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Fed Will Boost Balance Sheet by $500 Billion: Survey

Kushinator

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The Federal Reserve will boost its balance sheet by about half a trillion dollars over a six-month period beginning in November and keep it inflated for up to a year, according to a survey of leading markets participants by CNBC.

About 70 percent of the 67 respondents, which include economists, strategists and fund managers, believe the Fed will begin quantitative easing again.

Of those, 80 percent believe the Fed will start before the end of this year. November is seen as the most likely month for the Fed to restart asset purchases by 38 percent of those who took the survey, but December was a close second with 32 percent.

“The trigger for the resumption of quantitative easing late this year will be an increase in unemployment back into double-digits,” wrote Mark Zandi, of Moody’s Economy.Com. He thinks the Fed will act in December and ultimately purchase an additional $1 trillion in assets.
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The talk among experts is that the Fed is targeting interest rates for the sake of inducing inflationary expectations. Such a strategy could flatten an already flat (relatively) yield curve to the point where it resembles that of Japan's (1 year: 0.12, 5 year: 0.3, 30 year 1.87), although i doubt it will go to such an extreme as Japan is facing its own set of unique issues that is responsible for their price stagnation.

Edit: I should have provided the charts.



 
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washunut

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The talk among experts is that the Fed is targeting interest rates for the sake of inducing inflationary expectations. Such a strategy could flatten an already flat (relatively) yield curve to the point where it resembles that of Japan's (1 year: 0.12, 5 year: 0.3, 30 year 1.87), although i doubt it will go to such an extreme as Japan is facing its own set of unique issues that is responsible for their price stagnation.

Edit: I should have provided the charts.



This will almost certainly have a bad ending for Americans. The only deflation is in housing. So the Fed is willing to induce inflation which hurts the poor and people on fixed incomes the most.

As far as Zandi is concerned I think it is important to remember that he works for Moodys. This large rating agency was one of the key enablers of the housing bubble. The administration has not yet taken on the rating agencies so he has turned into a leading economist flunky for this administration.

What is the saying. Fool me once shame on you, shame me twice.....
 

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They are purchasing treasuries I presume? Do they have any detail about what they intend to buy, or is that always kept quiet? I am a rookie so I just don't know.
 

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This will almost certainly have a bad ending for Americans. The only deflation is in housing. So the Fed is willing to induce inflation which hurts the poor and people on fixed incomes the most.

As far as Zandi is concerned I think it is important to remember that he works for Moodys. This large rating agency was one of the key enablers of the housing bubble. The administration has not yet taken on the rating agencies so he has turned into a leading economist flunky for this administration.

What is the saying. Fool me once shame on you, shame me twice.....
That is not true.

 

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They are purchasing treasuries I presume? Do they have any detail about what they intend to buy, or is that always kept quiet? I am a rookie so I just don't know.
Yes, treasuries.

It is all speculation at this point. But in order to further entice inflation expectations, they will have to purchase a bit farther out on the curve. The 2 year is near an all time low (which was mentioned in Bernanke's helicopter speech), so my guess is they will primarily target between the 5 and 10 year treasuries.
 

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Most expect that if the Fed does initiate another round of quantitative easing, they will purchase Treasuries in the 2 - 10 year range, which is the maturity range they specified for the re-investment of the proceeds of maturing/principal/interest income from the existing portfolio. However, there is a significant probability that they will extend this maturity range to include 30 year Treasuries as well. Expectations are center around purchases of $100 B per month for about five months.
 

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Most expect that if the Fed does initiate another round of quantitative easing, they will purchase Treasuries in the 2 - 10 year range, which is the maturity range they specified for the re-investment of the proceeds of maturing/principal/interest income from the existing portfolio. However, there is a significant probability that they will extend this maturity range to include 30 year Treasuries as well. Expectations are center around purchases of $100 B per month for about five months.
Do people think that there are no consequences for printing more dollars. Has anyone noticed how weak the dollar has been since the announcement.

Maybe the U.S. should be cited for currency manipulation.
 

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Do people think that there are no consequences for printing more dollars. Has anyone noticed how weak the dollar has been since the announcement.

Maybe the U.S. should be cited for currency manipulation.
Increasing the monetary base is not the same as printing dollars. Besides, a weaker dollar is great for exports.
 

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Increasing the monetary base is not the same as printing dollars. Besides, a weaker dollar is great for exports.
Where do you think the dollars will come from. Yes it is good for exports. Then why are we mad at the Chinese.
 

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Where do you think the dollars will come from.
They will have to be loaned out via banks who are much more "risk adverse" than in previous periods.

Yes it is good for exports. Then why are we mad at the Chinese.
The Chinese manipulate their currency by pegging it at a rate that does not reflect the balance sheet of the Bank of China (who has around $2.5 trillion in foreign currency reserves). Therefore they are manipulating their currency; monetary policy is not the same as currency manipulation.
 

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They will have to be loaned out via banks who are much more "risk adverse" than in previous periods.



The Chinese manipulate their currency by pegging it at a rate that does not reflect the balance sheet of the Bank of China (who has around $2.5 trillion in foreign currency reserves). Therefore they are manipulating their currency; monetary policy is not the same as currency manipulation.
Depends how you want to define currency manipulation. A couple of months ago the dollar was at about 90:1 to the yen. Now it is 84. A cause of the drop is what the Fed is doing, in essence devaluing the dollar.

As to not printing money, they will be buying treasuries that the administration will be issuing to pay for the debt, thus monitarizing the debt. I have not heard anyone say other than here that this is not expanding money in circulation. They are trying to make it a loser to hold cash equivalent by inducing inflation. Maybe that congressman who talked about getting rid of the Fed was not the lunatic I thought.
 

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They will have to be loaned out via banks who are much more "risk adverse" than in previous periods.



The Chinese manipulate their currency by pegging it at a rate that does not reflect the balance sheet of the Bank of China (who has around $2.5 trillion in foreign currency reserves). Therefore they are manipulating their currency; monetary policy is not the same as currency manipulation.
You end up at the same result though. China has to buy dollars to keep the peg working helping cause inflation in China, the US sells dollars to buy up debt to get the dollar lower
 

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You end up at the same result though. China has to buy dollars to keep the peg working helping cause inflation in China, the US sells dollars to buy up debt to get the dollar lower
The US has a current account deficit with China, leaving China with dollars. To say we "sell dollars" to buy up debt to get the dollar lower is incorrect.

The Department of the Treasury and the Federal Reserve, which are the U.S. monetary authorities, occasionally intervene in the foreign exchange (FX) market to counter disorderly market conditions. Since the breakdown of the Bretton Woods system in 1971, the United States has used FX intervention both to slow rapid exchange rate moves and to signal the U.S. monetary authorities' view that the exchange rate did not reflect fundamental economic conditions. U.S. FX intervention became much less frequent in the late 1990s. The United States intervened in the FX market on eight different days in 1995, but only twice from August 1995 through December 2006.
U.S. Foreign Exchange Intervention - Fedpoints - Federal Reserve Bank of New York
 

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The US has a current account deficit with China, leaving China with dollars. To say we "sell dollars" to buy up debt to get the dollar lower is incorrect.



U.S. Foreign Exchange Intervention - Fedpoints - Federal Reserve Bank of New York
The US has a current account deficit with most countries in the worldl. Japan, Germany and Canada included. Japan is most likely going to sell billions of yen to drive it lower. When Japan bowed to US pressure to raise the yen it helped cause the deflationary spiral it is in

Germany has a slight trade surplus with China, which tends to mean the low yuan is not an issue, the issue is the US economy is not competitive in the products it will sell to China, and that the products it could sell to China it does not want to (high tech electronics or machinery

As for buying or selling dollars or Yuan or Yen

Having the central bank buy up debt (t bill or mortgages) tends to increase money supply, that will tend to cause the value of that currency to decline in value. It is manipulating the currency in the same way as China pegging the Yuan to the USD, China has to accumulate dollars or the peg will not work. With the peg China will tend to see higher inflation ( which given its property bubble will be a good thing), if it got rid of the peg, China would most likely see a deflationary crash from bad debts
 

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The US has a current account deficit with most countries in the worldl. Japan, Germany and Canada included. Japan is most likely going to sell billions of yen to drive it lower. When Japan bowed to US pressure to raise the yen it helped cause the deflationary spiral it is in

Germany has a slight trade surplus with China, which tends to mean the low yuan is not an issue, the issue is the US economy is not competitive in the products it will sell to China, and that the products it could sell to China it does not want to (high tech electronics or machinery

As for buying or selling dollars or Yuan or Yen

Having the central bank buy up debt (t bill or mortgages) tends to increase money supply, that will tend to cause the value of that currency to decline in value. It is manipulating the currency in the same way as China pegging the Yuan to the USD, China has to accumulate dollars or the peg will not work. With the peg China will tend to see higher inflation ( which given its property bubble will be a good thing), if it got rid of the peg, China would most likely see a deflationary crash from bad debts
Your point was negated as a current account deficit leaves countries holding dollars. The most risk adverse option is in US Treasuries, hence the high level of treasuries held by both China and Japan (which is a positive for dollars).

Japan's currency continues to appreciate in light of a decade + period of credit easing. To state that credit easing causes currency depreciation is simply plucking.
 

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Your point was negated as a current account deficit leaves countries holding dollars. The most risk adverse option is in US Treasuries, hence the high level of treasuries held by both China and Japan (which is a positive for dollars).

Japan's currency continues to appreciate in light of a decade + period of credit easing. To state that credit easing causes currency depreciation is simply plucking.
Of course it is not always the case but it tends to be that qualitative easing tends to cause currency depreciation. It may not be enough to offset other factors but that is generally what will occur
 

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Do people think that there are no consequences for printing more dollars. Has anyone noticed how weak the dollar has been since the announcement.

Maybe the U.S. should be cited for currency manipulation.
There is a considerable amount of angst attached to any further Fed easing of any kind, QEII or not. The dollar situation is particularly fraught with uncertainty, with much talk of a trade war, retaliation, etc. The US continues to pressure the Chinese for currency reval, the Japanese have now weighed in with defensive moves, and there has been talk in the US of a modern-day equivalent of Smoot-Hawley.

Of course, at bottom, its not a lot different than the classic 'beggar thy neighbor' policies that nations resort to when deficits and debts bedevil them and they don't have a major war to bail them out.
 

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Further to this topic, a Barron's article, here, by Randall Forsyth discusses "Is the Fed Mulling 'Qualitative' Easing?" Putting into print some of the talk currently circulating on the street, he begins by discussing a WSJ story by Jon Hilsenrath who said the central bank was studying announcing purchases in smaller increments and conditioned on the state of the economy.

Hilsenrath broke the story that the Fed would consider replacing maturing mortgage-backed securities rather than letting them run off; that approach was approved at the Aug. 10 meeting of the Federal Open Market Committee in order to prevent a passive tightening of monetary policy. Consequently, Hilsenrath is looked upon by most as having a reasonable degree of credibility.

The operative theory seems to be that a small-scale approach to purchasing, say, $100 billion or less per month, might bridge disagreements on the FOMC, some of whose members are reluctant to commit to a large-scale QE2 (as a second phase of quantitative easing is being dubbed) at this time, and at least one (Thomas Hoenig fo Kansas City) who is against any further easing of any kind.

Moreover, remember that the next FOMC meeting is on Nov. 2-3 and conveniently concludes the day after Election Day.

Forsyth also discusses the "Bernanke Put," the appellation ascribed by analysts at RBS to the central bank strategy of pegging the yield on longer-term Treasury securities in an attempt to stimulate the economy. In support of this strategy, Forsyth describes the RBS guys justification this way:

"That would be more effective in bringing down long-term interest rates than massive purchases under QE2, John Richards, RBS North America head of strategy, and Eric Liverance, its head of quantitative strategy, argue in a provocative research note.

Moreover, pegging long-term yields has ample precedent and required relatively few purchases of bonds when it was practiced during World War II. Treasury bond yields were pegged at 2.5% while the federal government ran massive budget deficits to finance the war effort.

Indeed, Richards and Liverance also point out, this would be Bernanke's favored tack. In his famous speech in November 2002—in which the future Fed chairman invoked Milton Friedman's metaphor of dropping money from helicopters to describe what's now called QE—he said:

"A more direct method, which I personally prefer, would be for the Fed to begin announcing explicit ceilings for yields on longer-maturity Treasury debt."

Thus, this is not a concept the Richards and Liverance conjured out of whole cloth. "Clearly, putting a ceiling on yields has been in Chairman Bernanke's mind for some time. Gone now are worries that the Fed will be accused of creating inflation by monetizing the debt. Indeed, low—not high—inflation has been identified as a concern requiring targeted attention," they write."


We had the Greenspan Put; perhaps now we'll have the "Bernanke Put." Your reaction to this strategy?
 

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Further to this topic, a Barron's article, here, by Randall Forsyth discusses "Is the Fed Mulling 'Qualitative' Easing?" Putting into print some of the talk currently circulating on the street, he begins by discussing a WSJ story by Jon Hilsenrath who said the central bank was studying announcing purchases in smaller increments and conditioned on the state of the economy.

Hilsenrath broke the story that the Fed would consider replacing maturing mortgage-backed securities rather than letting them run off; that approach was approved at the Aug. 10 meeting of the Federal Open Market Committee in order to prevent a passive tightening of monetary policy. Consequently, Hilsenrath is looked upon by most as having a reasonable degree of credibility.

The operative theory seems to be that a small-scale approach to purchasing, say, $100 billion or less per month, might bridge disagreements on the FOMC, some of whose members are reluctant to commit to a large-scale QE2 (as a second phase of quantitative easing is being dubbed) at this time, and at least one (Thomas Hoenig fo Kansas City) who is against any further easing of any kind.

Moreover, remember that the next FOMC meeting is on Nov. 2-3 and conveniently concludes the day after Election Day.

Forsyth also discusses the "Bernanke Put," the appellation ascribed by analysts at RBS to the central bank strategy of pegging the yield on longer-term Treasury securities in an attempt to stimulate the economy. In support of this strategy, Forsyth describes the RBS guys justification this way:

"That would be more effective in bringing down long-term interest rates than massive purchases under QE2, John Richards, RBS North America head of strategy, and Eric Liverance, its head of quantitative strategy, argue in a provocative research note.

Moreover, pegging long-term yields has ample precedent and required relatively few purchases of bonds when it was practiced during World War II. Treasury bond yields were pegged at 2.5% while the federal government ran massive budget deficits to finance the war effort.

Indeed, Richards and Liverance also point out, this would be Bernanke's favored tack. In his famous speech in November 2002—in which the future Fed chairman invoked Milton Friedman's metaphor of dropping money from helicopters to describe what's now called QE—he said:

"A more direct method, which I personally prefer, would be for the Fed to begin announcing explicit ceilings for yields on longer-maturity Treasury debt."

Thus, this is not a concept the Richards and Liverance conjured out of whole cloth. "Clearly, putting a ceiling on yields has been in Chairman Bernanke's mind for some time. Gone now are worries that the Fed will be accused of creating inflation by monetizing the debt. Indeed, low—not high—inflation has been identified as a concern requiring targeted attention," they write."


We had the Greenspan Put; perhaps now we'll have the "Bernanke Put." Your reaction to this strategy?
Look at the results of the Greenspan put. We had two huge bubbles in a decade. Sort of like hanging a picture over a hole in your wall rather than fixing the wall.

Another way to look at it. Think of Greenspan and/or Bernanke as the nation's CFO. When Greenspan started out the country's balance sheet was underleveraged. So it could support a lot more debt and still have a good debt/equity ratio. Over a couple of decades of adding debt we are losing that advantage. Right now because of size and relative stability countries still feel compelled to buy our dollars. The Chinese also have to buy some dollars to allow us to keep importing their products.

What does all of this mean. My sense is that we have gone down a bad path for something like 20 years. Like a losing gambler we keep doubling down hoping to get out of debt. The Fed's policies are enabling our government to not have to make difficult choices. When/ if other nations find a way out of buying dollars, the game will be up. Then we will be like Greece and have other countries tell us we have to cut costs.
 

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washunut said:
My sense is that we have gone down a bad path for something like 20 years. Like a losing gambler we keep doubling down hoping to get out of debt.
There is a lot of truth in that. We have now reached a point where (according to Capital Economics via Vince Farrell) our total debt, public and private, is about 340% of GDP and household debt to income is about 123%. No good can come of this situation.

washunut said:
The Fed's policies are enabling our government to not have to make difficult choices.
We can't be too hard on the Fed with this. Remember, the Fed is a creature of Congress and answers to Congress. The Fed has its mandates (employment and inflation) and has to answer to Congress for their actions in furtherance of those mandates.

Indeed, the problem lies with Congress more-so than with the Fed. Permit me to quote a recent article by Bill Frezza:

...democracy rests on the idea that most citizens vote their self interest. A solid tenet of political campaigning has always been that elections could be won by convincing enough constituencies that you and your party could give them something for nothing. It didn't matter which group was being targeted - wannabe homeowners, union retirees, Midwest farmers, reckless bankers, or bellicose defense contractors. It didn't matter what was being promised - low cost mortgages, fat pensions, crop subsidies, easy money, or bloated contracts. The strategy worked as long as enough voters believed that their goodies would be delivered at someone else's expense. This has turned the Federal Government into the largest income redistribution machine in the history of man.

Our two political parties pander to different groups but both Democrats and Republicans had a common interest in making sure that the system kept doling out largesse. More often than not political compromise consisted of larding up spending bills to the point that both parties could honestly tell their core constituencies that they delivered the goods.
...
While the rhetoric of the two parties varied, each time one or the other gained power government spending went only one way. Up. A vast social-issues issues sideshow was maintained to sharpen party differentiation and entertain the masses but at the end of the day these issues bore little relevance to the fiscal health of the country.

The giveaway game isn't working any more, and the reason is simple. The cupboard is bare. It's not only bare; it's been hocked - along with the kitchen, the house, the car, the foundation, and the neighborhood.
Are we willing to make the hard decisions - those that will require higher taxes for everyone - required to put our house in order?

...OR67 (formally a denizen of U-City)
 
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There is a lot of truth in that. We have now reached a point where (according to Capital Economics via Vince Farrell) our total debt, public and private, is about 340% of GDP and household debt to income is about 123%. No good can come of this situation.



We can't be too hard on the Fed with this. Remember, the Fed is a creature of Congress and answers to Congress. The Fed has its mandates (employment and inflation) and has to answer to Congress for their actions in furtherance of those mandates.

Indeed, the problem lies with Congress more-so than with the Fed. Permit me to quote a recent article by Bill Frezza:



Are we willing to make the hard decisions - those that will require higher taxes for everyone - required to put our house in order?

...OR67 (formally a denizen of U-City)
I view the fed as a sort of quasi- governmental agency. Like the supreme court the are chosen by the President and confirmed by congress. While not as independent as the court which is a seperate part of government the Fed needs to have some independence to have any value.

The Fed has shown more or less independence based on how the chairman handles it. This chairman, while intelligent seems more concerned with keeping his job than doing the things that need to be done for the good of the country. He took tough steps during the crisis and I give him credit for that. After the crisis I see a much different and weaker chairman.
 

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Do people think that there are no consequences for printing more dollars.
A reserve dollar sitting on deposit with the Fed isn't "printed" until it's lent, and there's little indication that corporations and households are eager to add to the $52 trillion debt pile they already owe. (I keep hearing about the more than $1 trillion in "cash" companies have on their balance sheets, much of it held by overseas units. People rarely mention the $7.2 trillion worth of corporate debt, a record.) Borrowers want to pay off or liquidate debts, and in a system such as ours demand for goods drops when credit contracts (since most people consider money to be their credit line on their Visa or Discover card.) I was in a Target store the other day (a new one) and the place looked like a ghost town. There were exactly two cashiers at the front of the store.

I find it interesting that Treasuries keep rising in price even as the stock market continues to rally. Honestly, sometimes I think we're in 1931 and the proverbial **** is about to hit the fan. Two years ago if anyone mentioned the word "deflation" he was largely dismissed as a Chicken Little or a crackpot. Now even the Federal Reserve Board has gone on record describing deflation as the greater threat facing the country. But until the Fed starts dropping dollars from helicopters so people can pay off their debts and the job market improves, I'm not worried about inflation. All of this talk about "quantitative easing" apparently didn't amount to much at the last Fed meeting.
 

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A reserve dollar sitting on deposit with the Fed isn't "printed" until it's lent, and there's little indication that corporations and households are eager to add to the $52 trillion debt pile they already owe. (I keep hearing about the more than $1 trillion in "cash" companies have on their balance sheets, much of it held by overseas units. People rarely mention the $7.2 trillion worth of corporate debt, a record.) Borrowers want to pay off or liquidate debts, and in a system such as ours demand for goods drops when credit contracts (since most people consider money to be their credit line on their Visa or Discover card.) I was in a Target store the other day (a new one) and the place looked like a ghost town. There were exactly two cashiers at the front of the store.

I find it interesting that Treasuries keep rising in price even as the stock market continues to rally. Honestly, sometimes I think we're in 1931 and the proverbial **** is about to hit the fan. Two years ago if anyone mentioned the word "deflation" he was largely dismissed as a Chicken Little or a crackpot. Now even the Federal Reserve Board has gone on record describing deflation as the greater threat facing the country. But until the Fed starts dropping dollars from helicopters so people can pay off their debts and the job market improves, I'm not worried about inflation. All of this talk about "quantitative easing" apparently didn't amount to much at the last Fed meeting.
I agree with you about the need for America to deleverage. Agree also with all the talk about corporate cash, much of which sits overseas.

Two areas where I am a bit less confident as you. First it is true that if the Fed prints money that then sits in treasuries in a bank we have nothing to worry about. However if the velocity of money increases that is when we will be in trouble. Not sure that the Fed will be able to shrink it's balance sheet when this happens. Also you mention the threat of deflation, just don't see it. Other than housing prices where is this alleged deflation?
 

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Two areas where I am a bit less confident as you. First it is true that if the Fed prints money that then sits in treasuries in a bank we have nothing to worry about. However if the velocity of money increases that is when we will be in trouble. Not sure that the Fed will be able to shrink it's balance sheet when this happens. Also you mention the threat of deflation, just don't see it. Other than housing prices where is this alleged deflation?
Why would the velocity of money increase when the country is lumbering under so much debt, incomes are stagnant, unemployment is (conservatively) at almost 10%, and confidence is in the dumps? Households are not spending. They can't. I could also mention all of the crummy real estate that banks refuse to write down, government budgets under pressure, pension promises that will not be kept due to overinflated expectations on rates of return.... At this point, I'd say the country is on a precipice. It's not that we have rampant deflation, but where is the inflation? The CPI is trending DOWN, standing over the last twelve months at just over 1%, under 1% if food and energy are excluded. (Consumer Price Index Summary). This is below the minimal 1.5% level the Fed feels is necessary to ensure that we don't slip into a Japanese-style deflationary funk. Real estate is a large part of this, because a home represents the greatest single asset held by many families and, consequently, drives many spending decisions.
 
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