Saved By Zero

Whatever It Takes
By James Turk
The Fed would have us believe that low interest rates and easy money will solve today's monetary and economic problems. It was of course low interest rates and easy money that put the US - and much of the world - into this monetary and economic mess in the first place. Is it reasonable to expect that the cause of today's problems is also the cure? No, of course not, and the Fed knows that too. But there is some method to their madness.

They hope - and it is nothing more than that - that low interest rates and easy money will spur consumer confidence, causing banks to lend and people to go out and spend. It won't work though, as can be easily proven by picking up a good textbook or two. Monetary history makes clear the recurring boom/bust cycle.

Banks lend too much, creating the boom. The bust then follows after it becomes clear that the boom was built upon easy credit that fostered bad decisions.

We have had the boom. We are now in the bust. We have moved from a period of over-spending and over-borrowing to one in which the bad loans and bad decisions from the boom years come home to roost, creating the bust.

The Federal Reserve wants us to believe that the sole problem reverberating throughout the world is simply a lack of liquidity, but it is nothing of the sort. It is in fact one of solvency. Most banks and many consumers and companies are over-extended, and their precarious financial position cannot be put right with newly created dollars.

What's needed today is the same medicine that has over time inevitably cured every other bust. It is capital and savings, and unfortunately, they are in short supply in today's America. But the Federal Reserve will not be deterred from pursuing the reckless path it is on. They seem to think that they can avoid the bust, and further, that the economy can emerge unscathed from years of imprudent and reckless credit extension by the banks.

History says the Fed is mistaken, but history also tells us something else. The consequences of the Fed's actions will debase the dollar, perhaps irreparably so.

Since last month's peak in the Dollar Index, gold has climbed 6.3%, while silver did even better. It has climbed 12.6%. These precious metals are clearly the place to be, given the path of monetary debasement being taken by the Fed.
http://goldmoney.com/en/commentary.php#current

Fed’s new strategy to cut cost of borrowing
With US interest rates now virtually zero, the Federal Reserve is deploying a range of new and unorthodox tools. But its objectives remain the same: to limit the severity of the recession, and over time achieve low unemployment and price stability.

The Fed can still stimulate the economy by reducing the actual borrowing costs facing households and companies. These remain high even though the so-called Federal funds rate set by the Fed – the rate banks charge to lend each other surplus reserves overnight – is now fixed in a range from zero to 0.25 per cent.

The Fed wants to reduce borrowing costs in real (inflation-adjusted) terms. So it also has to ensure that people do not start to expect deflation, or falling prices.

There are three basic elements that make up real borrowing costs. The risk-free rate represented by the yield on a government bond of similar duration, the risk premiums or “spreads” charged to households and companies and the expected inflation rate.

The Fed’s new strategy targets all three. But it is primarily focused on risk spreads, because spreads are abnormally high, whereas risk free rates are quite low, and the Fed still does not believe there is a big deflation risk.

In normal times this would be dangerous, because it would risk fuelling inflation. However, increasing the money supply is helpful today, because it guards against the possibility of deflation – falling prices – in the future.

Will it work? Theory suggests that if the Fed is willing to print enough money to buy enough assets it can avoid sustained deflation – though it might have to go to extremes to do so.

The harder question is to what extent the Fed’s unorthodox policies will succeed in restoring growth. Some options – such as buying mortgage-backed securities to push down home loan rates – look promising.

However, the Fed’s ability to expand its credit operations is limited by its need for Treasury to provide capital to take on the credit risk associated with non-government (or quasi-government) lending, as well as practical and human constraints.

The Fed does not know what exact combination of factors explain today’s high risk spreads. If factors other than liquidity risk explain much of the risk spreads, then Fed operations may not reduce spreads as much as it hopes – unless it becomes the market by buying assets.
http://www.ft.com/cms/s/0/a9c6ac20-cc7b-11dd-acbd-000077b07658.html

Japan central bank cuts key rate to 0.1 percent
TOKYO (AP) -- Japan's central bank cut its key interest rate to 0.1 percent on Friday, joining the U.S. Federal Reserve in lowering borrowing rates to nearly zero amid an ever-worsening outlook for the global economy.

The Bank of Japan also introduced new steps to thaw a growing credit crunch for companies.

The bank said it plans to start buying commercial paper -- the short-term debt firms use to pay everyday expenses -- in an effort to funnel cash directly to firms and will increase its purchases of government bonds to 1.4 trillion yen ($15.7 billion) per month from 1.2 trillion yen ($13.4 billion).

Bank of Japan Gov. Shirakawa said recent foreign exchange fluctuations factored into Friday's rate cut.

"A stronger yen affects the economy in multiple ways," he said. "But our decision was not based solely on the yen. Rather, we focused on the overall economic picture."

The Japanese currency's dramatic surge this week has triggered strong language on the political front, with government officials dropping hints at possible intervention to limit the yen's climb and protect Japanese exporters.
http://biz.yahoo.com/ap/081219/as_japan_central_bank.html

Yen Recovers After Dip Against Dollar
TOKYO -- The yen dipped against the dollar in Asia Friday after the Bank of Japan cut its key interest rates in response to the economic downturn, but continued concern over the U.S. economic outlook caused the Japanese currency to quickly recover.

After Japan's central bank cut its overnight call rate target to 0.1% from 0.3%, the U.S. currency briefly moved up to ¥89.63 from ¥89.29, but then soon headed lower again.

Following the U.S. Federal Reserve's move Tuesday to lower its own policy rate to effectively 0%, the BOJ's policy loosening means the interest rate gap between the U.S. and Japan has narrowed, something that should usually reduce upward pressure on the yen.

But traders said with the gap now nearly gone, the market has instead focused on the two countries' economic outlook, and that's prompting them to sell dollars.

"The dollar won't be able to rise far above ¥90 because many players are still interested in selling the dollar there," said Yuji Saito, head of FX Group at Societe Generale.
http://online.wsj.com/article/SB122966823951421347.html?mod=googlenews_wsj