Mervyn King and the US Fed have nothing in reserve

[CGowen]

By Liam Halligan
Last Updated: 4:20pm GMT 27/01/2008

....


But the Fed's move was out of all proportion to the problems the US economy faces. Yes - output has stalled and the "bears" are growling, but overall corporate profits remain robust and consumption is holding up.

By acting beyond a meeting, and cutting so much, Bernanke just whipped up hysteria - with the markets now fretting the ground is being prepared for extremely bad news.

The Fed also destroyed any remaining claim it had to inflation-fighting credibility. It has a dual mandate, of course: targeting both inflation and output. But to cut rates so deeply when inflation is at 4.1 per cent - a 17-year high - throws any pretence of caution to the wind.

...

But if Bernanke lowers US rates sharply again this week, the currency markets will see the dollar as a one-way bet. In that case, the world's reserve currency would fall off a cliff, sending inflation sky-high, sinking America into a fully-blown slump and causing havoc across the global financial system.

...
http://www.telegraph.co.uk/money/main.jhtml;jsessionid=T5HQ3AY45SKRNQFIQMFSFGGAVCBQ0IV0?xml=/money/2008/01/27/ccliam127.xml

http://tinyurl.com/36cb5e

[gateley]

1. I heard a trend analyst (?) say that we're looking at DEflation. I'm going to

go look that up -- they way he said it, sounded far worse than inflation.

[TalkingDog]

5. Deflation is what was happening in the Depression

Yeah, stuff was cheap, but nobody was buying. There was no money flowing through the system.(think mason jars buried in the back yard).

So if you aren't spending and nobody else is spending, then no stores are spending, and so no manufacturers are spending and thus business sectors are not spending.

It's like being stuck in the mud because you have no traction vs skidding down the highway on ice because you have no traction.

One isn't moving at all, one is moving way too much and out of control, both suck.


My Favorite Master Artist: Karen Parker GhostWoman Studios

[gateley]

7. Well that certainly paints a vivid picture -- thanks! nt

[AnneD]

8. I went to a local SqualMart this Saturday...

It was noon time and...HARDLY ANYONE WAS THERE. I have NEVER seen that little traffic there-It is in a nice middle class area. It was an eye opener.

[CGowen]

9. Dodging deflation with a 'money rain'

By Ed Crooks

The perennially reassuring point about the threat of deflation in modern economies is that if governments can create money, though the central bank, they can always create more of it - in theory.

The difficulties arise in practice, when there are obstacles to the creation of more money. This is why the eurozone, with one central bank but 12 separate governments, presents some unique problems. With the rising euro delivering a powerful deflationary shock, the issue is more urgent now than in the past.

Like the US Federal Reserve, the European Central Bank has been thinking about deflation - specifically, how to avoid it and how to wriggle out of it. It concluded last October that proposed deflation-fighting weapons, such as buying government debt, private sector debt, equities or property, or foreign assets, "are very uncertain, may be unstable; and interventions like this will expose the central bank to significant fiscal losses that the private sector as a whole will have to underwrite". The most appealing solution was the "money rain" - giving money to the private sector until it is spent.

Administratively, this should be possible: people could be given tax cuts or benefit payments financed by money from the central bank.

When fiscal and monetary policy are separated by the independence of the central bank, as in Japan, arranging such a money rain can be tricky. As Adair Turner, vice-chairman of Merrill Lynch Europe, warned this year, it may be even tougher when fiscal policy and monetary policy are not set at the same level of government.


....

http://search.ft.com/nonFtArticle?id=030515005668

http://www.federalreserve.gov/pubs/feds/2000/200051/200051pap.pdf

[Hydra]

2. I always think it's funny when they say

"Don't make the sheep panic! It may be bad, but that will make it worse!!!"

[lovuian]

3. Yes fighting inflation right now is out of the question

Inflation is here for food prices gas healthcare the main staple of Americans

this will mean americans need higher wages and social security needs higher amounts to keep up

Corporations profits are going to be dropping
if they don't do this

[dipsydoodle]

4. The move was motivated by misguided panic

The figure which is bandied about regarding the SocGen trader was their net loss. Their total exposure had been 50 billion Euros. They reversed all of the deals to reocver c. 40 bilion Euros in such a short space of time it damaged the market. The market falls were interpreted as being related to the American economy. Put bluntly - it was a fuck up.

[sendero]

6. That's the story..

.... but nobody has given any quantification of how much the unwinding of of the SocGen positions contributed to the rout. The only number I've heard was "40%" and that sounded like a guess, the speaker made no attempt to spell out how the number was arrived at.

Probably some, but probably not the major factor either.

I think it was a mistake for the Fed to make a between meetings adjustment of that size no matter what. But the Fed's new role is to prop up the markets at all costs.

Greenspan did it and now Helicopter Ben is going to do the same thing. Over the long haul it is not good policy, and the damage we already have has been caused in large part by that orientation IMHO.