This is big news. This means that the Fed is either prepared to destroy the remaining portion of its decimated balance sheet, or (and this is more likely) it is going to be directly printing money out of thin air to pass out in exchange for bad debts.
[quote]Oct. 6 (Bloomberg) -- The Federal Reserve will double its auctions of cash to banks to as much as $900 billion and is considering further steps to unfreeze short-term lending markets as the credit crunch deepens.
"The Federal Reserve stands ready to take additional measures as necessary to foster liquid money-market conditions,'' the central bank said in a statement released in Washington today. Fed and Treasury officials are "consulting with market participants on ways to provide additional support for term unsecured funding markets,'' the statement said.
Today's steps follow a hoarding of cash by banks that sent the premium on the three-month London interbank offered rate over the Fed's benchmark interest rate to a record. Industrial companies are also finding it harder to raise cash after the market for commercial paper shrank to a three-year low as investors flee even borrowers with few links to mortgages.
"It is pretty much all out war,'' said Christopher Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi UFJ Ltd., New York. ``They are pulling out all the stops to try and get borrowers and lenders to meet and do transactions once again.''[/quote]
One of the things I find so interesting about this crisis is the speed at which I am learning new things, yet still have so much more to learn!
First of all, I sincerely hope that the Fed manages to get us on the inflationary track instead of the deflationary track. My understanding of deflation isn’t that awesome yet, but I know enough to definately not want things to go that way (espically since I have tried to align my limited investments against inflation).
I was assuming that no matter how things turned out however, we were going to be going into a pretty substantial depression over the next couple of years. However, my (flawed?) understanding of how the central banks control currency lead me believe that a depression is caused by a contraction of the money supply.
If the Fed is going all out to inflate the money supply (and assuming they succeed), will that prevent the depression? Meaning, what will be the differences in the economy (day-to-day living) if they succeed, vs. if they fail?
I just read an article on CNBC in regards to the huge plunge in the markets that we have seen today. These ‘experts’ and economists keep hammering in the concept that "if something isnt done soon we could be facing a recession." Huh? So if a recession (in my commoners understanding of the concept) could be defined as a significant decline in economic activity spread across the economy,lasting more than two quarters, normally visible in real GDP, real
income, employment, industrial production, and sales, then WHAT HAVE WE SEEN OVER THE LAST YEAR!?!? Maybe they are just out of touch, but regardless of thier fuzzy numbers I have watched what this has meant for people in my own community and around the country and I truly believe that these people are nuts! We MAY see a serious recession? MAY? I think we are a little past that point of blind optimism.
IMO the deflation in commodities and equities as well as the strengthening of the dollar that we are now seeing is due to deleveraging by banks, hedge funds and financial institutions both here and overseas. I believe this is temporary…at least where commodities and the dollar are concerned. There are about 400 trillion in these derivitives worldwide and I think it is going to take a long time to unwind that much debt.
The current global financial contagion, which has been building for years, won’t be either inflation OR depression. It will be BOTH hyper-inflation AND depression. Why? Think back to all the exponential curves shown in the Crash Course. When the fiat money supply goes stratro, it is the central banks’ hesitancy to ‘feed the beast’ that triggers the market freeze and deflation. The western-world’s monetary system has reached the point of exhaustion. A new financial system will arise (phoenix-like) from the ashes.
Could someone explain what they mean by "auctions of cash to banks"? Is this a euphemism for banks bidding to see who’s willing to pay the highest interest rates for money loaned from the Fed?
It means the Fed closing all the banks for all business (or most business) for an extended time. This would probably be announced something like this: ‘We need to get a handle on the debt and can not do so with so much volatility in the financial sector occuring on a daily basis. Therefore we are announcing a nationwide banking holiday for the next (time span) so that we can make better progress at saving the national financial system.’
The speed and depth of this crisis are without parallel. We are very,
very close to an all out-banking holiday and all that means.
They normally announce them on the weekend, but it could happen any day of the week starting today. Load up on cash and food while you can. If the banks totally shut down, stores and gas stations will have to sell their remaining inventory on a cash only basis. Forget debit and credit cards. Cold cash gets you one more trip to the grocery store. If it doesn’t come to pass, the cash and food won’t be wasted.
I posted a month ago asking for anyone’s thoughts on why the USD was so strong… a few days later, Chris posted his update and talked about the impending doom in the USD which was great to hear but the USD continued its rally. I then posted asking for thoughts on the Euro trying to figure out this move and was unaware of how bad it was in Europe and then this past week I’ve clearly seen why this has happened. But now that everyone is on top of the reasoning behind the USD rally vs the Euro, how about the USD vs JPY, CAD, AUD? OK, I can see the explanation behind the CAD and AUD saying they are commodity based currencies and all the hard commodities and oil have taken a beating but the Canadian banking system is very strong. Also, Chris has mentioned before about how commodity based currencies should give some protection. Our banks in Canada are in a much different position, I think I heard a stat that mentioned they are only levered 10-12x which is night and day to US and European institutions.
What I’m trying to get at is that in the end, you can have all sorts of theories but with every new data point, you need to treat them independently of your previous hypothesis and re-examine things. Could it be that what we are seeing is a global ‘margin’ call and that the flight to the USD is only because the meltdown is affecting all currencies and countries? If this is a new path of thinking, this would mean that risk might be measured in the overall capability of an economy to withstand volatility before folding. This could partially explain why companies that are levered ie. emerging countries or small commodity based economies ie. Australia may have greater risk. The implied vols on the AUD is at 25%! almost double that of Europe. We can hypothesize all we want on events coming up in a few years but personally I find making predictions past a few months as being a coin flip since there are just too many factors to take into account. If you want to make money, focus on the short term… don’t buy the long term big picture crap. Stay liquid, short term focused and treat every new data point as it is … you will make money in a bear market and a bull market.
I don’t know what the previous poster meant by "new financial system", but from what I have heard, the Amero represents a continuation of the current one with a different name. My bet is that the current system will have destroyed the confidence required for systems of it’s kind, and this will force the powers that be to implement a completely different system. If they do not, one will be implemented for them by the public, even if it starts out as a direct barter system. I do not mean to say that we won’t see the Amero, just that if we do, I don’t see it lasting very long. All of the current assets and debt would have to be converted to any new currancy, so the new currancy would start out in just as precarious a situation as the USD is now.
This is a post from Chuck Butler, Vice President of EverBank, Inc, who writes a daily newsletter. He, like Chris, had concluded that the rise in the US dollar, relative to other currencies, must be entirely the result of shadow manipulation of some kind, since it seemed to have no other logical explanation. However, on Friday, he came up with a new theory, for what its worth. This theory is not exlcusive of the idea that markets might be manipulated to some extent, and also explains the rise of the dollar against currencies other an just the Euro. I don’t understand the idea enough to endorse it, but I point it out:
"Good day… And a Happy Friday to one and all! A Fantastic Friday, I hope! As the blind man said, as he spit into the wind… It’s all coming back to me now… And so it was yesterday morning after I had hit the send button for the Pfennig, a trader friend called to give me some insight, and… After talking to him, it all came back to me now…
What the heck is he talking about now? I hear you asking… Well, recall how I have been scratching my head and wondering just how in the world the dollar could be rallying in the face of all that’s going on, and the bad data to boot. Well, here it is folks, sit back and take a sip of coffee…
One of the things we’ve learned this week is that the European banks are not getting to go Ollie, Ollie Oxen Free, on the holding of toxic waste debt… And since they are U.S. issued mortgage bonds, the trader that called tells me that they need to have capital reserved in U.S. dollars. Well, usually, these banks use LIBOR for this funding… But with the credit crunch going on all over, LIBOR rates have gone through the roof. So… Looking for alternative means of raising capital, the European banks have turned to the euro / dollar swap market… Selling their euro reserves and buying dollars.
SLAP! I could have had a V-8! Now why didn’t I think of that? Anyway… This is what’s going on… One would logically think that when LIBOR gets back to normal, these euro / dollar swaps would be reversed. Now… The next question is… What will it take to get the LIBOR rates to normalize? Well, that would be an unlocking of the credit crunch. And according to our Fed Chairman, U.S. Treasury Sec. and President, the way to unlock the credit crunch is to pass the Bailout Package! Dang it! I knew it would all get back to that darn Bailout Package!"
It would depend. Perhaps yes. Perhaps no. See http://en.wikipedia.org/wiki/Corralito for a wiki overview of the extended baking holiday during the Argentine economic crisis.
Yes, it is a short term loan (28 day or 84 day) of federal reserve cash, and the more they auction, the lower the interest rates are. That is partly how interest rates are controlled, and is also used to increase the amount of money in the system (since the loans are constantly being renewed).
I never used to think to wonder about that kind of thing. But now I do…
I’m no stock trader, but obviously it takes a large number of ‘buys’ to make the market move up by 400 points. Did a huge herd of traders simply turn around en masse after lunch, believing they could buy stocks cheap? Some hedge fund thing going on? Foreign buyers? Some other reason… Any guesses? Is it totally naive or totally paranoid to wonder about this?