As opposed to the smorgasbord of reasons given by the Fed that the higher discount rate should be construed as a signal that financial markets have stabilized rather than an attempt to tighten monetary policy, I say this is more of a smokescreen trying to placate the concerns of foreign investors like China who holds a buttload of our debt. For one thing, the discount rate, which we all know as the rate Fed charges its member banks, is nearly meaningless because there's no real need for the banks to borrow funds since they're sitting on a pile of cash anyway (better known as excess reserves). Check out for yourself how much these banks are hoarding:
AGGREGATE RESERVES OF DEPOSITORY INSTITUTIONS
So what the hell is the real intention? The real reason in my mind is to clearly send a signal, albeit mixed, to the largest U.S. Treasury debt holders, especially China, that everything is under control. It's no surprise that the sudden announcement by the Fed was made following the looming threats made by China that it would dump U.S. treasuries. China is by far the largest foreign creditor with nearly $800 billion in U.S. Treasury debt (it would be well over $1 trillion if stakes in other investments are considered), of which $34.2 billion was sold in December.
Foreign Holders Of U.S. Debt
Let's also not forget another critical factor. On his visit to China last summer, Geithner reassured his host by promising that "the United States is committed to a strong and stable international financial system. The Obama administration fully recognizes that the United States has a special responsibility to play in this regard, and we fully appreciate that exercising this special responsibility begins at home." But Chinese aren't stupid. They know that we have unsustainable debt levels and, above all, we lack a policy to deal with it. So the REAL question that shouldn't escape the mind of Bernanke and his cronies is just what would happen should China decide to dump in en-masse? No doubt, it's crystal clear by now that the Treasury can no longer sell their debt so easily as in the past, especially at record low interest rates.
(Courtesy of Seeking Alpha)
To better understand how our huge debt is being monetized, I highly recommend that you read up on How The Federal Reserve Is Monetizing Debt by chris Martenson from Seeking Alpha:
http://seekingalpha.com/article/158330-how-the-federal-reserve-is-monetizing-debt
AGGREGATE RESERVES OF DEPOSITORY INSTITUTIONS
So what the hell is the real intention? The real reason in my mind is to clearly send a signal, albeit mixed, to the largest U.S. Treasury debt holders, especially China, that everything is under control. It's no surprise that the sudden announcement by the Fed was made following the looming threats made by China that it would dump U.S. treasuries. China is by far the largest foreign creditor with nearly $800 billion in U.S. Treasury debt (it would be well over $1 trillion if stakes in other investments are considered), of which $34.2 billion was sold in December.
Foreign Holders Of U.S. Debt
Let's also not forget another critical factor. On his visit to China last summer, Geithner reassured his host by promising that "the United States is committed to a strong and stable international financial system. The Obama administration fully recognizes that the United States has a special responsibility to play in this regard, and we fully appreciate that exercising this special responsibility begins at home." But Chinese aren't stupid. They know that we have unsustainable debt levels and, above all, we lack a policy to deal with it. So the REAL question that shouldn't escape the mind of Bernanke and his cronies is just what would happen should China decide to dump in en-masse? No doubt, it's crystal clear by now that the Treasury can no longer sell their debt so easily as in the past, especially at record low interest rates.
(Courtesy of Seeking Alpha)
To better understand how our huge debt is being monetized, I highly recommend that you read up on How The Federal Reserve Is Monetizing Debt by chris Martenson from Seeking Alpha:
http://seekingalpha.com/article/158330-how-the-federal-reserve-is-monetizing-debt