Politically the Fed's have to take what' s considered "correct" actions or face electoral problems for the ruling elites lackeys. Running deficits scares the shit out of the average guy because doing so unchecked in his household leads to ruin. In government usage it simply transfers debt from one side of the accounting ledger to another.
For instance, my grandson, who lives with me, borrows money from me and buys a computer game bringing a little more wealth to my household. Even though it's a debt. When he pays it back no real change has occurred other than the increase in wealth. We now have a computer game. If he doesn't pay it back I have a deficit.
I still have the increase in wealth.
But if gives the game away in debt is where the problem lies as we've lost the asset and and now show a trade deficit. If the party he gave or traded it to doesn't reciprocate in kind we become poorer.
It's the same if the country runs trade deficits.
As far as we can tell right now the government has decided to buy or refinance every bad mortgage to re-inflate the economy but no real effort to improve our middle class which means manufacturing and selling to our creditors overseas. Until then, we're fucked!
As I've posted a time or two before:
The Automatic Earth: December 27 2009: Eyes wide open and pedal to the metal
For instance, my grandson, who lives with me, borrows money from me and buys a computer game bringing a little more wealth to my household. Even though it's a debt. When he pays it back no real change has occurred other than the increase in wealth. We now have a computer game. If he doesn't pay it back I have a deficit.
I still have the increase in wealth.
But if gives the game away in debt is where the problem lies as we've lost the asset and and now show a trade deficit. If the party he gave or traded it to doesn't reciprocate in kind we become poorer.
It's the same if the country runs trade deficits.
As far as we can tell right now the government has decided to buy or refinance every bad mortgage to re-inflate the economy but no real effort to improve our middle class which means manufacturing and selling to our creditors overseas. Until then, we're fucked!
As I've posted a time or two before:
The Automatic Earth: December 27 2009: Eyes wide open and pedal to the metal
But in case you were starting to think that we bring only sorrowful tidings, here's a ray of light for you. For Wall Street, things may not be all that bad. Not at all. The major US banks, as their European counterparts, have access to enormous amounts of funds (yours) at ultralow interest rates. All they need to do is borrow at one of the Fed windows, walk across the street (I know they don’t have to do that, but I'm going for the George Bailey era image here) and buy themselves some Treasuries.
In practical terms, say Bank (of) A borrows $1 billion at 0.25% from the Fed, and buys Treasuries that pay 5.25% (oh yes, we’ll get there, and beyond). All a banker needs to do is sit back, or play golf, and make 5%, or $50 million, on that $1 billion. Since it’s that easy, why not borrow, say, $200 billion, leverage that 10-fold, buy the $2 trillion in Treasuries, and make $100 billion just for sitting still?
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