Posted on 09/28/2007 3:45:12 PM PDT by TheLineMustBeDrawnHere
A serious attempt by the Fed to break inflation (the M3 the world sees)coupled with moderation in federal spending, could prevent this from happening, but don't hold your breath because the Fed has two feet into it the other way now.
M3 in the rest of the world is the same or higher. M0 & M1 (which excludes Eurodollars here) is lower here than the rest of the world and is actually negative in the last year.
I think the fed is more worried about deflation, not inflation, at this point.
The Fed reduction of 50 BPS was followed by a sharp rise in commodity prices and drop of the $ versus the € and even the C$. Speculation? I'd say they got our number.
bump
Again, the #s oversees are WORSE than ours. And M3 includes EURODOLLARS coming into the US which appears to be the biggest increase of deposit money into our system. M2 is 6% and if you deduct productivity and an expanding economy, the inflation rate is around 1.5-2% which the CPI #s suggest as accurate. Sorry, not buying your BS when oversees #s are worse.
I agree the Fed is more focused on deflation. I just don’t agree that that’s the right focus. If you’re on a non-sustainable path of overspending and then inflating the currency at ever rising rates to cheapen the repayment of those debts, and you see a bubble you created burst and you stare at the prospect that a correction could lead to deflation if you do nothing to stem it, or on the other hand might lead to hyper-inflation if you try to press the inflation peddle harder to get away from that, I think you’re just passing the problem to another generation by pushing the peddle.
Welcome to FreeRepublic.
You don’t have to buy my BS about anything. What’s important is if the world continues buying our BS about the value of our dollar. Let’s let the market continue this debate and check back in a month or so. If the dollar comes back I’ll eat humble pie. If the € is at $1.45 and the C$ is still worth more please report back - I’ll be gracious.
I agree that dropping the target rate to 1% would be a huge mistake. I think it was a big mistake to hold it there so long to begin with. Nevertheless, dropping the target rate several times a half-point is prudent. Dropping it down below 3% and holding it there for several quarters will cause another far worse bubble. But there is room from where the target rate is now and I think they need to use that room. Recessions are inevitable - and the fed should try when it can to soften it as much as possible.
1 month is hardly a long term indicator and still highly manipulated by speculation. Let’s try checking back in in say 5-6 years and see where the $ to € conversion is. Again, the link I gave you showed a straight up 6% increase in M1 in Eurodollars and a -.9% decrease in US Dollars. But you can continue to believe its not currency manipulation for profit by speculators if you want.
With all of the positive #s coming out right now, I think the Fed would do best to hold still for the next meeting at least.
One area we may disagree is that I think central banks cause the systemic mis-allocations (bubbles) by creating inflation. I also see recessions as the correction or cure of those distortions, and to the extent the Fed tries to avoid it they worsen the future correction. “Just back away from those fine-tuning knobs” is what I’d advise. “Don’t help us anymore: Please!”
But ask yourself, what if it isn't speculation? What if it's real?
We agree on this. As I stated in my last post, it is pretty well recognized that the housing bubble was created by the fed allowing money to be too cheap for way too long. One might make a case for making it 1% for a quarter or two for a jolt (I would not subscribe to that) but holding it there for as long as they did made conditions too ripe for the credit shenanigans in real estate to occur.
At the same time, I think the fed can and should set the target rate a little lower for a time if it thinks there is a threat of recession and it thinks inflation is under control. There is another argument that it should stand pat and just let the credit market correct itself. I don't agree with that. If the fed can lower it a little and still keep inflation in check it should do it.
I know I will be belittled. But something does not “feel right”. I feel the market is over heated. I could be wrong. Oil Gold falling dollar. Who knows?
You may be right. They just cut the rate a half point. Nevertheless, the current target rate has plenty of room for several more half-point cuts if we should need them and inflation stays in check. What they absolutely cannot do is lower it down below 3% and keep it there. That is what caused this in the first place.
Agreed. 1% interest rate is simply ludicrous. Adjusted for even tame inflation rate of 1.5% and you are effectively losing money to loan it out. Personally, I’d rather have slightly higher inflation but a growing economy than contained inflation and a contracting economy. But if the fed can manage both, all the better.
>>As it falls the interest rates paid to foreign buyers will have to increase, or the treasury issues will remain unsold.
I agree totally with you, but the funny thing is, Treasury issues are not yet “remaining unsold”. Quite the opposite. A lot of capital fled to Treasuries, pushing the yields down. T-bill auction rates are WAY down — substantially more than the 50 bp reduction in the fed funds rate.
Yet, you can still get decent-to-excellent rates in bank CDs, both short and medium term.
What’s your take on this? I think that for now even FDIC ensured bank borrowing carries a “risk premimum” over treasuries these days, which explains part of it... but darned if I can guess how it will all play out over the next year or three.
Disclaimer: Opinions posted on Free Republic are those of the individual posters and do not necessarily represent the opinion of Free Republic or its management. All materials posted herein are protected by copyright law and the exemption for fair use of copyrighted works.