Let's see: The Fed is broke...so it "sells" 3 year Treasuries
(ie., it borrows more money), then it turns around and purchases
longer term securities with the money it just borrowed. Do I
have that about right?
In other words, the Fed borrows money to try and manipulate
interest rates. Is there really more to it than meets the
eye? Does this really stimulate anything? What am I
missing by not jumping for joy?
Posted by muslhead on 20th of Jun 2012 at 02:17 pm
This is akin to paying off your mastercard with your Visa. Does
nothing in the long run to fix your debt situation just allows you
to shuffle it around to make it look like you are making
progress.
True, but the 1 long-term benefit that nobody seems to discuss
is: our enormous national debt is getting re-financed at lower and
lower rates. So, all of the doomsayers who say our national debt's
interest payments alone will eventually crush us are missing the
saving grace of this continuing crisis. I am in no way defending
any of our policies - simply pointing that a better analogy is we
keep getting new credit cards with lower interest rates to pay off
the existing balances which does offer some benefit to the debtor
(us).
the due date for paying off the principal
amount on these securities gets shorter and shorter and
shorter...that's the ultimate killer. We don't have the money
to pay back the principal...never did. One day the game ends
when no one is willing to lend the US Government
money at 0.001%, hoping at best to get their money back from an
entity that needs to either borrow yet again or print money to
honor the obligation. The music is CERTAIN to stop at some
point, lower interest rates not withstanding.
RichieD, The Treasury always continuously rolls over our
debt in new debt instruments of varying maturation timeframes, so
the time is not getting shorter as long as the Treasury can
continue to sell long-dated bonds. In fact, they are now
re-financing long bonds at the lowest rates in history. Also,
we do have the means to pay off the debt, but it will be very
painful. Specifically, there is over $50T of accumulated wealth in
the US, so the US Govt could (if collapse and anarchy and
physical attacks on the rich were the alternatives) raise the
funds from extreme tax hikes (which is what we did after WW II when
we had a similar debt:GDP ratio). There is also an enormous
amount of wealth in Federal lands which could be auctioned, if
needed. Still, these are extreme measures which will not be pursued
as long as we can continue to rollover our debt. I agree that we
will have a huge problem if/when the music stops and the Treasury
can no longer sell new bonds. But, whenever I get convinced that
will happen (and that the US$ will also collapse), we see that the
rest of the developed world is equally bad off, and EVERYBODY
runs to the US$ and Treasuries when panic ensues. This will
continue to hold true as long as the US$ is the world's reserve
currency, backed by our military rather than gold. So,
while our current situation bad, it is not hopeless, and
Bernanke is doing whatever he can with this terrible situation.
The Essence of Operation Twist
Posted by RichieD on 20th of Jun 2012 at 02:12 pm
The markets love it...what a farce.
Let's see: The Fed is broke...so it "sells" 3 year Treasuries (ie., it borrows more money), then it turns around and purchases longer term securities with the money it just borrowed. Do I have that about right?
In other words, the Fed borrows money to try and manipulate interest rates. Is there really more to it than meets the eye? Does this really stimulate anything? What am I missing by not jumping for joy?
I think you hit the nail on the head
Posted by brophy on 20th of Jun 2012 at 02:36 pm
Your CNBC segment starts in 15 min.
This is akin to paying
Posted by muslhead on 20th of Jun 2012 at 02:17 pm
This is akin to paying off your mastercard with your Visa. Does nothing in the long run to fix your debt situation just allows you to shuffle it around to make it look like you are making progress.
gold is like paying debt
Posted by freddy123321 on 20th of Jun 2012 at 02:28 pm
gold is like paying debt with some rocks?
Operation Twist
Posted by sethbru on 20th of Jun 2012 at 02:23 pm
True, but the 1 long-term benefit that nobody seems to discuss is: our enormous national debt is getting re-financed at lower and lower rates. So, all of the doomsayers who say our national debt's interest payments alone will eventually crush us are missing the saving grace of this continuing crisis. I am in no way defending any of our policies - simply pointing that a better analogy is we keep getting new credit cards with lower interest rates to pay off the existing balances which does offer some benefit to the debtor (us).
True sethbru but...........
Posted by RichieD on 20th of Jun 2012 at 04:59 pm
the due date for paying off the principal amount on these securities gets shorter and shorter and shorter...that's the ultimate killer. We don't have the money to pay back the principal...never did. One day the game ends when no one is willing to lend the US Government money at 0.001%, hoping at best to get their money back from an entity that needs to either borrow yet again or print money to honor the obligation. The music is CERTAIN to stop at some point, lower interest rates not withstanding.
Totally agree....and when the music
Posted by wowten on 20th of Jun 2012 at 06:43 pm
Totally agree....and when the music stops don't be the one without a chair!
Twist
Posted by sethbru on 20th of Jun 2012 at 06:33 pm
RichieD, The Treasury always continuously rolls over our debt in new debt instruments of varying maturation timeframes, so the time is not getting shorter as long as the Treasury can continue to sell long-dated bonds. In fact, they are now re-financing long bonds at the lowest rates in history. Also, we do have the means to pay off the debt, but it will be very painful. Specifically, there is over $50T of accumulated wealth in the US, so the US Govt could (if collapse and anarchy and physical attacks on the rich were the alternatives) raise the funds from extreme tax hikes (which is what we did after WW II when we had a similar debt:GDP ratio). There is also an enormous amount of wealth in Federal lands which could be auctioned, if needed. Still, these are extreme measures which will not be pursued as long as we can continue to rollover our debt. I agree that we will have a huge problem if/when the music stops and the Treasury can no longer sell new bonds. But, whenever I get convinced that will happen (and that the US$ will also collapse), we see that the rest of the developed world is equally bad off, and EVERYBODY runs to the US$ and Treasuries when panic ensues. This will continue to hold true as long as the US$ is the world's reserve currency, backed by our military rather than gold. So, while our current situation bad, it is not hopeless, and Bernanke is doing whatever he can with this terrible situation.
of course, that is why
Posted by muslhead on 20th of Jun 2012 at 02:43 pm
of course, that is why this could go on a lot longer than we think before it explodes