Diluting the dollar leads to lower interest rates. We live in interesting times!

[Kurt_and_Hunter]

Right-wing economics is hyper-concerned with inflation because inflation erodes Capital. So that sucks for Capitalists.

So to them destroying wages and even destroying growth is better than anything that might threaten capital preservation. If you already have it your top interest is keeping it.

Hence the Larry Kudlow types have seized on the bogus hyper-inflation menace. All stimulus should be somewhat inflationary... if it's any damn good. But they greet any increase in the money supply as an obvious prelude to post-WWI Germany style hyper-inflation. (Again, if you already have money you want the supply restricted because you already have it!)

Fortunately the Fed is run by serious people--not infallible but not wing-nuts--and the Fed guidance this week focused on maintaining Price Stability. That is a euphemism for avoiding deflation. That is a much, much, much, much greater threat than inflation and the Fed is doing the right thing by increasing the money supply any way they can while as a bonus also minimizing potential upward pressure on interest rates by buying up bonds and mortgages with the new money.

This leads to a sentence that would make Larry Kudlow's head explode...

The big news ... the Fed announced they have "decided to purchase up to $300 billion of longer-term Treasury securities over the next six months" and also buy more MBS. This is quantitative easing (printing money) ... and this should lead to lower mortgages rates and lower long term rates. I've seen forecasts of 30 year mortgage rates in the 4% to 4.5% range for conforming loans. This will have a some stimulus effect.

http://www.calculatedriskblog.com/2009/03/sign-of-times-not-hiring-and-summary.html

The Fed is diluting the money supply by an additional 1.2 Trillion dollars in a way that lowers interest rates. 99% of the time that would be an oxymoron.

Why don't bond buyers recognize they will be paid off in diluted dollars? Because they see the same evidence the Fed sees and they know the threat of deflation is more real today than the threat of inflation. The dilution factor is almost irrelevant in a potentially deflationary environment with the Fed Funds rate stuck at 0.25%.

Mortgages and bond yields are, in large part, bets on future inflation. If anyone really expected big inflation they would stop buying bonds paying a paltry 4.5%. But they haven't... bonds are selling a lot better than cars and houses.

The market that Larry Kudlow believes to be an infallible risk-discounting engine has looked at our burgeoning deficits and 24/7 money creation and fully considered the hyper-inflation hypothesis and finds it to be a joke.

So STFU up about hyper-inflation, Larry.

The Fed is correct to print money until conditions tell them to stop.

[amborin]

1. wrong, wrong, wrong, the fed is terrified of DEFLATION

the scary threat now, the immediate threat, is DEFLATION

yes, later down the road, if we ever recover, inflation can become a problem

but not for yrs, and then the fed can simply raise interest rates and cut the money supply

[Kurt_and_Hunter]

3. ...

[amborin]

5. my bad, and i apologize, sorry!

[amborin]

4. whoops, sorry

i think you agree the fed just made the right decision

[Kurt_and_Hunter]

6. No worries. (I probably do the same more often than I even realize)

:hi:

[soothsayer]

2. abolish th fed! and go to the gold standard (although then we'll learn that our gold has all been

stolen)

[jody]

7. Lower interest rates allows car manufacturers to keep bloated inventories and not cut prices.

Price cuts would equate supply with demand and attract buyers.

Lower inventories would encourage production requiring reemployment of laid off workers.

Of course manufacturers would lose money on their original investment in production but life's a gamble anyway.

How many real cuts in new car prices has anyone seen even though the internet has many pictures of tens of thousands of new cars in lots all over the world?

Why should dealers reduce prices to sell cars when they can keep them in inventory for little or nothing?

[Kurt_and_Hunter]

8. re: "Why should dealers reduce prices to sell cars..."

re: "Why should dealers reduce prices to sell cars when they can keep them in inventory for little or nothing?"

Few people pay cash for a new car. Interest rates have a BIG effect on the size of your monthly payment.

Even if we assume higher interest rates would lead to sticker price reductions to clear inventory the total cost to the buyer could easily be higher over the life of the loan.

When given the choice of a rebate or a 0% loan more car buyers want the 0% loan because it usually saves them more money, total, than the rebate would.

Even more so for houses. I would guess the difference between 6.5% and 4.5% on a mortgage does more to lower the monthly payments than a 15% price reduction up front.

I cannot think of an instance where higher interest rates would help our economic situation.

[jody]

9. I see we disagree. Have a great day. n/t