Wednesday, March 18, 2009

There's what the Fed claims it's doing, and then there's the real story if you look carefully

In a discussion last week at QandO about the futility of the tea bag protests (because Americans in the end will still pay up by April 15th), I made the point that governments with central banks have no need to worry about tax revenues that actually come in. I also pointed out a sinister thing that very few Americans realize:

"There isn't enough money in the world to borrow (there isn't enough that lenders are willing to lend, to be more specific), so the Federal Reserve has been buying U.S. Treasury securities like mad. The overt reason has been so it can drive down mortgage rates, including 30-year rates. It's a cover story so the common American voter won't realize how much new money is being created."

If you didn't know this before, now you do. And now your eyes are open when you read something like this:
Federal Reserve to Buy $1.2T in Bonds, Mortgage-Backed Securities
By Neil Irwin
Washington Post Staff Writer
Wednesday, March 18, 2009; 5:07 PM

The Federal Reserve said today that it will deploy an additional $1.2 trillion to try to lower interest rates and stimulate the economy, an aggressive move aimed at containing the recession.

The central bank will increase its purchases of mortgage-backed securities by $750 billion, on top of a previously announced $500 billion. It also will double its purchases of debt in Fannie Mae and Freddie Mac to $200 billion. Those steps are intended to lower mortgage rates. The announcement of the previous purchases pushed mortgage rates down a full percentage point.

The Fed also said it will buy $300 billion in long-term Treasury bonds, a step it had previously considered but had been reluctant to act on. That move will lower long-term interest rates for the U.S. government directly and, Fed officials hope, will indirectly lower borrowing costs for businesses and individuals.

Following today's announcement, Treasury bond prices spiked and yields on those bonds declined, as traders anticipated the Fed bond purchases. At 2:30 p.m., 15 minutes after the announcement, the yield on 10-year Treasury bonds had fallen half a percentage point, to 2.53 percent.
And of all things, the Fed's statement had the unmitigated gall to claim, "In these circumstances, the Federal Reserve will employ all available tools to promote economic recovery and to preserve price stability."

Price stability? Price stability?! That's an outright lie. Pumping up the money supply by over a trillion dollars, when there's only $8 trillion currently floating around, can do nothing but cause price instability. Let's take a look at the Fed's own numbers for the last few years, to see what's going on:
                                        TABLE 1                March 12, 2009
MONEY STOCK MEASURES
BILLIONS OF DOLLARS

---SEASONALLY ADJUSTED------- ---NOT SEASONALLY ADJUSTED----
------M1------- -----M2----- -------M1------- -----M2-----
CURRENCY, M1 + CURRENCY, M1 +
TRAVELER'S CHKS, RETAIL TRAVELER'S CHKS, RETAIL
DEMAND DEPOSITS MMMFS, DEMAND DEPOSITS MMMFS,
AND OTHER SAVINGS, & AND OTHER SAVINGS, &
CHECKABLE SMALL TIME CHECKABLE SMALL TIME
DATE DEPOSITS DEPOSITS DEPOSITS DEPOSITS
----------- --------------- ------------ ---------------- ------------

...

2006-Jan. 1380.6 6712.2 1375.0 6685.3
Feb. 1379.8 6731.7 1361.5 6702.3
Mar. 1383.9 6749.0 1394.2 6775.9
Apr. 1380.5 6772.1 1393.0 6837.3
May 1386.8 6785.3 1391.5 6771.4
June 1374.4 6816.9 1378.4 6820.5
July 1369.2 6844.6 1367.8 6838.3
Aug. 1369.2 6865.3 1369.8 6853.0
Sep. 1361.6 6890.8 1346.5 6876.7
Oct. 1369.4 6945.3 1359.4 6917.4
Nov. 1371.3 6978.3 1367.5 6976.5
Dec. 1365.6 7021.5 1387.3 7049.2
2007-Jan. 1373.6 7069.5 1368.8 7043.0
Feb. 1366.0 7076.1 1347.2 7050.7
Mar. 1368.1 7111.7 1378.6 7147.8
Apr. 1378.8 7160.7 1392.1 7234.8
May 1379.7 7189.1 1384.0 7175.2
June 1364.5 7212.3 1368.3 7217.4
July 1366.6 7239.4 1365.7 7219.8
Aug. 1368.4 7287.7 1369.0 7279.2
Sep. 1366.2 7322.6 1351.1 7305.0
Oct. 1371.7 7352.8 1361.6 7317.1
Nov. 1366.7 7384.4 1361.7 7376.5
Dec. 1364.5 7417.3 1386.2 7444.9
2008-Jan. 1368.4 7463.6 1364.4 7438.0
Feb. 1371.1 7539.0 1351.5 7517.6
Mar. 1372.9 7600.5 1384.8 7652.0
Apr. 1373.7 7620.0 1387.4 7697.5
May 1373.7 7637.8 1376.9 7632.1
June 1383.6 7648.5 1388.2 7652.0
July 1400.1 7698.9 1399.8 7671.9
Aug. 1392.2 7687.3 1392.4 7682.8
Sep. 1452.1 7796.2 1435.1 7761.4
Oct. 1475.2 7916.0 1464.9 7878.7
Nov. 1524.0 7972.5 1518.3 7968.1
Dec. 1595.9 8154.2 1624.7 8171.1
2009-Jan. 1575.0 8244.0 1568.9 8224.4
Feb. 1558.5 8275.5 1534.5 8256.9
This should not surprise yet still absolutely floor anyone who understands the nature of money. And it's only going to get worse. Much, much worse. We'll be seeing many, many more headlines like these:

"Dollar Trades Near 2-Month Low on Fed’s Plan to Buy Treasuries"

"Canadian Dollar Advances Before Federal Reserve Statement"

Another article that whitewashes the increased inflation:
U.S. 30-year mortgage rates slide toward record lows
Wed Mar 18, 2009 5:48pm EDT
By Lynn Adler

NEW YORK (Reuters) - U.S. 30-year fixed home loan rates on Wednesday slid by as much as 3/8 percentage point to about 5 percent, nearing record lows, after the Federal Reserve more than doubled its planned purchases of mortgage-related securities.

The Fed announced "a shopping spree that would make Donald Trump blush," said Bob Walters, chief economist at Quicken Loans in Livonia, Michigan, which already cut the mortgage rates it offers by 1/4 to 3/8 point.

The Fed, as part of its ongoing efforts to cut loan rates to stimulate borrowing and revive the worst housing market since the Great Depression, said it would buy long-term Treasuries as well as more mortgage securities.

An added $750 billion would bring the Fed's total buying of Fannie Mae, Freddie Mac and Ginnie Mae mortgage bonds as high as $1.25 trillion this year.

The Fed will also double its potential note purchases from Fannie, Freddie and the Federal Home Loan Bank System to up to $200 billion and absorb as much as $300 billion in Treasuries.
What would Bastiat say about this? That it talks only about the seen (lower mortgage rates) but ignores the unseen (higher inflation as the inevitable result of monetary expansion). Moreover, with all the irresponsible borrowing that got us into this mess, why in hell do we want to promote more? The radio news earlier talked about lower interest rates being beneficial because they allow people to refinance (implying they need refinancing to get out of otherwise "unaffordable" loans). Again, why do we want that? First, government is saving some from irresponsibility by taxing all with inflation. Second, as is always the case with inflation, irresponsible borrowers benefit while prudent savers (those who put assets away and are the source of loanable funds) are punished. When John Q. Irresponsible refinances, he's lucky enough to pay back an absolute amount with increasingly inflated dollars. Those of us who save will experience a continual decrease in value, no matter what.

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