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Thoughts from the Frontline

The Transparency Trap

January 28, 2012

Choose your language

This week we take a brief pause in our series on the choices facing the developed world to look at some items that are catching my attention. We will get back to the US next week, as somehow I think we will not solve our problems between now and next Friday, and there will be plenty left for us to talk about. So today we look at the "shift" in Fed policy, and at the balance sheets of central banks, US GDP, Portugal and the ECB, the LTRO policy, and yes, there's even a tidbit on Greece. Plenty of ground to cover, so with no "but first," let's get started.

The Transparency Trap

The Fed announced this week that it will keep rates low until 2014. Interest rates responded by getting even flatter. This policy change has caused a lot of negative press, for some good reasons, but I want to offer a somewhat different take on their motives.

Telling us that rates will stay low for another three years has a lot of negative implications. First, it says that the Fed…

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Edward Lack

Jan. 29, 2012, 12:50 p.m.

tangential comment:
I am a physician in the US. 42 years ago I was an intern at a hospital and had a hernia repair performed on myself. 36 hours later I was again on duty. Last week my son-in-law, a Canadian with a Fortune 400 company, had a hernia repair. He was given 6 weeks leave of absence before he returns to work. Could this have anything to do with malfunction of the world economy?

David Champeau

Jan. 28, 2012, 7:36 p.m.

The charts show that the central banks have become “pawn shops” as they try to keep the credit-based monetary system afloat by exchanging poorer quality assets for “money” (really Notes, as in someone’s liability). Soon it will be checkmate.

Alan Harris

Jan. 28, 2012, 1:11 p.m.

I see the Feds action far more simplistically. The US wants growth and employment. So they send a signal….We can’t enact trade barriers/import taxes; instead were giving you cheap loans to invest in growing your business to make them more competitive, which will employ more people and swell our tax coffers, so USA can service its debts through that growth.

As for Greece…they know that they have simply become the bullet in a Mexican stand-off. They will end up walking away and paying off the debt at 1% in devalued Draculars.

Peter Halligan

Jan. 28, 2012, 12:06 p.m.

Hi John, as always an understandable and topical read. As before I do take issue with a fixation amongst practically all commentators (including you) that somehow, the level of economic activity is somehow desirable and justified. Does it not follow that if a path of indebtedness pursued over decades by profligate governments via fiscal deficits has spawned a level of economic activity that is unwarranted? How is it bad to remove the excess activity caused by this profligacy via an evolved welfare democracy (buying votes with benefits). It used ot be that the Fed would provide the punch bowl at the party at a time when people were sober and remove it when they were drunk. Now they provide the punch when people are already drunk and are behaving atrociously via a corrupt political and banking system. In this sense corruption is the favouring of the few at the expense of the many. I maintain that the actions of central banks to allow banks to rebuild bank balance sheets whilst at the same time impoverishing the consumer is an act of corruption. I also maintain that current levels of economic activity are fraudulent since they are dependent of the perpetuation of the impoverishment of the consumer in favour a banking system, either via taxes or inflation or “haircuts” taken from savings. There is a level of economic activity that neither encourages corruption nor results in fraudulent economic activity sponsored by central governments who need voters to remain on benefits. The level of activity might be 40% below that currently entertained, it might be 20%. If Ireland is not yet growing it will be because it has not found the level of sustainable activity that can be afforded, or because it can never recover with the level of odious debt imposed on it by banks and the ECB.

Craig Cheatum

Jan. 28, 2012, 11:13 a.m.

In the US, I wonder to what extent the Fed is simply doing a digital transfer of dollar-based reserves to corporations and financial institutions in exchange for bad or risky assets?  Is it money printing (put in circulation) until the new found reserves are spent or loaned out—which is apparantly not happening to any great extent?  I seems like it could be a zero sum game at this point.  Also, couldn’t the assets being purchased by the Fed eventually be worth more than they paid?  It would be interesting to compare the Fed balance sheet trends (which began to grow in significantly 2009 to 3$ trillion now) with corporate balance sheet trends (could it be around 3$ trillion now). 

Craig Cheatum