Can one of the board economics gurus put this in plain speak for me? (1 Viewer)

[Saint by the Bay]

Fed to auction $100 billion more to banks in March
http://www.chron.com/disp/story.mpl/headline/biz/5600950.html

What exactly does this mean and how does this work? What is the larger effect on the value of the dollar and the economy?

 

[Thorin]

Calling Blackadder!

 

[Saint by the Bay]

bclemms, TPS, dapperdan or JimE could probably break this down well for us too. All five would be bonus points.

 

[TDH]

More printed money causing the dollar's value to go down even further. This is going to raise inflation and the cost of oil.

 

[philipkw]

I don't have near the economic credentials of the folks that you mention but I'll take a stab. Caveat emptor.

It's my understanding that the auction is a new way for the Fed to get money to stressed lenders in order to facilitate the flow of funds to borrowers. Previous to the auctions, the way that stressed lenders would get funds would be to go to the Fed discount window but apparently lenders were reluctant to use it post mortgage meltdown. I <i>assume</i> that the lenders can get better rates via the auction.

Or something like that.

In the very simplest of terms, it's yet another mechanism for the Fed to flood the economy with dollars in an effort to keep the economy growing.

 

[rob021275]

In the very simplest of terms, it's yet another mechanism for the Fed to flood the economy with dollars in an effort to keep the economy growing.

In other words, it's just another stall tactic that is going to make things worse in the long run?

We should just take our medicine and get it over with (even though it'll probably take years). But that's better than decades/never getting resolved.

 

[SaintJ]

It means if I don't have money, I can just print more, and pretend everything is OK.

 

[bclemms]

I don't have near the economic credentials of the folks that you mention but I'll take a stab. Caveat emptor.

It's my understanding that the auction is a new way for the Fed to get money to stressed lenders in order to facilitate the flow of funds to borrowers. Previous to the auctions, the way that stressed lenders would get funds would be to go to the Fed discount window but apparently lenders were reluctant to use it post mortgage meltdown. I <i>assume</i> that the lenders can get better rates via the auction.

Or something like that.

In the very simplest of terms, it's yet another mechanism for the Fed to flood the economy with dollars in an effort to keep the economy growing.

Pretty much dead on.


The fact that this wasn't in the 2008 budget which is already projected to be a trillion dollars over budget and we are in debt 9 trillion bucks means the Federal reserve has to print or borrow the money. Since the Federal reserve can print money cheaper than it can borrow it then it will print 100 billion dollars.

The reason they have been doing this is to make "cheap" money available to the banks to increase the willingness of the banks to lend money. The idea behind this is if the fed gives the banks cheap money to lend they will lend it out cheaper and the people would be more willing to borrow. The reason the people borrow is to SPEND.

Just because we print $100 billion dollars and loan it out to people doesn't mean it will actually get there. Several economists claim that a very small percentage of the money actually goes to spending in the economy because so many are using the borrowed money to pay off debt and the banks are not using the auction to increase lending to consumers. Some estimates have been as low as 15% that actually trickles out to the economy and a large portion of that goes to imports.

In reality this is the US government and the federal reserve lending out cheap money to the banks to save them, aka a bailout. Each time the Fed lends out a 100 billion the dollar drops a little, inflation goes up a little and the person saving money and living within their means get punished to help those that are living on borrowed money and help the fat cats in the banking world. Basically everyone pays more to make things worse.



On the other hand, we can't afford to let the entire financial system to fall flat on its face or we will be looking at a very severe depression and with the dollar as weak and unstable as it is now a probrable currency crash. Their is no easy fix but we are simply compounding the problem instead of changing our ways.

 

[TDH]

Their is no easy fix but we are simply compounding the problem instead of changing our ways.

I already know the answer to this one. We're not going to change our ways. We're going to keep compounding the problem until we can't prop it up anymore and it all comes crashing down on us. One bubble after another propped up the economy in the 90s and early 00s. Looks like we're out of bubbles.

 

[threexcharm]

Bush is just trying to keep the economy going until after the election. I would hate to be president next term.....

I am no economic expert, but it seems like we may be facing problems that I have never
seen in my 55 years. I know thiings were bad in the Carter administration.

Here we have the devaluation of the dollar. The price of petroleum is causing the price of just about everything to significantly rise. The farmers are raising crops for Ethanol production instead of food. They are scooping up the incentives to do so. This is pushing up the price of food.

It almost seems like we are having a strong financial recession along with fairly strong inflationary price hikes. It is phemomena I can't remember witnessing.

Can someone expand on my observations? What in the world do you think is gonna happen??

Joe

 

[bclemms]

Bush is just trying to keep the economy going until after the election. I would hate to be president next term.....

I am no economic expert, but it seems like we may be facing problems that I have never
seen in my 55 years. I know thiings were bad in the Carter administration.

Here we have the devaluation of the dollar. The price of petroleum is causing the price of just about everything to significantly rise. The farmers are raising crops for Ethanol production instead of food. They are scooping up the incentives to do so. This is pushing up the price of food.

It almost seems like we are having a strong financial recession along with fairly strong inflationary price hikes. It is phemomena I can't remember witnessing.

Can someone expand on my observations? What in the world do you think is gonna happen??

Joe

You pretty much just gave the definition of stagflation.

The only way to get out of this mess without suffering is for the economy to really pick up steam before everything falls apart and if we don't change our ways it will simply delay this mess and give us time to make the problems so much worse we could be looking at a huge economic failure.

The other way to get out of this is for us to take our medicine. The Fed could to come out and state that the inflationary pressures are too much and the dollar can not withstand much more pressure. Then they need to slowly start increasing rates and let the stock markets get hit. This would surely send us into a hard recession but it would fix a lot of our problems for the long run. This may take a decade to really recover but we would have a much stronger economy when we did.


Personally I think the economic problems can be fixed at the political level but it would take drastic changes in foreign and economic policy that would cut off the hands that fed the politicians. On one hand I want to blame the politicians on the other hand the people voting for them are hugely responsible.

 

[philipkw]

Bush is just trying to keep the economy going until after the election. I would hate to be president next term.....

As big a disaster as Bush has been for the country, I don't think he's got anything to do with actions taken by the Fed. The Fed is *supposed* to operate independently of the government.

But your bigger point is valid. His "rebate" check is an attempt to stimulate the economy and he'd surely like to stave off disaster until he slinks back to the morass of mediocrity from whence he came.

 

[Furor]

The public debt, taking into account the Social Security and Gov't trust funds surpluses, is just over $5 trillion. By percentage of gross domestic product, it's about 36%. Some countries that are in worse shape debt-wise than the US: Norway, Sweden, UK, Brazil, Netherlands, Switzerland, Canada (64% of GPD) and 57 other ones.

 

[UK SAINTS]

The public debt, taking into account the Social Security and Gov't trust funds surpluses, is just over $5 trillion. By percentage of gross domestic product, it's about 36%. Some countries that are in worse shape debt-wise than the US: Norway, Sweden, UK, Brazil, Netherlands, Switzerland, Canada (64% of GPD) and 57 other ones.

Thanks for adding these statistics. Who are some of the countries whose ratios are much better?

 

[Furor]

Thanks for adding these statistics. Who are some of the countries whose ratios are much better?

Spain, Finland, Iceland, Denmark, and Russia (7% of GDP).

http://en.wikipedia.org/wiki/List_of_countries_by_public_debt