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Fed can NOT print


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#1 pdx5

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Posted 30 December 2006 - 02:35 AM

Many people wrongly assume that Benny Bernanke and company can print any amount of dollars as the government sees fit. That is not exactly the reality UNDER THE CURRENT LAWS AS WRITTEN. There are basically two ways for government to cover the excess spending over tax revenues collected. When the US congress authorizes spending and it is signed by the president, the US Treasury can then issue Treasury obligations (notes, bills & bonds) to domestic and foreign lenders. If that is not sufficient to cover the authorized expenditures, then the Federal Reserve can issue Repo's to banks, which then the banks can loan out to customers. So, every dollar spent by the government must be covered by someone willing to pay cash to buy Treasury obligations or willing to take a loan from a bank which must be repaid with interest to the bank which then in turn can repay the Fed. The US treasury currently collects more taxes than are paid out in Social Security. The excess revenues are spent in the general budget and US Treasury obligations are issued to the Social Security account (pieces of paper essentially). Now let's say the economy slows down a lot due to the housing bubble bursting. Which could result in many people unable or unwilling to acquire bank loans. It would then follow that the Fed will be unable to issue Repo's in sufficient quantity. A drastic slowdown in economy would also put a crimp on domestic selling of Treasury obligations. A drop in interest rates paid out on Treasury obligations would also put a crimp in foreigners buying them. If this scenario became a reality, the government will be forced to curb spending UNDER THE CURRENT LAWS. But laws can be changed <sigh>. Atleast this is my understanding. Please correct me if I am wrong.

Edited by pdx5, 30 December 2006 - 02:37 AM.

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#2 greenie

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Posted 30 December 2006 - 03:24 AM

I do not agree on some points.


A drop in interest rates paid out on Treasury obligations
would also put a crimp in foreigners buying them.



drop in interest rate means demand for money (credit) is falling. It means there are too many lenders, but too few borrowers - quite opposite of what you said. Think about it.

Central banks of foreign goverments are political elements, not businesses. They will not care much about losing/gaining money, as long as their political needs are satisfied. If you do not believe me, check when British central bank sold their gold - right at the bottom.


If this scenario became a reality, the government will be forced to curb spending
UNDER THE CURRENT LAWS. But laws can be changed <sigh>.


Government will not curb spending due to any economic limit. US government's finances are in good condition and they can borrow lot more than what they have done without major financial damage. IF you hear reports from MSM, you will tend to think completely the opposite - 'US has too much debt and dollar is about to collapse' - total nonsense.

However, government will curb spending due to political pressure, because MSM convinced everyone that our budget deficits are precarious.

The place where I see real trouble is in the budgets of states and local governments. California, for example, is on the verge of bankruptcy, but nobody knows about it. It was going bankrupt in 2003, but got rescued by the tax money from housing bubble. People in Sacramento did NOTHING to help the budget.
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It's the illiquidity, stupid !

#3 pdx5

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Posted 30 December 2006 - 04:15 PM

drop in interest rate means demand for money (credit) is falling. It means there are too many lenders, but too few borrowers - quite opposite of what you said. Think about it.

Above is true in strictly business sense, but as you already pointed out, the govt is a political
animal. It will drop rates to stimulate the economy even though the actual business conditions
do not justify it, such as existing inflation rates. And if rates are dropped on Treasury instruments
to satisfy domestic political need, then foreign countries with excess dollars could shop elsewhere
for better returns. It's not just the foreign govt's who buy treasuries. There are Billions of US treasuries
bought by foreign individuals and businesses.
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