Fed cuts rates quarter point to zero percent, is open for more

[FRED]

http://www.itulip.com/images/emergconsumcredit.jpg
Fed cuts rates quarter point to zero percent, is open for more

Central bank says it will cut rates as needed to boost economy

Last update: 4:52 p.m. EDT Oct. 30, 2009

WASHINGTON (MarketWatch) -- The Federal Reserve on Wednesday slashed overnight interest rates and left the door open for more cuts -- all part of an effort to return confidence to investors so that a cratered economy doesn't crater further.

In its statement, the Federal Open Market Committee said it had unanimously decided to cut its benchmark target interest rate by a quarter of one percentage point to 0% and clearly signaled it was considering further cuts. This signal came in a statement saying that the main risk facing the economy was weak growth.

The cut brings the funds rate to its lowest level ever.

“We are confident that the Cash Card program that we are coordinating with the Treasury Department has produced enough inflation but we are prepared to target negative interest rates–pay consumers to borrow–if necessary,” said Federal Reserve Chairman Ben Bernanke.

Congress passed the 2009 Emergency Consumption Stimulus Act in June 2009 issued every taxpayer an Emergency Consumer Credit Program Card with a $2,000 account balance to the US Treasury at a cost of $260 billion. To discourage saving, the only restriction on the use of the Program Card is that the balance cannot be transferred. To encourage continuous use, the account balance declines by $200 monthly so that at least $200 must be spent each month.

AntiSpin: Note the date, one year in the future. Zero percent is where we are headed and likely sooner than a year from now. Then what?

That’s when government gets really, really creative.

At one point the during Japan's 18 years of drifting in and out of recession the Japanese government issued coupons to Japanese consumers to spend, but the clever savings-minded Japanese purchased small items with the coupons and banked the change.

Our government will be more creative. Expect US issued credit or debt cards by 2010.

You heard it here first!

iTulip Select (http://www.itulip.com/forums/showthread.php?t=1032): The Investment Thesis for the Next Cycle™
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[don]

And before that a loosening of eligibility for food stamps (as per military families), a federal mortgage relief bill, extended unemployment benefits to historical lengths, consumer energy assistance (home & car) and additional federal health care subsidies, every one a substitute for wage and salary increases.

As predicted by iTulip, as in many 2nd or 3rd world countries, widespread government 'employment'.

Print, baby, print. :(

[Nervous Drake]

I believe it. It's really the next logical step. Man, the Fed sure is gaining a lot of clout these days.

What are the strings attached to such a deal? For being good and loyal citizens to the government of the United States, all of our needs will be taken care of?

I like to look at something like this in its extreme to understand the implications. If the US Fed issued a debit card to every American citizen that will cover the cost of food, shelter, and some entertainment, what's in it for the party on the other end?

What's the catalyst to break from this horrid system that is developing?

[Rajiv]

Sort of reminds me of a 19th century satire in Hindi by an Indian Playwright Baratendu Harish Chandra - "Andher Nagari, Chaupat Raja - Take ser bhaji, Take ser Khaja"

The title basically transliterated means - "Dark City, Bankrupt King -- buy anything for a dollar whether it be a Kia or it be a Ferrari."

[bart]

As predicted by iTulip, as in many 2nd or 3rd world countries, widespread government 'employment'.

Print, baby, print. :(


Currently, total US Federal, state and local government expenditures are about 47.5% of GDP - no, that isn't a typo.

[necron99]

Amusing [semi-] joke! What's more, it dovetails nicely and provides me an opportunity to inject some of my patented gloom and lugubrious doom!!

Anyone see this website before?

http://www.breadwithcircus.com/ecollapse.html

The author claims to have seen the Federal contingency plan for the scenario where the U.S. government officially defaults on its debts. I think he's right that the Feds must have such a plan -- they plan everything -- just, who knows if this is really it or not.

I'm not necessarily endorsing that this plan is true, in fact it's left-over from 2004 and predicts that Bush/Cheney will implement it before the 2008 elections. That's less than a week from now.

But it's an interesting thought exercise -- all the world's liquidity _is_ being eaten up to service U.S. debt, so what happens when we finally hit the wall? What would the government do and what plans are already being formulated?

The scenario in the web page dovetails with the fictitious "government debit card" here like this:

1) Feds declare "force majeure", after the Asian and European markets close, while Wall Street is still on lunch hour.

2) Over the course of a few days, panic selling shuts down all the world's markets.

3) Meanwhile, Feds parachute elite troops in to secure gold bullion in all Treasury locations. Current U.S. dollar is declared worthless around the world and, eventually, by the Feds themselves. This is accompanied by capital controls, gold ownership controls, and possibly martial law.

4) With no economic medium of exchange available, National Guard troops are ordered to secure the nation's food and fuel supplies in order to prevent looting and rioting, etc.

5) Feds issue electronic "New Bonar" debit cards!! All you economic productivity now belong to us. You still have perfect freedom, because Freedom is what we stand for in the good ole' U.S. of A.: you can use the "New Bonar" electronic cards to purchase food and fuel from your friendly neighborhood National Guard repository... or you can choose to starve.

I'm not ready to declare this as anything more than a thought experiment... but the current crop of politicians, on both sides of the aisle, have more than proved their willingness to intervene in the economy in order to protect existing economic power. Is it really that far from a $700 Billion + bailout of fictitious Wall Street wealth, to a wholesale takeover of the monetary system itself in order to keep the status quo up and running? Their other options are evaporating quickly.

[doom&gloom]

I am personally beginning to think we never get to ZIRP. The creativity of
the Fed in using all these wonderous new tools of the post-FIRE'd economy
may well allow them to escape ZIRP for all practical purposes.

[necron99]

Sorry folks, it's late and I'm sleep-deprived, the above scenario I posted is a bit speculative even for _me_, and that's saying something... not to mention, reducing the financial crisis to liquidity is too glib by half, also so is attributing the motive to "keep the status quo up and running"... half of iTulip is dedicated to asking "what happens when we hit the wall"; as I understand it, the more scholarly worst-case scenario is simply devaluation. So let's assume the next few commenters don't need to castigate me on those points, n'kay? Sorry, half-baked post. I was just amused when I saw such a detailed exploration of the martial-law scenario, just think of it as a reminder of other options still floating out there...

[Lukester]

Currently, total US Federal, state and local government expenditures are about 47.5% of GDP - no, that isn't a typo.

I hope Bill will forgive me for posting this link to a find of his from out of the select forums. There seems a reflexive conclusion that in a national implosion the unrelenting expansion of government debt and it's intrusion into the national economy is a self evident horror.

Tak 45 minutes out of your lives and listen carefully to this Japanese American Fed economist analyse the Japanese experiment - if nothing else, it should notably complicate our reflexive and too easy nostrums about how the "Banana Republicization of America in this emerging national depression will be ensured" by a growing government attempt at stimulus.

Dr, Koo seems a smart man with an inquiring and agnostic spirit, and makes a fascinating analysis. The conclusion? Many of our reflexively libertarian instincts in a national depression are just plain wrong according to a real life case-study - Japan. View it and decide for yourselves. For myself, the constant vituperation against government forays into stimulus and propping efforts are anything but a black and white case of right or wrong.

____________

Apologies to Bill for the repost without his express permission (t was a public archive). And thanks to him also for this great find.

Bill: Japan USA comparison, I posted before and highly recommend a listen.
http://www.csis.org/component/option...,view/id,1828/ (http://www.csis.org/component/option,com_csis_events/task,view/id,1828/)

[grapejelly]

Obama has come out in support of tax credits for the middle class...which amounts to more of the same tax policy...give government handouts to as many folks as possible. This is exactly what I expect to continue and get worse in the name of "stimulus".

[vinoveri]

http://www.itulip.com/images/emergconsumcredit.jpg

AntiSpin: Note the date, one year in the future. Zero percent is where we are headed and likely sooner than a year from now. Then what?

That’s when government gets really, really creative.

At one point the during Japan's 18 years of drifting in and out of recession the Japanese government issued coupons to Japanese consumers to spend, but the clever savings-minded Japanese purchased small items with the coupons and banked the change.

Our government will be more creative. Expect US issued debit cards by 2010.

You heard it here first!



How does this comport with Ka-Poom, i.e., what's inflation in Nov 2009?
Are these stimuli to create demand OR help folks pay for inflated consumables?

[we_are_toast]

Currently, total US Federal, state and local government expenditures are about 47.5% of GDP - no, that isn't a typo. http://www.bea.gov/newsreleases/national/gdp/2008/pdf/gdp308a.pdf

Total GDP 14.4T
Total gov (fed and local) 2.95T
% of Gov 2.95/14.4 = 20.4% ?

I heard 2 different people on 2 different networks say we would get to 0%. The expectations are there.

Nobody anticipated what FDR was going to do to resolve GD1, and I don't think we can anticipate what a pres Obama will do. My guess is we're going to see things we don't expect. The worlds financial system will need to be rebuilt and it won't look like it does today. We're in for some surprises and the hole that was dug may take a long time to fill in, but it won't get as deep as we expect.

[Rajiv]

From the New York Times - A Rate of Zero Percent From the Fed? Some Analysts Say It Could Be Coming (http://www.nytimes.com/2008/10/30/business/economy/30zero.html?_r=1&ref=business&oref=slogin)


WASHINGTON — Zero percent interest rates! It sounds like free money, or maybe a promotional deal from General Motors (http://topics.nytimes.com/top/news/business/companies/general_motors_corporation/index.html?inline=nyt-org) to get people to buy Hummers. Are zero rates coming to the Federal Reserve (http://topics.nytimes.com/top/reference/timestopics/organizations/f/federal_reserve_system/index.html?inline=nyt-org)?

Multimedia

http://graphics8.nytimes.com/images/2008/09/27/business/economy/Stockmarket.190.1.jpg
Interactive Feature (http://www.nytimes.com/interactive/2008/09/27/business/economy/20080927_WEEKS_TIMELINE.html)
Seven Weeks of Financial Turmoil (http://www.nytimes.com/interactive/2008/09/27/business/economy/20080927_WEEKS_TIMELINE.html)

Related

Concerned Fed Trims Key Rate by a Half Point (http://www.nytimes.com/2008/10/30/business/economy/30fed.html?ref=economy) (October 30, 2008)

Times Topics: Credit Crisis — The Essentials (http://topics.nytimes.com/top/reference/timestopics/subjects/c/credit_crisis/index.html)

As it happens, the Fed is surprisingly close to that point already. On Wednesday, the central bank lowered its target for the federal funds rate — the rate that banks charge each other on overnight loans — to 1 percent from 1.5 percent.

But in practice, the actual federal funds rate fluctuates slightly around its target as the Fed carries out its open-market operations in the money markets. And because banks and financial institutions have been so frightened about lending in the last month, the actual Fed funds rate has been below 1 percent for the last two weeks. On Tuesday, it averaged only 0.67 percent.

A growing number of analysts now predict that the economy is so weak that the Fed will have to reduce its official target to zero if it wants to jumpstart the stalled economy.

[don]

Japan Edges Into the Lead Over US :p

Japan's desperate £260bn bid to kick-start economy

Japan is to give emergency cash hand-outs to every household in the country regardless of whether they are rich or poor as a part of $260bn (£159bn) blitz to kick-start the world's second-largest economy and prevent a slide back into deflation.


http://www.telegraph.co.uk/news/worldnews/asia/japan/3286794/Japans-desperate-260bn-bid-to-kick-start-economy.html

[bart]

http://www.bea.gov/newsreleases/national/gdp/2008/pdf/gdp308a.pdf

Total GDP 14.4T
Total gov (fed and local) 2.95T
% of Gov 2.95/14.4 = 20.4% ?

I heard 2 different people on 2 different networks say we would get to 0%. The expectations are there.

Nobody anticipated what FDR was going to do to resolve GD1, and I don't think we can anticipate what a pres Obama will do. My guess is we're going to see things we don't expect. The worlds financial system will need to be rebuilt and it won't look like it does today. We're in for some surprises and the hole that was dug may take a long time to fill in, but it won't get as deep as we expect.


Those stats are incorrect or spun - they don't include everything like off budget spending etc. Fed/BEA link sources shown in chart below.
As anyone can also see, this is not a short term trend.


http://www.nowandfutures.com/images/govt_expenditures_to_gdp.png

[D-Mack]

I hope Bill will forgive me for posting this link to a find of his from out of the select forums. There seems a reflexive conclusion that in a national implosion the unrelenting expansion of government debt and it's intrusion into the national economy is a self evident horror.

Tak 45 minutes out of your lives and listen carefully to this Japanese American Fed economist analyse the Japanese experiment - if nothing else, it should notably complicate our reflexive and too easy nostrums about how the "Banana Republicization of America in this emerging national depression will be ensured" by a growing government attempt at stimulus.

Dr, Koo seems a smart man with an inquiring and agnostic spirit, and makes a fascinating analysis. The conclusion? Many of our reflexively libertarian instincts in a national depression are just plain wrong according to a real life case-study - Japan. View it and decide for yourselves. For myself, the constant vituperation against government forays into stimulus and propping efforts are anything but a black and white case of right or wrong.

____________

Apologies to Bill for the repost without his express permission (t was a public archive). And thanks to him also for this great find.

Bill: Japan USA comparison, I posted before and highly recommend a listen.
http://www.csis.org/component/option...,view/id,1828/ (http://www.csis.org/component/option,com_csis_events/task,view/id,1828/)

He says Bernanke has no clue about the Great Depression and I think he is right. But what were the causes of this balance sheet problems in Japan compared to the US ? He mentions the rating agencies, but what about derivatives in general?

[lurker]

I hope Bill will forgive me for posting this link to a find of his from out of the select forums. There seems a reflexive conclusion that in a national implosion the unrelenting expansion of government debt and it's intrusion into the national economy is a self evident horror.

Tak 45 minutes out of your lives and listen carefully to this Japanese American Fed economist analyse the Japanese experiment - if nothing else, it should notably complicate our reflexive and too easy nostrums about how the "Banana Republicization of America in this emerging national depression will be ensured" by a growing government attempt at stimulus.

Dr, Koo seems a smart man with an inquiring and agnostic spirit, and makes a fascinating analysis. The conclusion? Many of our reflexively libertarian instincts in a national depression are just plain wrong according to a real life case-study - Japan. View it and decide for yourselves. For myself, the constant vituperation against government forays into stimulus and propping efforts are anything but a black and white case of right or wrong.

____________

Apologies to Bill for the repost without his express permission (t was a public archive). And thanks to him also for this great find.

Bill: Japan USA comparison, I posted before and highly recommend a listen.
http://www.csis.org/component/option...,view/id,1828/

I took a look at the PDF and the thrust of it seemed to be reinforce something that John Mauldin previously argued:

"What would you rather, currency debasement or 40% unemployment (with all the attendant problems of societal collapse) ?"

Given this choice only the most hardened libertarian would choose the latter.

I, for one, would rather have some of my savings stolen by inflation, than be cowering in a bunker with a stash of food and an automatic weapon. Perhaps I don't have enough fighting spirit :(

Of course I would like to see a few high profile financial types sent to prison for a long long time to make me feel a bit better for the plundering of my savings.

[FRED]

I took a look at the PDF and the thrust of it seemed to be reinforce something that John Mauldin previously argued:

"What would you rather, currency debasement or 40% unemployment (with all the attendant problems of societal collapse) ?"

Given this choice only the most hardened libertarian would choose the latter.

I, for one, would rather have some of my savings stolen by inflation, than be cowering in a bunker with a stash of food and an automatic weapon. Perhaps I don't have enough fighting spirit :(

Of course I would like to see a few high profile financial types sent to prison for a long long time to make me feel a bit better for the plundering of my savings.

That's been the iTulip position since 1999: governments always choose currency depreciation and inflation over unemployment for the simple reason that the unemployed vote.

[sishya]

I hope Bill will forgive me for posting this link to a find of his from out of the select forums. There seems a reflexive conclusion that in a national implosion the unrelenting expansion of government debt and it's intrusion into the national economy is a self evident horror.

Tak 45 minutes out of your lives and listen carefully to this Japanese American Fed economist analyse the Japanese experiment - if nothing else, it should notably complicate our reflexive and too easy nostrums about how the "Banana Republicization of America in this emerging national depression will be ensured" by a growing government attempt at stimulus.

Dr, Koo seems a smart man with an inquiring and agnostic spirit, and makes a fascinating analysis. The conclusion? Many of our reflexively libertarian instincts in a national depression are just plain wrong according to a real life case-study - Japan. View it and decide for yourselves. For myself, the constant vituperation against government forays into stimulus and propping efforts are anything but a black and white case of right or wrong.

____________

Apologies to Bill for the repost without his express permission (t was a public archive). And thanks to him also for this great find.

Bill: Japan USA comparison, I posted before and highly recommend a listen.
http://www.csis.org/component/option...,view/id,1828/ (http://www.csis.org/component/option,com_csis_events/task,view/id,1828/)


Very Nice video form CSIS. I think everyone should look at this and see how events have matched. I think that is how the Treasury is going to do. Force our savings to US Bonds(or foreigners running to US Bonds), which will be used for public works. Now since all Governments will be doing the same and cannot depreciate their currency and export their way out of this individually, US Dollar may not fall much but little. This way the GDP may be near Zero but unemployment will not grow exponentially but only moderately if executed properly.

Anyway I think this is good to look at the events unfolding from all angles.
It is a good exercise to go through Dr.Koo's Video.

[Andreuccio]

governments always choose currency depreciation and inflation over unemployment for the simple reason that the unemployed vote.

...or riot.

[EasternBelle]

As far as I can see this famous economist has come to the iTulip conclusions.

1. Monetary policy is ineffective in balance sheet recessions
2. Options for government are - investments, preferably throughout the recession and dollar depreciation, with associated risks of inducing dollar run and higher interest rates and importing inflation. You have seen it at itulip first.

I find it telling though, that in all his great charts he does not refer to the different starting point in regards to household savings and budget deficits. If I understand correctly Japan had a Corporate Balance Sheet problem only. The US now has a consumer balance sheet problem, a growing government balance sheet problem and a banking balance sheet problem.

What I find amazing is though that the case is presented as if Japan has now basically come out of the dolldrums and is doing well. With their debt to GDP levels the highest in the world, their saving grace has indeed been relentless depreciation of the yen and in fact they did externalise a lot of their problems via the convenient carry trade.

Eastern Belle

[rj1]

I personally think it is likely we will reach "effective ZIRP", but the official interest rate will never go down to 0%, so the less-financially astute among the population don't know what's going on.

It was pretty much what we were doing when the interest rate was 1.5% and the effective rate was something like 0.67%. What's the effective rate nowadays?

[metalman]

I personally think it is likely we will reach "effective ZIRP", but the official interest rate will never go down to 0%, so the less-financially astute among the population don't know what's going on.

It was pretty much what we were doing when the interest rate was 1.5% and the effective rate was something like 0.67%. What's the effective rate nowadays?

.23% here... (http://itulip.com/forums/showthread.php?p=59344#poststop)

[The Outback Oracle]

I took a look at the PDF and the thrust of it seemed to be reinforce something that John Mauldin previously argued:

"What would you rather, currency debasement or 40% unemployment (with all the attendant problems of societal collapse) ?"

Given this choice only the most hardened libertarian would choose the latter.

I, for one, would rather have some of my savings stolen by inflation, than be cowering in a bunker with a stash of food and an automatic weapon. Perhaps I don't have enough fighting spirit :(

Of course I would like to see a few high profile financial types sent to prison for a long long time to make me feel a bit better for the plundering of my savings.

I don't quite figure how anyone thinks there is a choice between deflation (or zero inflation) and it's accompanying problems and high inflation and it's problems. The end result is the same.
Note i'm not arguling with EJ about what WILL happen.

[FRED]

I don't quite figure how anyone thinks there is a choice between deflation (or zero inflation) and it's accompanying problems and high inflation and it's problems. The end result is the same.
Note i'm not arguling with EJ about what WILL happen.

This might be worth a re-read.

Ka-Poom Theory is a Rhyme not a Repeat of History (http://www.itulip.com/forums/showthread.php?p=2905#post2905)

[rj1]

.23% here... (http://itulip.com/forums/showthread.php?p=59344#poststop)

So in other words, we are Japan.

I think we need to start ignoring the official rate. What's the official rate matter if it's not true to what's actually going on on the street?

The United States does not have its interest rates set at 1%, its interest rates are set at 0.23%. So we've essentially reached the "pushing on a string" point.

[bart]

So in other words, we are Japan.

I think we need to start ignoring the official rate. What's the official rate matter if it's not true to what's actually going on on the street?

The United States does not have its interest rates set at 1%, its interest rates are set at 0.23%. So we've essentially reached the "pushing on a string" point.

I suggest waiting a few more days to make that conclusion. Its fairly normal lately for the effective rate to be quite different that the official rate for a while after an official rate change.

[sirbrian82]

I tried to find the powerpoint presentation he was referencing to no avail. Any suggestions on where to find it?