Bernanke Leaves Fed with Record Balance Sheet of 4.1 trillion

[GaiaHunter]

Deflation is an issue in a consumer driven economy. During times of deflation it is advantageous to hold onto money instead of spending it as it gains value. This further drives down economic output and drives up deflation. Hence the deflation spiral. If I got this wrong I am sure somebody will be by to correct me.

Deflation caused by shrinking purchasing power is bad.
Deflation caused by increase of available products is good.

That is why despite everyone knowing that in 1 year that iphone is going to be half price and replaced by a better version you see queues to buy at release.

People buy products when they decide the price they are paying is worth it.
Will you buy a 4K monitor at $10K?
I wont, some people will.
But advances and mass production will mean some will buy it at $1000 and some will buy it at $500.

It is also a silly notion that a bankrupt costumer base is better than a costumer base with savings.

Sure, customers not buying is bad for companies already out that have trouble reducing the cost of their products/services.

But customers with money are a prime target for new products/services.

Also, if you have money you won't stop buying food, energy or pay your rent just because tomorrow they will be cheaper.

 

[Darwin333]

Can you point me to what credible economic research you are basing this opinion on? I'm unaware of any credible source that believes central banks have such fine tuned control over inflation rates or thinks the fed has such an ability.

Are you saying that if the Fed targeted a 0% inflation rate that they do not have the tools nor ability to prevent runaway death spiraling deflation? How is it that they are able to target positive inflation yet we aren't at severe risk of runaway hyperinflation?

We live in the new modern economy where computers can track things in real time and down to a gnats ass. The Fed puts out quarterly reports that tracks their inflation goals in which they can tweak things and in normal economic conditions (as in not going to hell in a handbasket) it isn't very hard for them to introduce inflation in order to stave off a very very small (tenth of a percent) amount of deflation. This is something that the Fed has proven that they can do over and over and over again, causing inflation is rather easy for them at this point.

Sure, we can be honest about it. That's not why it is done. Period. Punkt. Full Stop. End of Story. This is not only not adopted by every industrialized country on earth regardless of debt levels, it is also recommended by organizations such as the World Bank and the IMF. Not only do banks lose their ability to respond to economic shocks with an inflation target of zero, but as previously mentioned there are extreme risks with hitting the zero lower bound. That is why central banks do this, and this is what the economics literature supports.

And why is it recommended by the "experts" such as the world bank and IMF? Exactly how does a bank lose the ability to respond to economic shocks if the currency that they hold has the same value as it did last year and the year before that? I am sorry but I just don't see how banks require the product that they hold to continually lose value. How exactly would that cause hell on earth because the shit that has been sitting in their vaults (or 1's and 0's these days) is worth the same thing as when it was put in there instead of less?

Saving money is not a bad financial idea.

Today it is. If you save money you are quite literally losing value every single year. How exactly is losing value by doing nothing other than holding onto your money a good financial idea?

I'm really not sure where you got these ideas but you seem to have gotten some really bad economics information somewhere.

Then please enlighten me with actual reasons and not just statements. I don't care who said what, I want to know why our currency needs to continually lose value in order to stave off world wide destruction.

 

[Tango]

Are you saying that if the Fed targeted a 0% inflation rate that they do not have the tools nor ability to prevent runaway death spiraling deflation? How is it that they are able to target positive inflation yet we aren't at severe risk of runaway hyperinflation?

Check a graph of quarterly inflation data. See how often you are one, two or sometimes even five percentage points off target. It is radically different to have two points of buffer before you hit deflation, and it also changes dramatically the way you need to react to off-target readings.

My advice is: read a book on central banking, such as the Gali manual mentioned above.

 

[Darwin333]

Check a graph of quarterly inflation data. See how often you are one, two or sometimes even five percentage points off target. It is radically different to have two points of buffer before you hit deflation, and it also changes dramatically the way you need to react to off-target readings.

My advice is: read a book on central banking, such as the Gali manual mentioned above.

Please quantify what you mean by "5 percentage points off target". If you mean that the fed is targeting 1.5% inflation and those quarterlys show 6.5% then I don't recall seeing that in my lifetime.

Regardless, they seem to be able to, or at least claim to, hit their own targets within a rather narrow margin quarter after quarter. Are they so incompetent that the number must be positive for them to hit it? Do they, the masters of the economy, not have a clear understanding of the zero yet?

As it is, they aim for say 1.5% and they might hit 1.6% or 1.4%. Are you saying that -.1% versus 0 or +.1% would truly be the end of the world? Or is the Fed simply not good enough to follow their charter, which btw is law?

How do you honestly argue they can and should keep it stable at +1ish% but will utterly fail, causing Armageddon, if they even thing about trying to keep it at 0? I am not sure if yall have way to much faith or not enough.

 

[Tango]

Please quantify what you mean by "5 percentage points off target". If you mean that the fed is targeting 1.5% inflation and those quarterlys show 6.5% then I don't recall seeing that in my lifetime.

Regardless, they seem to be able to, or at least claim to, hit their own targets within a rather narrow margin quarter after quarter. Are they so incompetent that the number must be positive for them to hit it? Do they, the masters of the economy, not have a clear understanding of the zero yet?

As it is, they aim for say 1.5% and they might hit 1.6% or 1.4%. Are you saying that -.1% versus 0 or +.1% would truly be the end of the world? Or is the Fed simply not good enough to follow their charter, which btw is law?

How do you honestly argue they can and should keep it stable at +1ish% but will utterly fail, causing Armageddon, if they even thing about trying to keep it at 0? I am not sure if yall have way to much faith or not enough.

I think you should have a look at an annualized monthly inflation rates table such as this:

http://www.usinflationcalculator.com/inflation/historical-inflation-rates/

There is way more volatility than you think. We are not talking about 0.1% differences. We are talking about going from 5.6% to -2.1% in exactly one year (July08-July09).

Now move that interval down 2 percentage points and think what it would mean (as it was we stayed in deflation for 7-8 months in 2009).

Maybe you do not fully understand how important it is we stay in positive territory. It is not a linear scale, so to speak. Right now if you target 2% it's the same if you get a + or - 0.5% (something quite common as you can see on the table). If you were targeting 0% a 0.5% negative difference would already be a serious problem.

What would follow would be a much increased volatility because your policy response would have to be much more frantic as you have no safety margin.

Again: read a good manual and you'll understand.

 

[Tango]

I'll elaborate a little. The economy has quite a few positive feedback mechanisms. For example, as soon as you hit negative inflation rates investments fall, as credit becomes more expensive to maintain in real terms. This feeds back creating more deflationary pressure (and worsens employment and output; puts negative pressure on inflation expectations... All of which create more deflationary pressure...)

The reason why the job of central banks is so hard is because it is a problem with multiple unstable equilibria, and the stakes are so high you always want to err on the side of caution and guarantee safety margins that buy you the possibility of affording prudent policies.
Making the system more unstable is the last thing you want, especially when you consider worst case scenarios.

 

[fskimospy]

Tango, thanks! You have put it more clearly than I would have. Hopefully it makes an impression.

 

[LegendKiller]

Are you saying the fed does not own the mortgages in those securities?

No, the Fed does not own the mortgages. Nor do they own the property. They own a bond that has a lien on the mortgage which is secured by a lien on the property.

They cannot take the mortgage unless the securitization fails to pay principal when due (Event of Default), nor can they take the property unless the borrower defaults on the mortgage and there is a foreclosure.

Do you know anything about anything? Have you even ever read a Sale and Servicing Agreement or an Indenture?

No, you haven't. You run around talking in simplistic language to try and froth up people.