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FED TO KEEP A LID ON RATES THROUGH 2014

Posted on Jan 25, 2012
rosebennet (CC-BY) 

The Federal Reserve lent weight to economists’ warnings of a long and slow recovery on Wednesday when it announced plans to keep short-term interest rates near zero for at least the next three years. The idea is that low rates will encourage borrowing and investment in American businesses, helping resurrect the economy. —ARK

The New York Times:

The decision means that the Fed does not expect the economy to complete its recovery from the 2008 crisis over the next three years. By holding rates near zero, the Fed hopes to hasten that process somewhat by reducing the cost of borrowing.

“While indicators point to some further improvement in overall labor market conditions, the unemployment rate remains elevated,” the Fed said in a statement released after a two-day meeting of its policy-making committee. “Household spending has continued to advance, but growth in business fixed investment has slowed, and the housing sector remains depressed.”

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Filed under economy Federal Reserve the Fed Bernanke central bank interest rates recovery

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The Risk of Sovereign Debt

Mises Daily: Wednesday, December 07, 2011 by 

Collateral debt is in almost all cases collateralized by some asset. A mortgage is backed by the value of the house that it is borrowed against. Student loans are backed against the future earnings ability of the student (or their parents’ income and assets if cosigned). In almost all cases debt is collateralized by the asset that it is used to purchase.

Sovereign debt is slightly different, as no clear asset stands ready to serve as collateral. Instead, borrowing is backed by the future taxing capacity of the state. When investors purchase sovereign debt, they do so knowing that if their plans turn out wrong they will not be receiving some portion of that state’s assets as the consolation prize. They purchase the bond knowing that the ability to repay is conditioned by the future economic health of the country, and also by its future taxing power. As there is a general negative relationship between tax rates and economic health there is an upper bound on how much tax revenue can be raised in the future to pay off debts incurred today.

When we say that sovereign debt is “risk free,” we mean that there is no credit risk. A state is forever able to pay off its nominal liabilities in one of two ways: either it increases its taxes to raise more revenue (through direct taxes), or it monetizes its debt by increasing the money supply (an inflation tax).

Central banks are, by and large, granted some degree of operational independence in order to avoid the second circumstance. The inflation tax is an extremely attractive way for a state to pay for its liabilities. No one pays it directly, and hence there is a reduced chance for “taxpayers” to see the wealth appropriation. A government given direct control of the printing press has an incentive to give higher rates of inflation than the public desires, if only to pay off the debts it incurs. Central-bank independence removes this option.

Sovereign debt is not risk free; the real payoff may differ from the nominal promise. For domestic-debt holders, this arises when inflation occurs. For foreign-debt holders, this risk mainly arises through foreign-exchange risk. In either case the source is the same — inflation reduces the purchasing power of the currency of denomination and thus reduces the real value of the future payment.

Interest rates are set on sovereign debt with these risks in mind. Importantly, if direct default risk is minimized through the state’s future taxing capabilities, the lone risk remaining is through inflation or an adverse exchange-rate movement.

The advent of the European Monetary Union brought about an interesting change to the way that investors calculated these risks.

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Filed under economics economy politics sovereign debt risk collateral assets economic health tax rates tax revenue inflation central banks taxpayers currency interest rates European Monetary Union eurozone crisis

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The Fed Twists, The Market Shouts

October 03, 2011                                                                                           by Congressman Ron Paul

Last week the Federal Reserve began the second incarnation of “Operation Twist”, an attempt to drive down interest rates by purchasing long-term Treasury debt and selling short-term debt. This is just the latest instance of the central bank desperately flailing around doing something merely for the sake of doing something.  Fed officials still do not understand— or admit— that the Fed itself caused the financial crisis by driving interest rates too low and relentlessly expanding the money supply.  Thus, this latest action will just exacerbate the problem.

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The only way to return to a sound economy is for the Federal Reserve to cease and desist its monetary manipulation and allow interest rates to be determined by markets, just as the price of goods, services, and labor should be determined by markets.  Everything the Fed is doing by pumping money into the economy benefits only the insolvent, too-big-to-fail banks. Low interest rates encourage consumers to take on more debt, meaning more profits for the banks issuing those loans. Purchasing mortgage-backed securities, as the Fed has done, keeps housing prices inflated, helping the banks who have non-performing mortgages on their books.  However, it hurts consumers who continue to be priced out of the housing market. In order to maintain a decent standard of living for the American people and to restore the vibrancy of the U.S. economy, it is time to end the Fed.

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Filed under politics economics economy news Ron Paul Federal Reserve Fed Operation Twist central bank money manipulation interest rates Treasury debt financial crisis End the Fed

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When There's Nothing Left to Lose

This is an important, well-written editorial by an American economist with experience both in Washington and on Wall Street. He proposes that the policies of Wall Street brought about the offshoring of a huge number of American jobs and the policies of the US government continue to maximize the unemployment rate of American citizens. There are so many excellent ideas in this piece it begs to be read in its entirety. What follows is simply the handwriting on the wall suggested by the final paragraph of the article.

Saving the Rich, Losing the Economy

by PAUL CRAIG ROBERTS

SEPTEMBER 26, 2011

For four years interest rates, when properly measured, have been negative. Americans are getting by, maintaining living standards, by consuming their capital. Even those with a cushion are eating their seed corn. The path that the US economy is on means that the number of Americans without resources to sustain them will be rising. Considering the extraordinary political incompetence of the Democratic Party, the right wing of the Republican Party, which is committed to eliminating income support programs, could find itself in power. If the right-wing Republicans implement their program, the US will be beset with political and social instability.  As Gerald Celente says, “when people have nothing left to lose, they lose it.”

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Filed under economy economics politics economic policy policymakers banks austerity interest rates support programs

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Twist Paves the Way for QE III

from europac.net

By:  Peter Schiff

Friday, September 23, 2011

From my perspective, the Twist really amounts to another Fed “Hail Mary” pass that will fall short of the end zone. But, by putting the squeeze on banks and further restricting credit availability to small business the move will likely do more harm than good.

The policy rests on the false premise moving already historically low interest rates even lower will stimulate the economy into recovery. But low interest rates are part of the problem, not part of the solution. 

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Filed under economy economics stimulus recovery Federal Reserve Fed Bernanke Peter Schiff Operation Twist interest rates