Wednesday, December 17, 2008

Fed Non-Event

How does it feel runnin' around
'round
'round?
How does it feel watchin' from upside down?

(Slade, How Does It Feel?)

First of all, sad congratulations to myself. I predicted here, in January, Fed's rate below 1% by January 2009. Doesn't make me feel good.

Yesterday's target rate cut by Fed doesn't mean anything. Real rate, as reported here, was mostly below 0.5% for a long time and below 0.25% since December 5. Unfortunately, most commentators could even read Fed's statement right. "Quantitative easing" really means that nothing in Fed's arsenal is working. Fed is desperately trying to stop deflation by any means possible. It's flooding banks with money. And where is this money going? Treasuries are up, I'm not sure they were that high even during the Great Depression. OK, so a lot of dollars went for Treasuries. Dollar is down. It feels very wrong in deflationary environment. But there is a probable explanation: dollar carry trade. Trade to Euro zone, because almost nobody is lending to anybody else. Maybe China, but I wouldn't bet on it. Not Russia, not Latin America. I'm thinking if there is a way to make money off it, but dynamics are not obvious. The main problem though is that money is not going to where it's needed: businesses. And Great Depression 2.0 is not off the table exactly because businesses can't get credit. So what's next, uncle Ben? Direct lending to businesses? Throwing money down from helicopters?

Some time ago one of my articles was called "Why Doom And Gloom?". Now I see the answer. Well, there were successful businesses during Great Depression. There were great businesses launched during Great Depression. Doesn't mean I want to see GD 2.0.

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2 comments:

Joyful Alternative said...

What are the banks doing with all that money we gave them? My newspaper says construction has stopped on an addition to the Penn State Medical School and Hospital because they can't get a loan. Who's got better credit than a state land-grant university? So now a couple of hundred construction workers who could be working are unemployed, and there won't be a couple of hundred research-oriented job openings next year. The university has been promoting start-ups from their research results, and now this isn't going to happen.

There certainly isn't any sense to cutting the Fed rate to nothing if banks aren't lending money for productive purposes to entities with exceptionally good credit ratings.

Alex Filonov said...

They are doing dollar carry trade: sell dollars for other currencies and invest money at higher rates than available in US.