Sound Money for America! Audit the Fed - Repeal the Federal Reserve Act!
Fed officials hint recession in final stages (3/26/09)
http://www.reuters.com/article/bondsNews/idUSN2658981920090326
I Highlighted a few words and sentences in the article to show how the media/Fed uses their words
At the end of the article I posted definitions to help make the article make sense.
~Fed officials hint recession in final stages~
Fisher, president of Federal Reserve Bank of Dallas, answers question after ...
MINNEAPOLIS — Top Federal Reserve officials hinted on Thursday that the long U.S. economic downturn could be in its final stages, although the early stages of recovery will likely be far from stellar.
Meanwhile, policy-makers showed a split on whether the Fed's current stance of aggressively pumping money into credit markets poses a major risk of stoking high inflation.
Dallas Fed President Richard Fisher, who terms himself the most pessimistic member of the Federal Open Market Committee at present, said the Fed's aggressive rescue efforts should soon stem the decline in growth.
Weakness could be tempered after the current quarter, which is likely to match the annualized contraction of 6.3 percent in gross domestic product seen for the dismal final quarter of 2008, Fisher said at a conference in Dayton, Ohio.
Gary Stern, Minneapolis Fed President, said that at least a mild recovery could take hold by mid-year before healthier growth kicks in during 2010.
"Many pieces are now in place to contribute to improvement in financial market conditions and in business activity," Stern told the Economic Club of Minnesota. "There is reason to think that improvement is not too far off."
Jeffrey Lacker, Richmond Fed President, offered recent increases in U.S. retail sales, lower gasoline prices and steady wages as signs for hope on the economy.
It is reasonable to expect the economy to hit bottom later this year and then begin a gradual recovery, Lacker said in Charleston, South Carolina.
Still, Dennis Lockhart, Atlanta Fed President, told Reuters in Paris that the recession would drag on for at least a few more months.
The significance of a recent run of better-than-expected economic data, including Wednesday's durable goods orders for February, should not be overstated, he said.
"One month does not make a recovery, so we have to be careful not to react too strongly," Lockhart said.
INFLATION BALANCING ACT
Some financial markets participants fear the Fed's provision of huge amounts of liquidity to support the economy will fire up inflation when the economy eventually recovers.
The Fed's balance sheet, which as recently as mid-September 2008 stood at about $1 trillion, is now more than $2 trillion.
Just last week, the Fed vowed to provide the economy with an additional $1.15 trillion, partly by buying government bonds for the first time since the 1960s.
Charles Plosser, Philadelphia Fed President, told Reuters in an interview that a debate on how the Fed will shrink that balance sheet has to happen long before inflation flares.
Plosser also said that the composition of the balance sheet, as much as its size, troubled him and voiced support for buying Treasury bonds.
Bond purchases are "more neutral in their effects on the allocation of credit" than a number of other Fed programs which have targeted specific corners of the credit market.
Lacker, who along with Plosser is one of the Fed's biggest inflation hawks, seemed anxious to secure a commitment to run down the balance sheet as soon as possible.
"Such a large increase in the monetary base cannot be left in place indefinitely without creating quite sizable inflation pressures," he said.
"Choosing the right time to withdraw that stimulus will be a challenge and I believe it will be very important to avoid the risk of waiting too long."
Still, Stern, the Fed's longest-serving regional bank president, was less worried, saying the central bank had "ample time" to withdraw excess liquidity when the time was right.
"The relation between growth in the money supply and the path of prices holds in the long run, over periods of at least five and, more likely, 10 years," Stern said.
In the short run, most officials agree that the Fed is buying some needed insurance against the threat of deflation resulting from the downturn in global economic activity.
Inflation expectations had remained "pretty stable" in recent months, and the Fed's big balance-sheet blow-out would ensure that "deflation doesn't become an issue," Plosser said.
Lacker concurred. "I am confident that we can prevent outright deflation by expanding our monetary policy stimulus if need be."
LOOKING BACK - AND FORWARD
As they are left to mop up the worst financial crisis in seven decades, some Fed officials concede that signs of an impending meltdown went unnoticed for too long.
"Most in the financial community, including those of us at the Federal Reserve, failed to either detect or act upon the tell-tale signs of financial system excess," Fisher said.
Stern, meanwhile, termed the mortgage providers Fannie Mae and Freddie Mac were "poster children" for regulatory action taken way too late.
Without timely responses to financial crises, the costs to the real economy grow and grow, Stern said. "You want to deal with these things as quickly, and forcefully, as you can."
End of Article...
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Deflation - is a sustained decrease in the general price level of goods and services.
Deflation - occurs when the annual inflation rate falls below zero percent, resulting in an increase in the real value of money — a negative inflation rate.
Deflation - also prevents monetary policy from stabilizing the economy because of a mechanism called the liquidity trap.
liquidity trap - is a situation in monetary economics in which a country's nominal interest rate has been lowered nearly or equal to zero to avoid a recession, but the liquidity in the market created by these low interest rates does not stimulate the economy.
Inflation - reduces the real value of money over time; conversely, deflation increases the real value of money.
Monetary policy - is the process by which the government, central bank, or monetary authority of a country controls (i) the supply of money, (ii) availability of money, and (iii) cost of money or rate of interest, in order to attain a set of objectives oriented towards the growth and stability of the economy.
Expansionary policy - increases the total supply of money in the economy.
Contractionary policy - decreases the total money supply.
Shoe leather cost - refers to the cost of time and effort (more specifically the opportunity cost of time and energy) that people spend trying to counter-act the effects of inflation, such as holding less cash and having to make additional trips to the bank. The term comes from the fact that more walking is required (historically, although the rise of the Internet has reduced it) to go to the bank and get cash and spend it, thus wearing out shoes more quickly. The actual cost of reducing money holdings is the additional time and convenience that must be sacrificed to keep less money on hand than would be required if there were no inflation.
Tobin effect-
The Nobel prize winning economist James Tobin at one point had argued that a moderate level of inflation can increase investment in an economy leading to faster growth or at least higher steady state level of income. This is due to the fact that inflation lowers the return on monetary assets relative to real assets, such as physical capital. To avoid inflation, investors would switch from holding their assets as money (or a similar, susceptible to inflation, form) to investing in real capital projects.
Under a gold standard, the long term rate of inflation (or deflation) would be determined by the growth rate of the supply of gold relative to total output.Critics argue that this will cause arbitrary fluctuations in the inflation rate, and that monetary policy would essentially be determined by gold mining, which some believe contributed to the Great Depression. - *NOTE* Bullshit argument HERE
The major difference is that government owned central banks do not charge the taxpayers interest on the national currency, whereas privately owned central banks do charge interest.
When a country has its own national currency, this involves the issue of some form of standardized currency, which is essentially a form of promissory note: a promise to exchange the note for "money" under certain circumstances.
In many countries, the central bank may use another country's currency either directly (in a currency union), or indirectly, by using a currency board.
A currency board is a monetary authority which is required to maintain a fixed exchange rate with a foreign currency. This policy objective requires the conventional objectives of a central bank to be subordinated to the exchange rate target.
The main qualities of an orthodox currency board are:
• A currency board's foreign currency reserves must be sufficient to ensure that all holders of its notes and coins (and all banks creditor of a Reserve Account at the currency board) can convert them into the reserve currency (usually 110–115% of the monetary base M0).
• A currency board maintains absolute, unlimited convertibility between its notes and coins and the currency against which they are pegged (the anchor currency), at a fixed rate of exchange, with no restrictions on current-account or capital-account transactions.
• A currency board only earns profit from interests on foreign reserves (less the expense of note-issuing), and does not engage in forward-exchange transactions. These foreign reserves exist (1) because local notes have been issued in exchange, or (2) because commercial banks must by regulation deposit a minimum reserve at the Currency Board. (1) generates a seignorage revenue. (2) is the revenue on minimum reserves (revenue of investment activities less cost of minimum reserves remuneration)
• A currency board has no discretionary powers to effect monetary policy and does not lend to the government. Governments cannot print money, and can only tax or borrow to meet their spending commitments.
• A currency board does not act as a lender of last resort to commercial banks, and does not regulate reserve requirements.
• A currency board does not attempt to manipulate interest rates by establishing a discount rate like a central bank. The peg with the foreign currency tends to keep interest rates and inflation very closely aligned to those in the country against whose currency the peg is fixed.
Central banks generally earn money by issuing currency notes and "selling" them to the public for interest-bearing assets, such as government bonds. Since currency usually pays no interest, the difference in interest generates income, called seigniorage.
Seigniorage - is the net revenue derived from the issuing of currency.
Contrary to popular perception, central banks are not all-powerful and have limited powers to put their policies into effect.
I Highlighted a few words and sentences in the article to show how the media/Fed uses their words
At the end of the article I posted definitions to help make the article make sense.
~Fed officials hint recession in final stages~
Fisher, president of Federal Reserve Bank of Dallas, answers question after ...
MINNEAPOLIS — Top Federal Reserve officials hinted on Thursday that the long U.S. economic downturn could be in its final stages, although the early stages of recovery will likely be far from stellar.
Meanwhile, policy-makers showed a split on whether the Fed's current stance of aggressively pumping money into credit markets poses a major risk of stoking high inflation.
Dallas Fed President Richard Fisher, who terms himself the most pessimistic member of the Federal Open Market Committee at present, said the Fed's aggressive rescue efforts should soon stem the decline in growth.
Weakness could be tempered after the current quarter, which is likely to match the annualized contraction of 6.3 percent in gross domestic product seen for the dismal final quarter of 2008, Fisher said at a conference in Dayton, Ohio.
Gary Stern, Minneapolis Fed President, said that at least a mild recovery could take hold by mid-year before healthier growth kicks in during 2010.
"Many pieces are now in place to contribute to improvement in financial market conditions and in business activity," Stern told the Economic Club of Minnesota. "There is reason to think that improvement is not too far off."
Jeffrey Lacker, Richmond Fed President, offered recent increases in U.S. retail sales, lower gasoline prices and steady wages as signs for hope on the economy.
It is reasonable to expect the economy to hit bottom later this year and then begin a gradual recovery, Lacker said in Charleston, South Carolina.
Still, Dennis Lockhart, Atlanta Fed President, told Reuters in Paris that the recession would drag on for at least a few more months.
The significance of a recent run of better-than-expected economic data, including Wednesday's durable goods orders for February, should not be overstated, he said.
"One month does not make a recovery, so we have to be careful not to react too strongly," Lockhart said.
INFLATION BALANCING ACT
Some financial markets participants fear the Fed's provision of huge amounts of liquidity to support the economy will fire up inflation when the economy eventually recovers.
The Fed's balance sheet, which as recently as mid-September 2008 stood at about $1 trillion, is now more than $2 trillion.
Just last week, the Fed vowed to provide the economy with an additional $1.15 trillion, partly by buying government bonds for the first time since the 1960s.
Charles Plosser, Philadelphia Fed President, told Reuters in an interview that a debate on how the Fed will shrink that balance sheet has to happen long before inflation flares.
Plosser also said that the composition of the balance sheet, as much as its size, troubled him and voiced support for buying Treasury bonds.
Bond purchases are "more neutral in their effects on the allocation of credit" than a number of other Fed programs which have targeted specific corners of the credit market.
Lacker, who along with Plosser is one of the Fed's biggest inflation hawks, seemed anxious to secure a commitment to run down the balance sheet as soon as possible.
"Such a large increase in the monetary base cannot be left in place indefinitely without creating quite sizable inflation pressures," he said.
"Choosing the right time to withdraw that stimulus will be a challenge and I believe it will be very important to avoid the risk of waiting too long."
Still, Stern, the Fed's longest-serving regional bank president, was less worried, saying the central bank had "ample time" to withdraw excess liquidity when the time was right.
"The relation between growth in the money supply and the path of prices holds in the long run, over periods of at least five and, more likely, 10 years," Stern said.
In the short run, most officials agree that the Fed is buying some needed insurance against the threat of deflation resulting from the downturn in global economic activity.
Inflation expectations had remained "pretty stable" in recent months, and the Fed's big balance-sheet blow-out would ensure that "deflation doesn't become an issue," Plosser said.
Lacker concurred. "I am confident that we can prevent outright deflation by expanding our monetary policy stimulus if need be."
LOOKING BACK - AND FORWARD
As they are left to mop up the worst financial crisis in seven decades, some Fed officials concede that signs of an impending meltdown went unnoticed for too long.
"Most in the financial community, including those of us at the Federal Reserve, failed to either detect or act upon the tell-tale signs of financial system excess," Fisher said.
Stern, meanwhile, termed the mortgage providers Fannie Mae and Freddie Mac were "poster children" for regulatory action taken way too late.
Without timely responses to financial crises, the costs to the real economy grow and grow, Stern said. "You want to deal with these things as quickly, and forcefully, as you can."
End of Article...
------------------------------------------------------------------------------------------------------------------------------------------
Deflation - is a sustained decrease in the general price level of goods and services.
Deflation - occurs when the annual inflation rate falls below zero percent, resulting in an increase in the real value of money — a negative inflation rate.
Deflation - also prevents monetary policy from stabilizing the economy because of a mechanism called the liquidity trap.
liquidity trap - is a situation in monetary economics in which a country's nominal interest rate has been lowered nearly or equal to zero to avoid a recession, but the liquidity in the market created by these low interest rates does not stimulate the economy.
Inflation - reduces the real value of money over time; conversely, deflation increases the real value of money.
Monetary policy - is the process by which the government, central bank, or monetary authority of a country controls (i) the supply of money, (ii) availability of money, and (iii) cost of money or rate of interest, in order to attain a set of objectives oriented towards the growth and stability of the economy.
Expansionary policy - increases the total supply of money in the economy.
Contractionary policy - decreases the total money supply.
Shoe leather cost - refers to the cost of time and effort (more specifically the opportunity cost of time and energy) that people spend trying to counter-act the effects of inflation, such as holding less cash and having to make additional trips to the bank. The term comes from the fact that more walking is required (historically, although the rise of the Internet has reduced it) to go to the bank and get cash and spend it, thus wearing out shoes more quickly. The actual cost of reducing money holdings is the additional time and convenience that must be sacrificed to keep less money on hand than would be required if there were no inflation.
Tobin effect-
The Nobel prize winning economist James Tobin at one point had argued that a moderate level of inflation can increase investment in an economy leading to faster growth or at least higher steady state level of income. This is due to the fact that inflation lowers the return on monetary assets relative to real assets, such as physical capital. To avoid inflation, investors would switch from holding their assets as money (or a similar, susceptible to inflation, form) to investing in real capital projects.
Under a gold standard, the long term rate of inflation (or deflation) would be determined by the growth rate of the supply of gold relative to total output.Critics argue that this will cause arbitrary fluctuations in the inflation rate, and that monetary policy would essentially be determined by gold mining, which some believe contributed to the Great Depression. - *NOTE* Bullshit argument HERE
The major difference is that government owned central banks do not charge the taxpayers interest on the national currency, whereas privately owned central banks do charge interest.
When a country has its own national currency, this involves the issue of some form of standardized currency, which is essentially a form of promissory note: a promise to exchange the note for "money" under certain circumstances.
In many countries, the central bank may use another country's currency either directly (in a currency union), or indirectly, by using a currency board.
A currency board is a monetary authority which is required to maintain a fixed exchange rate with a foreign currency. This policy objective requires the conventional objectives of a central bank to be subordinated to the exchange rate target.
The main qualities of an orthodox currency board are:
• A currency board's foreign currency reserves must be sufficient to ensure that all holders of its notes and coins (and all banks creditor of a Reserve Account at the currency board) can convert them into the reserve currency (usually 110–115% of the monetary base M0).
• A currency board maintains absolute, unlimited convertibility between its notes and coins and the currency against which they are pegged (the anchor currency), at a fixed rate of exchange, with no restrictions on current-account or capital-account transactions.
• A currency board only earns profit from interests on foreign reserves (less the expense of note-issuing), and does not engage in forward-exchange transactions. These foreign reserves exist (1) because local notes have been issued in exchange, or (2) because commercial banks must by regulation deposit a minimum reserve at the Currency Board. (1) generates a seignorage revenue. (2) is the revenue on minimum reserves (revenue of investment activities less cost of minimum reserves remuneration)
• A currency board has no discretionary powers to effect monetary policy and does not lend to the government. Governments cannot print money, and can only tax or borrow to meet their spending commitments.
• A currency board does not act as a lender of last resort to commercial banks, and does not regulate reserve requirements.
• A currency board does not attempt to manipulate interest rates by establishing a discount rate like a central bank. The peg with the foreign currency tends to keep interest rates and inflation very closely aligned to those in the country against whose currency the peg is fixed.
Central banks generally earn money by issuing currency notes and "selling" them to the public for interest-bearing assets, such as government bonds. Since currency usually pays no interest, the difference in interest generates income, called seigniorage.
Seigniorage - is the net revenue derived from the issuing of currency.
Contrary to popular perception, central banks are not all-powerful and have limited powers to put their policies into effect.
Comment
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Comment by Steven Vincent on March 28, 2009 at 5:01pm -
Great post! I do think that the truly MASSIVE monetary inflation is likely to create the illusion of an economic recovery for a time, but it will end in another even more massive crash. My guess is 18-36 months before the US Treasuries bubble bursts and they move us to an international currency.
© 2013 Created by Steven Vincent.
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