLearner writes:
Just wondering from Econ101: The Fed sells treasuries (bills,notes,bonds) to get cash for funding the US Gov. It holds the treasuries on its balance sheet. When the treasuries come due, the gov pays back the money to the Fed which pays back to the original financier. At this point the Fed conducts a new set of auctions to raise more cash. If the US gov needs more cash, it conducts more auctions.

With its current MBS-Tx exchange intitiatives, at the end of a 28day lending period, the Fed gets back its treasuries from the dealerbank and if the liquidity crunch persists, it probably plans to re-circulate the MBS for treasuries.
So if all 700B of current US treasuries are exchanges, how will it fund the US gov the next time it needs to raise cash?
EconLearner | 03.18.08 - 1:23 am | #

Fair Economist writes:
100% in agreement, Worried. The extreme complexity of modern finance makes the old-time distinctions between "money" and "asset" fuzzy to nonexistent. Money supply has been much less useful as a guide over the past 30 years than it had been before. This is part of why governments have de-emphasized money measures and turned more to price indices to guide money policy.
Fair Economist | 03.18.08 - 1:23 am | #

homedad43 writes:
YLSP @ 1:06 -

And that's why you take the kid by the hand. And if he fights, you pick the little booger up and use the potato sack carry to get him out of the store.

I swear, today's parents are such pansies.
homedad43 | 03.18.08 - 1:25 am | #

dryfly writes:
Still, if we take your "company store" analogy, it's the only one that operates at the discretion of (there's that word again) generous foreigners.

No - this is a company store that can print its own script (which was common in old time company stores).

Now if it wants to keep its money supply stable (not growing) it will have to consider those foreigners concerns... but what if it doesn't and it doesn't mind stiffing them, then what?

dryfly | 03.18.08 - 1:28 am | #

EconLearner writes:
From a comment on InterFluidity:

March 17, 2008

From: Earl L. Crockett

In Praise of Bernard “Little Berney” Bernanke

Being the reincarnated Jewish, or maybe Italian or Greek, grandmother that I am, I would like to rush over again to the Fed with another pot of chicken soup with matzo balls, linguini or chick peas, as the case may be, and make, sure that Little Berney is wearing the heavy wool sweater that I knitted for him for the last big religious holiday. And I do hope that Little Berney is at least getting a few hours sleep on that nice military cot, now set up in his office, that was sent over personally by that nice boy Dick Cheney, in place of his, Dickey Boy’s, assistant Dubya “B”, who was too busy making TV videos ad-nauseam last week about how he would like “the dollar to be stronger.”

Enough of that, well…more than enough. The newspaper press doesn’t seem to get the amazing commitment that Bernanke has extended in just the last two weeks. The press is full of “$200 billion in funds” stories that seem to be like the partisan crowd at the Super Bowl cheering the last touchdown without them ever looking at the score board total from last summer. To date, Bernanke has laid out $360 billion between the “summer of 2007” and the end of the year 2007, $70 billion each in January and February for a total of $140 billion, started off with a bang in the first week of March 2008, with $100 billion in TAF funds, and another $100 billion for “related financial markets” (where do you think the $90 billion in support came from in the Bear-Stern’s bailout) with a commitment to extend these funding amounts for “another six months if needed” and then stepped right back in a week later on Tuesday March 11, 2008, and popped for another $200 billion for “bad” loan paper, forget about AAA Treasuries etc. So the “score board” since last summer now totals $900 billion with the above promise of “another six months if needed” leading to a potential of already committed and then “promised” funds through September 2008, of $2.1 Trillion.

The above number crunching, has led me to “get”, and conclude, rather than “believe”, that Professor Bernard Bernanke PhD knows exactly what he’s doing down to the closest $100 billion. And why do I say that? Well… the estimated sum total of the US National Banking System equity is $2.2 trillion. If Bernanke goes beyond his already laid out, and promised amounts, it would be like your local bank “lending” more money to your neighbor,
who has zero, or upside down, equity in his/her home, and your “neighbor probably has already told you that he/she is getting ready to “walk away”.

To further my point about this being ultra-extraordinary times I will point to the Fed discount rate being dropped yesterday on a Sunday, a Sunday! It seems like the distinction, “business hours” has faded into history with about all of the other financial market “truths” that we once looked for, for comfort. Tighten your seat belts, boys and girls; it’s going to be one hell of a spring.

Earl L. Crockett

PS: My “financial market prayer” of the morning, “Will someone please tell me that I’m all, and totally, wrong about all of this”

References
1.0 “Through the Looking Glass, and Down the Rabbit Hole”, March 8, 2008, ELC.
2.0 “ Calling a Spade a Spade” March 10, 2008, ELC
3.0 “Testing the Assumptions” March 13, 2008. ELC
References available if requested by email:
earlcrockett@sbcglobal.net
3.17.2008 5:30pm
(link)JB:
EconLearner | 03.18.08 - 1:30 am | #

Worried writes:
"This is part of why governments have de-emphasized money measures and turned more to price indices to guide money policy."

There is only one reason why they have done that. Inflation is the stealth tax.

It apparently enables governments to fund their pet projects involving them and their friends or supporters while the debt for those projects melts away with devalued money.

Naturally long term this is rediculous.

It encourages more and more short term obsession with profit.

Norway for example has a 100 year plan for its super duper investment fund. 100 years!

At the moment i think people are wondering how to get thru to next friday intact!

The stage for this mess was set as soon as money was no longer linked to value.

Every philosopher in history has known this

Meanwhile the apologists wish me to know that there are special reasons why inflation is being 'adjusted'

Enuf!! Just fucking enuf!!
Worried | Homepage | 03.18.08 - 1:34 am | #

tj & the bear writes:

No - this is a company store that can print its own script (which was common in old time company stores).

Sure, it can print it's own script, but the suppliers may (at their discretion) refuse to take it. What good is a company store with empty shelves?

tj & the bear | 03.18.08 - 1:36 am | #

DEFLATION---HOWSWEETITIS writes:
Dryfly--- Indirectly it does. If people can't afford to live off their paychecks, they will borrow money. Without wages going up--and the price of everything else rising, defaults will follow. This leads to the destruction of capital and a slowdown in credit expansion.


What do you think led to the sub-prime mess? People's incomes failing to keep up with house price appreciation. So lenders, like dumbasses, lowered lending standards to get people in homes they never really could afford to pay.

We will have that situation going forward for credit cards, auto loans etc. When incomes fail to match the general rise in inflation, you will have defaults.

Defaults are deflationary.

Believe me, the FED can't inflate their way out of this mess. I will be back on here six months from now to remind you.
DEFLATION---HOWSWEETITIS | 03.18.08 - 1:37 am | #

Keep It Simple, I'm Stupid writes:
Doesn't matter from an inflation/deflation perspective. Inflation is money supply growth - deflation is money supply decline... wages and prices are nothing more than symptoms. The fact that middle class wages have increased slowly doesn't say anything about the increase or decline of money supply.

I don't really like this description. Inflation has come to mean two different things that are often, but not always, correlated. One of the things I dislike about Mish is the way he is incredibly doctrinaire that inflation/deflation not only is, but only can, be about the money supply. That often leads him to being insulting to people who were asking a perfectly valid question, just using a term he doesn't like.

Inflation has come to mean both things. Learn to live with it, and be precise in situations where it matters which one you are talking about.
Keep It Simple, I'm Stupid | Homepage | 03.18.08 - 1:40 am | #

DEFLATION---HOWSWEETITIS writes:
Just remember, the FED can't sustain its inflationary tendencies without a general rise in U.S wages. Unfortunately for the FED and U.S workers employed in industries exposed to a massive foreign pool of cheap labor, U.S companies have all the leverage to keep wages from increasing, whether the economy expands or contracts.

THere is no way out.
DEFLATION---HOWSWEETITIS | 03.18.08 - 1:41 am | #

Worried writes:
"U.S companies have all the leverage to keep wages from increasing"

Once people cannot afford to live then even the most docile of people tell the boss to pay more or they walk and die anyway and to hell with it.

That is the way it always works.

Bosses threatened by angry workers cave in so they can rest easy in their beds and park their cars in the streets and dont have to worry about their wives and children

It is the way it always has been

Wages will rise.

It is the same old dance
Worried | Homepage | 03.18.08 - 1:46 am | #

dryfly writes:
The stage for this mess was set as soon as money was no longer linked to value.

Money was never linked to an 'intrinsic' value only... it has always been ultimately liked to 'production'. Money & other 'valuables' are just claims to future production.

The Norwegian case is a perfect example. The Norwegians can't eat the value nor the money - they eat food, heat their homes with energy, etc. All of it has to be produced in the period in which it is consumed - nothing can be inventoried for long.

My father used to say (over and over) you have to grow the potatoes this year you plan to eat this year. It really applies to everything.

When you retire - the chits you hold (whether fiat or gold) are claims against that production ASSUMING the producers at that time recognize & accept those claims. You can't eat the money or the gold... somebody better produce enough or somebody is going to go hungry.

dryfly | 03.18.08 - 1:49 am | #

DEFLATION---HOWSWEETITIS writes:
Worried---your company can easily outsource your job to another country. There are over 3 billion people in China and India willing to work for a fraction of the cost that you do here in the States.

Remember, I said if your industry workforce is vulnerable to overseas competition. Obviously, if you a doctor, nurse, lawyer or Starbucks worker, your wages may increase with the general rise in inflation--again only because we protect those industries.

For the rest of us, we are screwed and our employers know it. Most employees are just happy to have their jobs. Asking for a pay increase, go ahead and try.
DEFLATION---HOWSWEETITIS | 03.18.08 - 1:52 am | #

dryfly writes:
Just remember, the FED can't sustain its inflationary tendencies without a general rise in U.S wages.

Why? That's tail wagging dog bass ackwards.

They aren't related but rather coincidental. Wages could easily go up in nominal dollar amounts as money supply explodes yet still fall - fall a lot - in parity terms.

Or not... money supply growth could end up in investment banks coffers & profits going to high income earners & not in wages... or it could end up as taxes going back into gov't coffers.

Prices & wages are symptoms & 'shadows' of money supply/destruction - not the cause.

dryfly | 03.18.08 - 1:57 am | #

DEFLATION---HOWSWEETITIS writes:
Companies take care of shareholders FIRST, employees second.

Over the last four years, corporate profits did well, yet employees received none of the excess cash generation. It all went to shareholders. Is this going to change in a recession, doubt it.

Like I said many times, people couldn't afford houses because wages FAILED to keep up with house price appreciation. Look how well that experiment of inflating the housing market--without a rise in wages-- fared with respect to today's credit markets.

Do we want to try it again? Go right ahead and inflate. Destroy the middle class even more. I just laugh the FED is allowed to stake this destructive path.

Can't wait for another 100 basis point cut tommorrow, my paycheck will be the same but I'll get to pay another 20 cents at the pump and another 20 bucks at the grocery store.

I feel richer by the day. LOL
DEFLATION---HOWSWEETITIS | 03.18.08 - 1:58 am | #

DEFLATION---HOWSWEETITIS writes:
Dryfly-- money supply growth will find its way into the hands of commodity producers. Consequently, a large share of the benefits accrue to the Middle east, Venenzula, Brazil, at the expense of the commodity importing countries, such as the U.S.

Watch 10 year yields fall to 1.5% and then tell me how much U.S inflation is in the system.
DEFLATION---HOWSWEETITIS | 03.18.08 - 2:03 am | #

DEFLATION---HOWSWEETITIS writes:
Nominal wages are not going to increase.

The supply of global labor far exceeds the demand for labor.

GE, Cisco, etc. have billions of people that they can hire. If Cisco needs 1000 engineers, it has 2 million available for hire in the U.S, 5 million in Russia, 7 million in India, and 10 million in China.

If he decides to hire the U.S worker, why pay more than the wage was last year? There is a slack of labor, no reason to hike wages.

The labor market is not tight on a global basis, which leaves 100 upon 100's of million of workers dying to work for a U.S company, plus many get no benefits like healthcare.

Basically, I don't see nominal wages increasing at all. They barely did the last five year with the FED gunning the money supply. Doubt another five years of prime pumping changes anything other than the price of oil, copper and gold.
DEFLATION---HOWSWEETITIS | 03.18.08 - 2:09 am | #

Worried writes:
Dryfly


>>My father used to say (over and over) you have to grow the potatoes this year you plan to eat this year. It really applies to everything.

I am not sure what your Dad meant Dry, you can give your potatoes to your neighbours or give them away in return for a bit of help - the green dollar. You could keep a few hundred weight as seed potatoes.

Potatoes have intrinsic value and could be a means of exchange just as tobacco was in parts of the USA.

Your Dad could have taken on a bit of cheap help in return for a place to sleep and good potatoe meals to enable him to get more green dollar help for the potatoe harvest.

What did he mean?

But paper is just a way of selling your beans this year to get the best seed potatoes next year.
Worried | Homepage | 03.18.08 - 2:10 am | #

Worried writes:
Deflation how sweet

>>your company can easily outsource your job to another country.

When the whole system might not make it to next friday then pressure will be applied to individual USA tax payers who get an easy ride at the moment to change the way they are doing buisiness.

This is a global event. Solutions will be found

One way or another wages will rise.

The net result is a poorer America but they will rise.
Worried | Homepage | 03.18.08 - 2:13 am | #

unirealist writes:
Just remember, the FED can't sustain its inflationary tendencies without a general rise in U.S wages.

Not exactly true. The fed gov can issue ration cards, food stamps, tax rebates, etc--inflating all the way. Wages themselves can go down even as inflation destroys the value of the currency.

I'm not disputing the fact that we are in a credit collapse/deflationary period. Only saying that ultimately, runaway inflation will be the result.

Dryfly, nice to have you back. But you seem far less sanguine this time around.
unirealist | 03.18.08 - 2:16 am | #

Doctor Chow Lin Phwack writes:
There are trillions of dollars sitting in these central banks and they are at risk to the depredations and depreciation foisted upon them by the Mandarins of Washington DC. In an asset dependent world these dollar holdings need to find a new home, official inflation statistics would have you believe inflation is running at 3 to 5 %, if you look at international currencies priced against gold (see chart above), the purchasing power of “paper” faith based currencies is declining at an 18% compounded annual rate since 2002.

As bubbles emerge in their own economies they must be prepared to do the same type of financial firefighting the Federal Reserve has become so adept at. It doesn’t matter which market you speak of, the Shanghai composite stock index market (up 200% in a year and a half), the Sensex in India, the Bovespa in Brazil, Japanese Nikkei 225, Dax 30 in Germany, The Russian Stock market, to name a few are all are exploding higher from the injection of funds caused by central banks when they buy dollars from their domestic exporters. Other asset markets are exploding as well in these countries; real estate, mining, manufacturing, etc., all these sectors and more are fetching astronomical valuations and sums.
Doctor Chow Lin Phwack | 03.18.08 - 2:22 am | #

DEFLATION---HOWSWEETITIS writes:
unirealist--agreed rebate checks and food stamps could supplement income. It does come out of U.S government coffers.

Nothing wrong with the idea, but its not exactly a free lunch.
DEFLATION---HOWSWEETITIS | 03.18.08 - 2:26 am | #

Doctor Chow Lin Phwack writes:
Money needs to be spent in order to stimulate economies, and this is the reason Bernanke wants to print more money and to lower interest rates. The main problem we see tonight, is the problem related to the issue of valuations and the lack of stored value; we find that over valuation always results in less spending, thus no matter how much money is printed, people will refrain from buying overvalued goods. This is why, we are scratching our heads this evening trying to understand why lowering rates will create positive inflation.
Doctor Chow Lin Phwack | 03.18.08 - 2:28 am | #

Sniglet writes:
So, will the Fed cut tomorrow stimulate a nice rally that can last for at least a couple days? Any guesses?
Sniglet | 03.18.08 - 2:28 am | #

Doctor Chow Lin Phwack writes:
Increased wages would be a god thing for the economy, because people would spend more money on more goods, stimulating the economy. It would be better to have wage inflation than depreciation, however, what obviously needs to occur is the stock market to fall 10%, homes to fall 20% and wages to increase 5%.
Doctor Chow Lin Phwack | 03.18.08 - 2:32 am | #

Doctor Chow Lin Phwack writes:
raders predict the Federal Open Market Committee, meeting today in Washington, will lower the overnight lending rate by a full percentage point or more, based on futures prices in Chicago. That would be the biggest reduction since 1984, when Paul Volcker led the central bank, and would bring the benchmark rate down to 2 percent.

Policy makers may promise more cuts if needed with a statement that warns of further risks to the economy as the housing recession breeds widening losses among banks and securities firms. The Fed took emergency steps over the weekend to stave off a financial panic, lowering its rate on direct loans to banks and becoming lender of last resort for Wall Street's biggest dealers in government bonds.

This Mr. bernanke has huge American balls that are swinging with great force like a bull in a dance hall! Wow!
Doctor Chow Lin Phwack | 03.18.08 - 2:37 am | #

Worried writes:
The problem is that the poor are in negative equity and that is then roasting *only some* rich people.

Massively rich people live in America.

Some sort of income rebalancing is needed here and all will be sweet.

No worries.
Worried | Homepage | 03.18.08 - 2:38 am | #

Geoff writes:
Thanks Homer.

I know you can use them, but nobody does. (At least no one I know.) So, I sort of assumed they haven't printed any - but that is only because I havent run across any, and the few I have, it was long ago. So Ive never seen a 2003 print or anything close. I think one of the big problems was that all the cash drawers have slots for $1, 5, 10 and 20. but not an extra for $2.

Have you seen any in circulation lately? Or are they just hoarded? Or? Why bother printing them at this point?
Geoff | 03.18.08 - 2:43 am | #

tg writes:
"When you retire - the chits you hold (whether fiat or gold) are claims against that production ASSUMING the producers at that time recognize & accept those claims. You can't eat the money or the gold"

Very true but the other side of the coin is what do you trade for if you have a surplus at the time of your harvest. Something with a longer expiration date may be very useful.
tg | 03.18.08 - 2:43 am | #

Douglas Watts writes:
This Mr. bernanke has huge American balls that are swinging with great force like a bull in a dance hall! Wow! Doctor Chow Lin Phwack | 03.18.08 - 2:37 am | #
---

That's Bernankeus sequoiaiae

to the scientists who study this stuff.
Douglas Watts | Homepage | 03.18.08 - 2:48 am | #

AlanY writes:
DEFLATION---HOWSWEETITIS, I just wanted to say thanks for your comments tonight. You explain the deflationary position more clearly and succinctly than Mish does. I'm not sure who to believe (nor even which definition of deflation to use), but I appreciate the discussion.
AlanY | 03.18.08 - 2:57 am | #

Doctor Chow Lin Phwack writes:
On a more serious note, please join me over here:

http://research.stlouisfed.org/f...art_type=line& s[1][id]=MZM&s[1][transformation]=pc1

Here, we are studying the increase of MZM and the growth rate of money as a percentage change from last year.

I want you to focus on the natural log chart!
Doctor Chow Lin Phwack | 03.18.08 - 3:01 am | #

REBear writes:
Have you seen B-52 Ben today? He looks really tired.
REBear | 03.18.08 - 3:10 am | #

Troy writes:
Looks like the comment section here has been sterilized, finally.

anyhoo,

For the rest of us, we are screwed and our employers know it. Most employees are just happy to have their jobs. Asking for a pay increase, go ahead and try

My rule of thumb is that if you can strike for higher wages, then you are protected in an inflationary economy.

I'm no economist but as a Georgist I see that rents -- and OER, owner-equivalent rent -- is one piece of the pie that rises in good times and shrinks in bad times.

I rented an apartment for 5 years in Japan with 0 rent increases. Not the same experience here in the states for the past 8 years, lemme tell you!
Troy | 03.18.08 - 3:12 am | #

DaveJ writes:
I think we need to Sterilize these bankers. Then maybe we won't have another generation of excessive risk takers.
DaveJ | 03.18.08 - 3:12 am | #

Doctor Chow Lin Phwack writes:
In regard to MZM, we are still pondering where the money has gone, thus the following story further complicates the matter of distrust, i.e, why are people not trusting the system?

Market strategists said there was deep distrust between banks when it came to lending.
"It's quite illiquid this morning. If you want unsecured cash you're really going to have to pay up for it. It's really quite an intense situation," said David Keeble, head of rate strategy at Calyon.
Concern swirled about the problems spreading to other banks. Shares of Lehman Brothers dropped 34 percent in pre-market trading, shares of Merrill Lynch fell 15 percent and Goldman Sachs declined 9.8 percent.
STOCKS, DOLLAR DOWN SHARPLY
Equity markets took a hefty hit across the world as uncertainty grabbed hold of investors.
"It is really -- and I don't want to use the broadly quoted word 'panic' here -- but it is an absolute confidence crisis and a liquidity crisis. Nobody trusts anyone anymore. It is not a nice situation," said Roland Hirschmueller, an equities trader at German brokerage Baader in Stuttgart.
Doctor Chow Lin Phwack | 03.18.08 - 3:16 am | #

DaveJ writes:
The Fed is acting like Old Pierpont Morgan. Bear Stearns was the Knickerbocker Trust and Lehman is the Trust Company of America.

There is the famous line when Morgan looked over TCA and told his fellow bankers, "This is where the trouble stops".

Maybe Bear Stearns thought that Countrywide was playing the part of the Knickerbocker Trust. I guess they were wrong.
DaveJ | 03.18.08 - 3:22 am | #

Doctor Chow Lin Phwack writes:
Does anyone trust Bush, Bernanke or Paulson?

In sociology (and psychology) the degree to which one party trusts another is a measure of belief in the honesty, benevolence and competence of the other party. Based on the most recent research, a failure in trust may be forgiven more easily if it is interpreted as a failure of competence rather than a lack of benevolence or honesty.

In psychology, trust is integral to the idea of social influence: it is easier to influence or persuade someone who is trusting. The notion of trust is increasingly adopted to predict acceptance of behaviors by others, institutions (e.g. government agencies) and objects such as machines. However, once again perception of honesty, competence and value similarity (slightly similar to benevolence) are essential. Once trust is lost, by obvious violation of one of these three determinants, it is very hard to regain trust. Thus there is a clear a-symmetry in building versus destruction of trust. Hence being and acting trustworthy should be considered the only sure way to maintain a trust level.

I suggest that without trust, The fed cn lower rates to zero and not gain trust, if the casino is thought to be crooked. We have an issue here where the casino has fewer people willing to play, because people have lost trust and faith in government!

Amen
Doctor Chow Lin Phwack | 03.18.08 - 3:25 am | #

Milkman writes:
The Mark to Market Fiasco

http://www.financialpost.com/ana...196d5ff& k=91199
Milkman | 03.18.08 - 3:40 am | #

BrantW writes:
"How is it not inflationary when the fed is lending out good securities in return for devalued rubbish?

Money supply before the repo operation: $6000 billion (including impaired assets)

Money supply after the repo operation:
$6200 billion (impaired assets now rejuvenated)

Nett inflation in money supply: +$200 billion" - Justin

You have it wrong. Fed lends $200B and takes RMBS as collateral. This adds $200B to banking sector. Fed reverse Repos $200 in UST. This requires the banking sector to cough up $200B in cash.

Net is zero. The addition of liquidity is qualitative. USTs have more "moneyness" right now than RMBS's.

When FED runs out of USTs to reverse repo....then they can only inflate.
BrantW | 03.18.08 - 3:52 am | #

Anonymous writes:
Nepotism and distrust in America; the decay of society.

http://pages.stern.nyu.edu/ ~byeu...ily_control.pdf

A high level of trust within a small elite may, like a low level of trust in society at large, be a
serious impediment to economic development. This is because such concentrated high trust
among the elite promotes political rent seeking, known to retard growth.

Fukuyama (1995) broadens this reasoning, arguing that amoral familism is pervasive in
most of the world’s traditional cultures. He argues that only northwestern Europe, North
America, and Japan have achieved ethical systems where people trust strangers in day-to-day business and other interactions. Fukuyama suggests that this reduces the cost of economic
activity and lets the most talented to take charge of the country’s economic and political life, allowing professionally run large corporations and stable democracy.

>> The issue, however is the massive increase in nepotism during The Bush era, The Katrina Era, The Ownership Society/Subprime Bubble which was fueled by the power of nepotism and collusion. Instead of allowing the best of the best to be in positions of control, America was complacent to be run into the ground by sub-standard managers that mis-managed everything they touched, which has resulted in systemic failure and distrust.

Having bernanke cut rates to zero is symptomatic of this disease, as America is frozen in denial, watching this slow motion train wreck, frame by frame. How exciting!
Anonymous | 03.18.08 - 3:53 am | #

Worried writes:
"You have it wrong. Fed lends $200B and takes RMBS as collateral. This adds $200B to banking sector. Fed reverse Repos $200 in UST. This requires the banking sector to cough up $200B in cash.

Net is zero. "

That assumes the Fed does not keep the garbage and let them have the money to maintain confidance in the banking system.

If you were the fed and you believed you could print your way out what would you do?

This is i believe called debt monetization.
Worried | Homepage | 03.18.08 - 4:35 am | #

a writes:
"We have safety nets so don't save." This is false and this is false in an important way. Europeans have safety nets and save.

The difference between the U.S. and Europe is that Americans have *means tests* on their wealth. For instance, have a kid apply to college in the U.S. (which is one of the single biggest expenses in life) and the college will look at how much money you have in the bank in determining how much tuition you pay. So there is an incentive not to have any money in the bank. Europeans have safety nets because they pay lots of taxes, but they generally don't have lots of mean tests.
a | 03.18.08 - 4:41 am | #

Worried writes:
"So there is an incentive not to have any money in the bank. "

Could it be in fact that Americans are in fact still savers?

And not so poor as they want us to believe?

Interesting. Velly interesting!
Worried | Homepage | 03.18.08 - 4:47 am | #

Vader writes:
In a consumer driven society, if the consumer is unable to consume, you will get deflation. No matter how many $s are in CBs.

Deflation is relative, you can have rich folks awash in money and the rest not able to buy apples. The rich get inflation the poor deflation. Indeed, in the US we could have rapid deflation among the rich and stagflation among the poor. Just ask the Bear Stern folks.

I do not have a clue what will happen to those off shore dollars. May be used to keep riots down. China has increasing UE and inflation at the moment and it is prone to violent revolutions. India may have to do the same. So all those dollars in the CB vaults may just evaporate. Or be used to buy companies in the US.

In any case, if the US consumer crashes there will be deflation.
Vader | 03.18.08 - 5:05 am | #

mndean writes:
The $2 bill was reintroduced in the late '70s (after being last produced as a United States Note in the '60s) as an attempt to reduce printing/retiring costs by encouraging people to use them instead of $1 bills. This also is the reason behind the $1 coins that the Mint tries to get people to use about every 10 years or so. It never seems to work (psychology, I guess), and to be honest, the $2 bill is not circulated widely, but only in certain places/industries. I used to get them all the time as a kid when I brought aluminum to the various recycling companies that bought my cans. I still believe most $2 bills are hoarded as a novelty, and my father even did so back in the '50s (he had a jar full of them).
mndean | 03.18.08 - 5:10 am | #

Worried writes:
Vader

Anything is possible but for example during the Irish potato famine corn was still being exported where higher prices could be found.

Millions died and millions emmigrated.

As you know arbritage is where price differences are exploited for a profit.

Unless price controls are introduced the poor will consume less while prices remain the same.

There are only 400 million americans relative to a world population who are massively demanding more food?

Why should prices fall for consumables in the US?

I think it is a US centric view that cannot see the rest of the world is out there eating drinking consuming and having a great old time indeed.

The US will compete with the world and be forced to export its important food products to the rest of the world just like any other country has to do.

Rather than deflation this is the equalisation factor at work

Surely?
Worried | Homepage | 03.18.08 - 5:13 am | #

Mark in SF writes:
Foreign banks could step in and do MBS/treasury swaps with fed guarantee. They've got more treasuries than the Fed. Maybe BOJ.
Mark in SF | 03.18.08 - 6:09 am | #

Worried writes:
"Foreign banks could step in and do MBS/treasury swaps with fed guarantee. They've got more treasuries than the Fed. Maybe BOJ"

Perhaps they are already doing this and for that reason inflation all round the world is going thru the roof?

Unless the US goes back to offering loans to deadbeats it cannot get the house prices to alter unless it actually buys the houses.

It could buy all foreclosed property for example. And sell it in many years time once prices have recovered and ensure prices never rise much for many many years as the foreclosed decayed properties come back on the market for renovators to take on.

There are no simple solutions here.

The problem was allowed to happen and cannot be undone with a simple solution.
Worried | Homepage | 03.18.08 - 7:33 am | #

Chris writes:
Worried, there are only 300 million Americans. And price controls never work, they just cause greater distortions.
Chris | 03.18.08 - 7:49 am | #

Angry Saver writes:
The $2 bill was reintroduced in the late '70s (after being last produced as a United States Note in the '60s) as an attempt to reduce printing/retiring costs by encouraging people to use them instead of $1 bills.

Saving money and cost cutting are bad for GDP. Instead of just cutting rates, maybe the fed should also issue fiddy cent bills.
Angry Saver | 03.18.08 - 7:54 am | #

Outsider writes:
Yesterday I asked who besides Lewis lost the most $$ in the BS takeover. Maybe someone answered, but here is the article of the top losers:

http://money.cnn.com/galleries/2....fortune/ 6.html
Outsider | 03.18.08 - 7:56 am | #

Alec writes:
If you were in oil or gold and everybody knows that the Fed is cuttin by 100, would you want to bail except for a little profit taking?

*Re 2 dollar bills.

You can still get them from your bank if you ask a couple of weeks in advance and get $3000 or so, no premium.

Ted Turner uses them in his buffalo restaurants as free advertising, the next time you open your wallet you remember where you got it.
Alec | 03.18.08 - 8:00 am | #

Pondering the Mess writes:
It's all okay. Once the dollar hits parity with the peso and we have ZIRP or negative rates, all the problems will be fixed!

Wait - what's that? We don't have any more decent jobs in this nation, we're in debt over our heads, and we depend upon buying foreign goods (oil, etc.) with an increasingly worthless currency?

Oops... hmmm... maybe the Fed should try a new tactic - one that might work!
Pondering the Mess | 03.18.08 - 8:06 am | #

david_in_ct writes:
re: the inflation / deflation debate
i fail to understand all the back and forth here and its because no one seems willing to agree on meanings for either of the two words, so it can easily degenerate into a pure semantical debate which ain't very useful. When pundits do this i understand it because then no matter what happens you can twist the meanings of the words to sort of suit what you had said irrespective of the outcome. i would have thought that here where no one is going to gain very much from being 'right' except perhaps fleeting adulation from other bloggers that the 'discussions' would
contain more in the way of quantifiable predictions.
For any of these discussions to begin to have some value there must be at least some numerical framework put around it. By far the most useful are things that end up with a prediction about quoted prices, or in other words where one might place a bet. Since all pricing is relative then someone with an 'inflationist' bent might say 'I believe that x days into the future the price of cheerios measured in yen is going to increase y percent. From there we can then ask the questions of why, and that eventually leads to building of some model, which if it has any value will be more correct than random over time, if it can be subjected to enough events.
I think in general it always pays to have at least the crudest of models because it gives you a place from which to start.
david_in_ct | 03.18.08 - 8:19 am | #

david_in_ct writes:
To be more on topic it would appear to me that Krugman has totally lost it, which in my world would mean that he probably has recently put on a good sized short.
To be talking about a liquidity trap in the midst of perhaps the all time liquidity squeeze is truly remarkable, about on par with yesterdays fear mongering which would have 20 - 30 million homeowners defaulting.
david_in_ct | 03.18.08 - 8:27 am | #

JJL writes:
As easily predicted by myself and others, Goldman Sachs and Lehman Brothers out with earnings this morning and guess what? Massive writedowns a thing of the past!! Absolutely NO NEED to mark level III assests to market anymore, they are all going to get stashed at the FED at months end. Thanks Bernanke, these fictitious earnings reports coupled with 100bps rate cut this afternood should be good for 500-700 points on the DOW minimum.
JJL | Homepage | 03.18.08 - 8:27 am | #

jim a writes:
But what's the mechanism now? Remember consumers were gorging on massive mortgage loans at an extraordinary rate. In retrospect I think it's surprising how little inflation that caused.
I think at some level, the problem is that we look at the money supply as if it was an ocean, when really its more like a series of lakes. We've had flooding in Lake Real Estate and Lake Equities, but not in Lake Consumer Goods. The Fed mostly influences the total rainfall, and doesn't operate the dams between the lakes. Arguably, this disparity is partly due to the greater concentration of wealth that we've been experiencing. The Wealthy spend more on equities and bonds than the poorer do.
jim a | 03.18.08 - 8:28 am | #

ac writes:

Wow, that futures pump is HOT.

ac | 03.18.08 - 8:32 am | #

energyecon writes:
So the prices producers receive went up less than anticipated, while the cost to produce went up more than anticipated...with a whopper of a cut expected which seem to be reflected in commodity (read: input) prices...

U.S. Producer Prices Rise 0.3% in February; Core Gains 0.5%
By Bob Willis

March 18 (Bloomberg) -- Prices paid to U.S. producers rose less than forecast in February, while prices excluding food and energy jumped the most since November 2006.

The 0.3 percent increase followed a 1 percent gain in January, the Labor Department said today in Washington. Excluding food and energy, so-called core wholesale prices climbed 0.5 percent, more than double the gain economists forecast.

Combined with figures last week showing consumer prices were unchanged in February, today's report signals companies may be faced with weaker profits as slowing demand reduces pricing power. Traders predict Federal Reserve policy makers later today will lower the benchmark interest rate a full percentage point as the economy slows, based on futures prices in Chicago.

[snip]
energyecon | 03.18.08 - 8:46 am | #

NoVa writes:
Its all the same. The milleniums pass but the rich still feed off the poor. If the rich want to live in peace they need to make sure the supply of crumbs for the poor is plentiful least they start eyeing how much is really on the table.

The wicked will plot against the righteous
and gnash his teeth at him;
but the Lord will deride him in his turn,
for the Lord has seen what awaits him.

The wicked have pulled out their swords,
the wicked have drawn their bows,
to throw down the poor and the destitute,
to murder whoever follows the straight path.
But their swords will enter their own hearts,
and their bows will splinter.

For the righteous, the little they have is better
than the abundant wealth of the wicked.
The limbs of the wicked will be broken
while the Lord gives his strength to the just.

The Lord knows when the day of the perfect will come;
and their inheritance will be eternal.
They will not be troubled in evil times,
and in times of famine they will have more than enough.

For the wicked will perish:
the enemies of the Lord will be like the flowers of the fields,
and like smoke they will vanish away.

The wicked man borrows and does not return;
but the righteous takes pity and gives.
The blessed ones of the Lord will inherit the earth,
but those whom he curses will be cut off.

It is the Lord who strengthens the steps of man
and chooses his path.
Even if he trips he will not fall flat,
for the Lord is holding his hand.

I was young and I have grown old,
but I have not seen the righteous man abandoned
nor his children seeking for bread.
All day long he takes pity and lends,
and his seed will be blessed.

Shun evil and do good,
and you will live for ever.
For the Lord loves right judgement,
and will not abandon his chosen ones.

The unjust will be destroyed for ever,
and the seed of the wicked will be cut off,
but the righteous will inherit the earth
and live there from age to age.
NoVa | 03.18.08 - 8:51 am | #

VennData writes:
You can only get so much ammo into a helicopter
VennData | 03.18.08 - 8:53 am | #

Yearning to Learn writes:
I think probert's question was about whether or not there was a $2 bill on Bear's door, not weather or not the $2 bill was real.

answer:
somebody taped a $2 bill (or similar) to Bear's door.

on some of the pictures you can see the tape outlines.
Yearning to Learn | 03.18.08 - 8:55 am | #

Doofus writes:
Can someone please explain to me why BSC is selling for over $5/share when it's being purchased for $2/share?

Who buys this for $3/share more than it's clearly worth?
Doofus | 03.18.08 - 8:56 am | #

energyecon writes:
Housing Starts, Permits in U.S. Decreased in February (Update1)
By Courtney Schlisserman

March 18 (Bloomberg) -- Housing starts in the U.S. dropped in February and construction permits fell to the lowest level in more than 16 years, signaling construction will continue to hurt economic growth.

Builders broke ground on 1.065 million homes at an annual rate, down 0.6 percent from a revised 1.071 million pace in January that was higher than previously reported, the Commerce Department said today in Washington. Building permits, a sign of future construction, sank 7.8 percent to a 978,000 pace, fewer than projected.

[snip]
energyecon | 03.18.08 - 8:58 am | #

Phoenix Woman writes:
My co-blogger MEC over at MR has a pic of a bear's stern to go with this bearish news: http://phoenixwoman.wordpress.co...17/bear-sterns/
Phoenix Woman | Homepage | 03.18.08 - 8:59 am | #

bZb writes:
All this discussion of how much "ammo" the Fed may have left is pointless. Both the Fed and the Treasury see as their No. 1 priority the stability of the financial system, i.e., keeping WS afloat.
WIth a key stroke, they can print/create all the ammo they need.
bZb | 03.18.08 - 8:59 am | #

Mook writes:
With a key stroke, they can print/create all the ammo they need.

You can lead a horse to water, but you can't make him drink.

And you can shower cash onto banks and consumers (from helicopters, if you like), but you can't make them spend it.

There's a reason it's called a "liquidity trap" and not "running out of money". There's no danger of the latter. There's a great danger of the former.
Mook | 03.18.08 - 9:03 am | #

bZb writes:
Mook,

You can lead a horse to water, but you can't make him drink.


Sometimes it's easier to see the fallacy of an argument if you modify it to an extreme:

If they give $600, you may not spend it. But if they give you $600K, you'll certainly spend some of it. If the Fed believes inflation is the way to go, they can certainly destroy a liquidity trap, real or imaginary.
bZb | 03.18.08 - 9:10 am | #

Mook writes:
If the Fed believes inflation is the way to go, they can certainly destroy a liquidity trap, real or imaginary.

Well, yeah, *if* inflation was the end goal for the Fed, rather than a means to an end, it might be that simple.

But somehow I doubt that Ben and his buddies are sitting around asking themselves, "Inflation. How can we get some more into the system? C'mon, let's have some ideas, people!"

I agree with you that their primary goal is to save the banking system but, as in any good war, the generals also seek to minimize collateral damage here. If they ran off $600K for everyone today and the resulting inflation pushed mortgage rates up to 15%, then what? Sure, that'd make for one heck of a positive yield curve for the banks, but it would also blow up even more of the MBSs and other CDOs that those same banks are overloaded with. You can't get something for nothing.
Mook | 03.18.08 - 9:22 am | #

number2son writes:
Exchanging MBS for treasuries, is this how GS managed to "reduce" its leveraged loan commitments by $20B?

I smell rotting fish.
number2son | 03.18.08 - 9:26 am | #

wally writes:
"the chits you hold (whether fiat or gold)"
That's a good way to put it, dryfly. Gold is a 'fiat' currency just like paper. The only difference is tradition.
wally | 03.18.08 - 9:27 am | #

Newbie writes:
Nova, "The unjust will be destroyed for ever,and the seed of the wicked will be cut off,but the righteous will inherit the earth and live there from age to age."

There is a lot of bad people/behavior out there that will survive just like Weeds on pastor, no matter the harsh winter cold or extreme droughts, they will always grow back stronger than ever by killing the good that sorrounds them.

If your "God or Savior" really was making the earth for the righteous, then the weed would die at some point. But does it ever dies...

You may call me Hopeless, I like to think of myself as a Realistic Historian. This world is only dominated by "Weeds".
Newbie | 03.18.08 - 9:32 am | #

tj & the bear writes:
<i>Gold is a 'fiat' currency just like paper.</i>

Bullshit.  Show me what country's "full faith & credit" backs gold.  Tell me what type of tree is cut down to print it.  Sheesh.

tj & the bear | 03.18.08 - 9:36 am | #

Worried writes:
tj & the bear

>>Tell me what type of tree is cut down to print it.

Are you making out that gold mining is the green alternative to growing trees for currency?

:-)
Worried | Homepage | 03.18.08 - 9:40 am | #

lawyerliz writes:
Scrolling down to the bottom here.

Nobody in the first part of the thread is addression the velocity of money. If it has slowing down considerably, and I think it has, then that is like taking some proportion of money out of the system, which is deflationary, no?
lawyerliz | 03.18.08 - 9:44 am | #

Keep It Simple, I'm Stupid writes:
I can understand why BSC shareholders are being obstinate and refusing to sanction the sale at $2 a share. What I can't figure out is why anyone not already tied to that boat anchor is willing to pay them more than $2.20 a share, or 0.05473 shares of JPM. While BSC might have more value in it than $2 if it can continue in operation for a while, there isn't any way for it to continue in operation without losing all of that extra value.
Keep It Simple, I'm Stupid | Homepage | 03.18.08 - 10:03 am | #

Mook writes:
If it has slowing down considerably, and I think it has, then that is like taking some proportion of money out of the system, which is deflationary, no?

In a roundabout way, that's the point I was trying to make a few posts up. You can't just say "we're going to fire up the printing presses to address the liquidity issue" - money quantity and money velocity are two different measures altogether. Related, yes, but certainly not interchangeable.

Theoretically, there's no upper bound on quantity, but there sure is on velocity (since you can't take rates below zero). Beyond that, you have to try to substitute quantity measures for additional velocity measures - and history seems to be decidedly mixed on how successful such efforts can be.
Mook | 03.18.08 - 10:05 am | #

Markel writes:
about on par with yesterdays fear mongering which would have 20 - 30 million homeowners defaulting.

Link?

I trust you not to waste my time with any links to Krugman's statement about the potential number of homeowners with negative equity--not in default.
Markel | 03.18.08 - 10:13 am | #

Journeyman writes:
I just want to point out that not all of the increase in commodities leaves the US. The increase in wheat prices has made possible some new Lincoln pickups in my part of the world.
Journeyman | 03.18.08 - 10:23 am | #

Marcus Aurelius writes:
"Lincoln pickups" says it all.
Marcus Aurelius | 03.18.08 - 10:28 am | #

Darren writes:
This comment thread is very disappointing, and well below the usual CR standard. There are a lot of people here who are proudly and wilfully ignorant of basic concepts of monetary policy (such as sterilization), and who are happy to share their disdain for expertise and knowledge with us.
Darren | 03.18.08 - 10:29 am | #

Darren writes:
"This also is the reason behind the $1 coins that the Mint tries to get people to use about every 10 years or so. It never seems to work (psychology, I guess)"

As a Canadian, this is one of the oddities of visiting the US... the wad of crumpled $1 bills that always winds up crammed into my pocket. It seems quite silly to me. Up here, we've had nothing but $1 and $2 coins for years now, and nobody misses the bills in the slightest.... coins are better.
Darren | 03.18.08 - 10:39 am | #

Worried writes:
"Theoretically, there's no upper bound on quantity, but there sure is on velocity (since you can't take rates below zero)."

Money velocity sounds like a term created by somebody who imagines that money only enters the system via loans.

If you sit down for long enuf and think for long enuf and believe that is not true you will find an easy solution to show that velocity is a bogus idea.
Worried | Homepage | 03.18.08 - 10:43 am | #

ddmmann writes:
helping you get the credit you deserve! http://www.fakepaycheckstubs.com
ddmmann | Homepage | 03.18.08 - 11:05 am | #

Outsider writes:
Up here, we've had nothing but $1 and $2 coins for years now, and nobody misses the bills in the slightest.... coins are better.

The coins are too close to quarter size. Gets too confusing to be practical.
Outsider | 03.18.08 - 11:08 am | #

halbhh writes:
Ironically, it seems the politics will inevitably push us into some of the same mistakes as Japan in the 90s.

And by saying in his NYTimes column "When push comes to shove, financial officials — rightly — aren’t willing to run the risk that losses on bad loans will cripple the financial system and take the real economy down with it."

http://www.nytimes.com/2008/03/1.../ 17krugman.html


In this way Krugman aids the current myth that the economic fallout of a debt bubble can be prevented if we only save bad investors in the debt.

Not at all.

So with Krugman, Brooks, Dodd, Bernanke, and others suggesting we can prevent the reality that is already here and was inevitable.....

Their denial will guide lawmakers into significant mistakes.

Am I wrong?
halbhh | 03.18.08 - 11:28 am | #

All Fall Down writes:
Two dollar bill and one dollar coin are failed denominations for the same reason. No place to put them in a cash register. Great idea but the whole retail environment will have to change before it works.
All Fall Down | 03.18.08 - 11:29 am | #

Prophet of Profit writes:
The argument that sterilized lending is not inflationary ASSUMES that the MBS is of high quality and will be paid back - however this is currently not the case.

Say I lent Joe Schmo $100 in exchange for an IOU; then Joe Schmo spends the $100 which goes into the economy but he is NEVER able to pay it back because Joe Schmo is a junk borrower. I take my worthless IOU to the Fed as collateral in exchange for $100 of high-quality Treasury then sell it to get my $100 back; in effect, there's now $200 that's in the economy and money supply just doubled! Isn't this the situation that we're in?!?!? Please let me know if there's something amiss!
Prophet of Profit | 03.18.08 - 11:44 am | #

hb writes:
Prophet,

yeah, you got it right generally, but the increase is $100 in your example. There was first $100 in your pocket, and now it's back there but another $100 is out into circulation also.
hb | 03.18.08 - 12:17 pm | #

hb writes:
Prophet, ah, that's what you meant.

For the moment the Fed is supposed to be "sterilizing" it's injections, but that could change.
hb | 03.18.08 - 12:18 pm | #

Scratchy writes:
"The coins are too close to quarter size. Gets too confusing to be practical."

Speaking from actual experience with the coins, that simply never happens.

The dollar and two dollar coins are big enough and textured differently enough from one another that in twenty years I don't recall ever confusing them with a quarter.
Scratchy | 03.18.08 - 1:23 pm | #

Prophet of Profit writes:
HB,
Thanks for the input. The way I see it, although it appears that the Fed's lending is sterlized, I do not believe it really is because of the junk status of the MBS being used as collateral; which explains the massive inflation we observe (but which Gov't officials continue to