Continuing on the topic of quantitative easing and monetization of debt, this month (November, 2010) "The FED" aka Federal Reserve Bank, began purchasing $600 Billion of U.S. Bonds.
From the Article:
"With the government's fiscal stimulus expired, and with little hope of additional stimulus spending being approved by Congress in the near future, the Fed had to take action in an attempt to reduce the high U.S. unemployment rate and avert deflation.
But with benchmark interest rates near zero, and after an earlier program to buy $1.7 trillion worth of securities failed to reduce unemployment, the Fed announced last week its unconventional monetary easing plan of buying $600 billion worth of longer-term bonds through June. The plan has been highly criticized."
Posted Nov 03, 2010 04:19pm EDT by Daniel Gross in Investing, Banking, Politics
"As the nation’s central bank, the Fed can create money and simply announce that it will buy large quantities of bonds."
Sooooo, The Fed, as the central U.S. Bank is called, can essentially print money, use that money to buy up whatever it wants. In this case, bonds are the purchase target, with the purpose of driving down interest rates. Not the rates you or I as every day citizens are charged, mind you, but interest rates the banks charge each other for loans, overnight, short term, etc... the intent being to drive those rates down so banks stop holding onto assets and begin loaning again.
Oh, and don't forget, the $1.7 Trillion innitial attempt failed, so let's try a smaller, second attempt! What was the quote? Ah... yes, grasshopper... "If you keep doing what you've always done, you'll keep getting what you've always gotten."
The victims of course, are again, you and I, and even more specifically, those aiming to retire, possibly on fixed incomes. When interest rates go down, so does the interest your money makes while in the possession of banks (savings, cash deposits, investments, etc) so it becomes very difficult to make more money with your money.
Of course, you can pull all your money out of the bank, and invest it in the very volatile, relatively high risk stock market, but after so many people had their pensions and 401k plans wiped out recently, many are leary of that. Overall, the everyday citizen makes less savings, so is inclined to save less, which is what most in the government want, to spur growth, by encouraging you and I to spend, spend, spend... irregardless of our desires to save money these days, for a rainy day. Seems like a lose/lose proposition for us...
But it gets worse!
When countries perceive America (or any country) as monetizing it's debt, they start to shy away from investing in our country, loaning our country money, and worst part of all... dumping our currency. This is of EXTREME importance for America, as the U.S. Dollar is THE world reserve currency for trading. If Argentina monetizes it's Peso, or if the EU monetizes the Euro, or if Russia monetizes the Ruble, or China the Yuan... it has repurcussions, but not on the global scale as our Dollar, which is driving the world trade and currency exchange, for the time being...
It would be a bad omen, if major nations moved away from the Dollar, showing a lack of faith in it. I hope that never happens. Oh wait... almost forgot about:
St. Petersburg, Russia - China and Russia have decided to renounce the US dollar and resort to using their own currencies for bilateral trade, Premier Wen Jiabao and his Russian counterpart Vladimir Putin announced late on Tuesday.
Nov 26 (Reuters) - Russia's Prime Minister Vladimir Putin said on Friday that the global economy should move away from excessive reliance on the dollar as a reserve currency.
It is only for bi-lateral trade between the two superpowers for now, but when major players like China and Russia choose to strengthen their own currencies and snub the world's reserve currency, and when Russia shortly after, calls for moving away from the dollar and leaning towards the Euro for the world's reserve currency, dark clouds lay ahead...