avoidance of pain is endemic in europe and the US. instead of accepting that economies are cyclical in nature there is the falsehood that the gov't can protect the populace from the downswings. the result is that when the balloon finally busts the crash is greater it would otherwise have been. the way for governments to cover up their mistakes and profligate ways is through inflation which is meant to deceive the populace that everything is ok,. it is also used to steal from the middle class in order to fund the unproductive bureaucracy.
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Fed's Interest on Reserves and Inflationary Spirals
- Thread starter Daal
- Start date
avoidance of pain is endemic in europe and the US. instead of accepting that economies are cyclical in nature there is the falsehood that the gov't can protect the populace from the downswings. the result is that when the balloon finally busts the crash is greater it would otherwise have been. the way for governments to cover up their mistakes and profligate ways is through inflation which is meant to deceive the populace that everything is ok,. it is also used to steal from the middle class in order to fund the unproductive bureaucracy.
Quote from wave:
Everything feeds off interest rates. The government will try to keep them low for as long as they can. However, the mother of all unintentional consequences will pop up when private and government pensions start having cash flow problems due to the 0.5% yield they are getting from treasuries. That will put a hurting on many companies and citizens.
Oh that discount rate hike, guess what the unintentional consequences will be...
OK. Here we go. The Fed is able to raise rates without selling its MBS portfolio as it does have the ability to short circuit the money multiplier. So even if they lengthen the duration of the portfolio, it is not necessarily inflationary since they can raise IOR/Fed Funds to a level where loan volumes drop substantially. In fact, even if the MBS portfolio duration extends out to 20+ with much higher rates (and/or cesation of the agency program), the Fed's balance sheet will fall by 30-50B a year in principal paydown and prepayment alone with the Fed doing nothing.
I think the bigger risk to the Fed's policy is congressional/government pressure to keep the housing market afloat. I think that may catalyze them to buy more MBS until at least most of the foreclosure inventory has been dumped (2012?).
Here's a draft of a paper I'm working on with respect to the subject. The included link in the paper is a great primer into how the system now works with the new IOR policy.
I think the bigger risk to the Fed's policy is congressional/government pressure to keep the housing market afloat. I think that may catalyze them to buy more MBS until at least most of the foreclosure inventory has been dumped (2012?).
Here's a draft of a paper I'm working on with respect to the subject. The included link in the paper is a great primer into how the system now works with the new IOR policy.