Sunday, September 05, 2010

An interesting gambit

I'm no economist,
but neither am I a Democrat

an interesting gambit

another fine mess

For simplicity, let’s assume that the Fed’s policy instrument (now that the federal funds rate is stuck near zero) is the 10-year Treasury note. As an example, suppose the yield is 4%. In that case, it’s all but certain that the Fed, if it chooses, can do something to stimulate the economy and raise the inflation rate.

another fine mess

For example, suppose the Fed were to bid the 10-year note yield down from 4% to 1%. It would take out a whole slew of marginal noteholders in the process. Banks that had been satisfied with a 4% return would be unsatisfied with a 1% return and would lend more aggressively. Domestic investors that had been satisfied with a 4% return would be unsatisfied with 1% and would bite the bullet and buy stocks. International investors would be unsatisfied and would shift their investments into foreign assets, thus weakening the dollar and making US products more competitive. Households would refinance their mortgages and spend some portion of the increased cash flow. Others who previously couldn’t afford houses could now afford them, so demand for houses and home furnishings would go up. And so on. With such a huge policy action, it’s virtually certain that business activity would accelerate enough to reverse any deflationary pressure. Andy Harless

What?  You don't like the positive approach?  Try Cuzzin Ricky's scenarios. What's that?  Nuh-uh, While immensely satisfying, the wholesale lynching of the Administration is illegal.  But, looky here.  John Bolton Suggests He Could Consider 2012 Presidential Bid.  He does foreign, Sarah does domestic. 

another fine mess
Oh my.


Anonymous said...

I don't know that that little queer Bruno is going to give them, but I'm giving 'em a 10!


Anonymous said...

"bite the bullet and buy stocks"

bwaaahahahahhhahahahaaa -- when Munis can be had @5.75%, sold at 116% with a 15 year + positive yield curve?!?!?

'Sides, according to Corsi [yeah - I know] you'll be buyin' Treasurys whether ya want 'em or not...

Anonymous said...

And of course the banks are presently getting their money from the fed for free, so they would probably be happy at 2% return. That return would probably cover the senior level bonuses if nothing else.

Anonymous said...

The Fed has the power to print money, buy worthless assets with that worthless money and set meaningless interest rates for the banks. But I don't think that they can have that much of an effect on bonds traded on the open market.

I also believe that our debt is financed with much shorter term paper, bonds with an average of less than 5 years. Most foreigners do not trust our health to buy long term paper.

And with respect to munis: when the federal bailouts dry up, more and more state and local entities will start defaulting on their debt. Remember what the federal bankruptcy judges did to the GM bond holders: they move them to the back of the line even though they had a greater claim on the assets than the unions. I would not be surprised if state judges did not put unfunded pension obligations before bong holders.


Rodger the Real King of France said...

Laurence - I will be shocked if they do not.

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