Wikinvest Wire

Turning Japanese I really think so

Sunday, November 16, 2008

As most of you probably already know, with the "effective" Fed funds rate much closer to zero percent than to the one percent prescribed by the "target" short-term rate , the Federal Reserve has already edged closer than ever before to a dreaded ZIRP (zero interest rate policy).

A ZIRP really isn't that bad, unless of course you're a saver, in which case the disparity between "real-world" inflation and the numbers concocted by governments in their "official" version of the same will end up eating you alive over time.

For banks and hedge funds, ZIRPs are great because they're a cheap source of funding for all kinds of wild speculative bets that are bound to inflate another asset class eventually.

As discussed in this report in The Economist, we are turning Japanese:

REMEMBER Japan’s zero interest rates? America is almost there too. Since October 29th, the target for the federal funds rate has been at 1%, but the rate at which funds actually change hands, known as the “effective rate”, has averaged around 0.25% (see chart).

The Federal Reserve does not always hit its target on the nose but the size of the gap is extraordinary. If it persists, any decision to lower the target further would be meaningless since it would not affect the rate banks actually pay.

Normally, the Fed keeps the funds rate on target by draining from or adding to the reserves that the banks hold with it. But the Fed has extended huge loans to banks and others to loosen up the credit markets, creating more reserves than it can drain. So to keep the fed funds rate up, it has, since November 6th, been paying interest on excess reserves at the full target rate of 1%.

Even so, the effective rate remains stubbornly low. One explanation is that the quasi-governmental home-loan banks and mortgage agencies have been lending to banks at rock-bottom rates. Another is that there are so few transactions that the effective rate has become an imprecise gauge.

The irony is that, were the gap to disappear, there would be a de facto tightening of monetary policy. On the other hand, if the effective rate remains near zero, the Fed will have to turn to more unconventional means of stimulating growth. Michael Feroli of JPMorgan Chase proposes outright purchases of mortgage-backed securities—another faint echo of Japan.
Well, not to worry.

Those "unconventional" means of stimulation are right around the corner.

They've got a whole playbook full of them that they never got to try out. They were developed about five years ago, just before a resurgent housing market rescued a floundering economy from a deflationary abyss and then went on to become an even bigger asset bubble than the one it supplanted.

With no new asset bubble waiting in the wings at the moment, it looks like the playbook will be used this time around.

ooo

This week's cartoon:

8 comments:

ButwhatdoIknow said...

To paraphrase Clemenceau--"Money creation is too important to be left to the bankers." Soon the government will get serious about distributing created dollars to the general populace, rather than through banking intermediaries. . . that will work as long as the foreigners still need dollars.

Freesia Realtor Mike Stewart said...

I think spending is the way forward. Oil and other commodities are falling and inflation is not a concern. There is a crisis of confidence. Governments need to spend to get things going again. I am a Downtown Vancouver Realtor and the real economy here is still robust from what I see everyday. That said we here in Canada have been running budget surpluses for years and had a higher level of regulation that precluded the excesses like in the US.

Anthony J. Alfidi said...

There's no more "unconventional" stimulus than printing money to buy paper assets that are essentially worthless. Furthermore, there's nothing to prevent the Fed from writing off the loans it has already made if the collateral (junk assets) goes to zero. Voila! Inflationary stimulus accomplished.

Owner Earnings said...

15 reasons the US economy will get worse: Link Here

dearieme said...

"we here in Canada have been running budget surpluses for years and ...precluded the excesses like in the US": you'll soon be able to buy large parts of the US then. Which bits do you fancy: somewhere warm to overwinter, perhaps? Or, thinking more expansively, Cuba may soon be available for purchase.

Anonymous said...

Which bits do you fancy:

The US would gladly sell Michigan to Canada. But would they take it?

Cdn in US said...

Counterpoint: the biggest problem with Canada is most Canadians think socialism actually works.

Canadian economy ~ 35M people + huge resource reserves. Mostly, does well in a resource boom. Does not do well in a resource bust.

williambanzai7 said...

WE'RE TURNING JAPANESE
(Turning Japanese, The Vapors)
WilliamBanzai7

Sing along link: http://video.google.com/videosearch?q=turning+japanese&oe=utf-8&rls=org.mozilla:en-US:official&client=firefox-a&um=1&ie=UTF-8&ei=I1SnSeeUCMPDkAX694TJDQ&sa=X&oi=video_result_group&resnum=4&ct=title#

We've got a Century's worth of horrendous economic news
You wrote "We love you" We wrote back "we too"
We sit here staring at Bloombergs, there's nothing else to do
Oh it's in color the DOW keeps going down
Our eyes are glazed And our deficit is flying in the clouds
Now we can kiss our own depressed Asset Bubble goodbye when there's no one else around

We've got a picture, We've got your picture
Like a million years of stagnant economic hell
We want a doctor to take your picture
So we can look at your Lost Decade from inside as well
You've got us turning up and turning down
And turning in and turning 'round

We're turning Japanese
I think We're turning Japanese
I really think so
Turning Japanese
I think We're turning Japanese
I really think so
We're turning Japanese
I think We're turning Japanese
I really think so
Turning Japanese
I think We're turning Japanese
I really think so

No loans, no bonus, no jobs, no women
No fun, no sun, no good news, no wonder it's dark
Everyone around us is in layoff danger
Investors all avoid us like a cyclone ranger

That's why We're turning Japanese
I think We're turning Japanese
I really think so
Turning Japanese
I think We're turning Japanese
I really think so
We're turning Japanese
I think e're turning Japanese
I really think so
Turning Japanese
I think We're turning Japanese
I really think so

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